JELD-WEN Holding, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 28, 2019; unaudited. JELD-WEN manufactures and distributes windows and doors across North America, Europe and Australasia. Results are seasonal, with activity typically higher in the second and third quarters.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $1,092.0 million | $1,136.5 million | $3,221.2 million | $3,255.1 million |
| Gross margin | $223.8 million (20.5%) | $241.5 million (21.2%) | $672.1 million (20.9%) | $694.2 million (21.3%) |
| Operating income | $54.4 million | $7.3 million | $152.6 million | $114.3 million |
| Net income | $17.0 million | $28.6 million | $55.2 million | $103.8 million |
| Diluted EPS | $0.17 | $0.27 | $0.54 | $0.97 |
| Adjusted EBITDA (non-GAAP) | $108.9 million | $132.6 million | $325.8 million | $353.2 million |
Revenue fell 3.9% in Q3 and 1.0% year to date. Management attributed the Q3 decline to a 3% fall in core revenue and a 2% foreign-exchange headwind, partly offset by a 1% acquisition contribution. Lower volume/mix was partly offset by pricing. Gross margin contracted amid North American manufacturing inefficiencies and unfavorable volume/mix in North America and Australasia.
Operating income rose year over year, but the comparison benefited from the prior-year $76.5 million Steves litigation accrual in SG&A. Q3 SG&A declined 29.9% to $161.4 million; the prior-year litigation accrual was the primary reason. Q3 net income nevertheless declined, in part reflecting tax expense of $22.5 million versus a prior-year tax benefit of $31.7 million. The 2019 effective tax rate was 56.9% for Q3 and 44.9% year to date; management cited tax-law effects and the mix of income and losses across jurisdictions.
Cash flow, liquidity and debt
- Cash from operations was $164.9 million for the first nine months, versus $88.0 million in 2018. Investing cash outflow was $153.9 million, including $76.4 million of capital expenditures, $28.2 million for intangible assets and $57.3 million for the VPI acquisition. Financing cash inflow was $6.1 million. Cash, cash equivalents and restricted cash ended at $131.7 million.
- At September 28, cash and cash equivalents were $127.9 million; total current assets were $1,257.1 million and current liabilities were $798.6 million.
- Reported debt was $1,514.4 million, including $67.8 million current maturities; the balance sheet also included $140.9 million of noncurrent operating lease liabilities. The company reported $449.9 million of total liquidity, including $307.1 million available under the ABL facility and $14.9 million under the Australian facility. It said it was compliant with credit-facility terms.
- In September, the company added $125 million to its term loan and used proceeds to repay $115 million of ABL borrowings. The $800 million of senior notes carry rates of 4.625% and 4.875%, maturing in 2025 and 2027.
Material changes and management commentary
- Segment performance diverged in Q3: North America revenue declined 1.4% and Adjusted EBITDA declined 20.9%; Europe revenue declined 1.8% while Adjusted EBITDA rose 8.9%; Australasia revenue declined 17.1% and Adjusted EBITDA declined 22.3%. Management cited market-related volume weakness and foreign exchange in Australasia, and operating inefficiencies and lower volumes in North America.
- For the first nine months, consolidated Adjusted EBITDA declined 7.7%. Revenue growth from acquisitions partly offset lower core revenue and unfavorable foreign exchange.
- The March 2019 VPI acquisition cost $57.3 million net of cash acquired. VPI contributed $30.2 million of 2019 revenue since acquisition and a $1.5 million net loss, excluding retention bonuses.
- The company adopted lease accounting guidance in 2019, recognizing operating lease assets and liabilities; adoption added approximately $200 million of lease liabilities and corresponding right-of-use assets.
- No specific earnings or revenue guidance is provided in the filing. Management said existing cash, operating cash generation and available credit were expected to support operations, planned investment and debt service for at least the next 12 months.
Risks, contingencies and unusual items
- Steves & Sons litigation: A court judgment awarded $36.5 million in past antitrust damages and ordered divestiture of CMI, subject to appeal. Conditional awards include $139.4 million in future antitrust damages if the divestiture order is overturned, and $9.9 million in contract damages under specified circumstances. Plaintiffs also sought $28.4 million in attorneys’ fees and $1.7 million in costs. The company recorded a $76.5 million loss contingency and appealed; a $40 million bond was filed. Management warned an adverse final outcome could materially affect financial position, results or cash flows, and said divestiture costs could not be estimated.
- Other antitrust lawsuits: Putative direct- and indirect-purchaser cases allege price-fixing in interior molded doors. The court denied motions to dismiss the cases in their entirety, narrowed some state-law claims and limited the damages period to 2014–2018. The company said it could not yet assess whether a loss was probable or estimate its magnitude.
- Controls and reporting: Management concluded disclosure controls were not effective at quarter-end because of previously identified material weaknesses in internal control over financial reporting. Remediation was underway; management cautioned that weaknesses would not be considered remediated until controls had been tested and operated effectively. The filing also revises prior-period financial statements for errors involving European installation-contract fulfillment costs; management said the errors and accumulated misstatements were not material to previously issued periods.
- Business and financial risks: The filing highlights end-market demand, competition, raw-material costs and availability, labor, seasonality, foreign-exchange and interest-rate movements, leverage, warranty/product claims, acquisitions, ERP implementation and cybersecurity risks. Restructuring and impairment charges were $17.4 million year to date, versus $9.4 million in 2018.
Important facts for investors to verify
- Track progress and potential outcomes of the Steves appeal, the divestiture order, requested legal fees and the purchaser antitrust cases.
- Assess whether weak volume/mix and North American manufacturing inefficiencies persist, and whether pricing and productivity can offset them.
- Reconcile reported earnings with Adjusted EBITDA, including the substantial adjustments and unusual litigation-related comparisons.
- Monitor debt, interest-rate exposure, lease obligations, working-capital movements and the sustainability of operating cash flow.
- Confirm remediation and independent testing of the disclosed material weaknesses, including controls related to the European accounting errors.