JELD-WEN Holding, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 29, 2018; financial statements are unaudited. JELD-WEN manufactures and distributes windows, doors, and related products across North America, Europe, and Australasia. The business is seasonal and tied to housing construction and repair-and-remodel activity.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,136.9m | $991.3m | $3,255.6m | $2,788.0m |
| Gross margin | $241.8m (21.3%) | $227.9m (23.0%) | $696.4m (21.4%) | $640.9m (23.0%) |
| Operating income | $7.6m | $86.4m | $116.9m | $214.1m |
| Net income | $28.9m | $51.3m | $104.6m | $104.5m |
| Diluted EPS | $0.27 | $0.47 | $0.97 | $0.95 |
| Adjusted EBITDA | $132.9m | $128.2m | $355.7m | $334.5m |
Adjusted EBITDA is a non-GAAP measure. Q3 pretax results were a loss of $2.7m, while a $31.6m income-tax benefit—substantially affected by discrete items—produced net income of $28.9m.
- Revenue and margins: Q3 revenue rose 14.7%, primarily from acquisitions (17% contribution), partly offset by unfavorable foreign exchange (2%). Gross margin dollars increased, but margin percentage declined amid acquisition mix, lower volumes and operational inefficiencies, unfavorable product mix, and material and freight inflation; pricing partly offset these pressures.
- Unusual operating expense: Q3 SG&A increased to $230.3m from $139.2m, including a $76.5m litigation contingency and acquisition-related costs. Excluding the litigation accrual and acquired-business SG&A, management said Q3 SG&A was $135.8m, or 14.0% of revenue, on a comparable basis.
- Cash flow: Nine-month operating cash flow was $88.0m, down from $174.3m. Investing cash use was $245.4m, including $167.1m for acquisitions and $68.7m of property and equipment purchases. Financing provided $56.7m, including increased borrowings, partly offset by $82.8m of share repurchases. Cash, cash equivalents, and restricted cash ended at $151.9m, versus $256.2m at year-end 2017.
- Debt and liquidity: September 29 debt was approximately $1.532bn, including current maturities; cash was $151.4m. Management reported total liquidity of $354.5m, down from $512.2m at December 31, 2017, mainly due to acquisitions, buybacks, and higher capital spending. The company reported compliance with credit-facility terms and stated that available resources should cover operations, planned investment, and debt service for at least the next 12 months.
Material changes and segment performance
- Nine-month revenue increased 16.8%, driven primarily by acquisitions (15%), with 1% core growth and a 1% favorable foreign-exchange impact. Gross margin percentage fell 1.6 percentage points; operating income declined to $116.9m from $214.1m, while net income was broadly unchanged. Nine-month results included a $20.8m gain on previously held shares of an acquired investment and a $12.4m income-tax benefit.
- Q3 segment revenue increased in North America by 16.8%, Europe by 10.5%, and Australasia by 14.0%. Segment Adjusted EBITDA was $84.1m in North America, $28.1m in Europe, and $26.3m in Australasia. Europe EBITDA declined 15.7%, reflecting lower volumes, mix, inflation, and foreign exchange; North America EBITDA rose 2.0% and Australasia rose 14.7%.
- The company completed acquisitions of D&K, ABS, A&L, and Domoferm during the first nine months. Cash consideration, net of acquired cash, was $167.1m; approximately $65.4m of acquired debt was also assumed. Acquisitions contributed $358.2m of revenue and $2.0m of net income since their respective acquisition dates.
- The board authorized up to $250m of share repurchases through December 31, 2019. Through September 29, 3.08m shares had been repurchased for $83.6m.
Outlook, risks, and other significant matters
- The filing provides no specific revenue, earnings, or margin guidance. Management cited seasonality and said cash from operations and available liquidity were expected to be adequate for at least the next 12 months.
- Steves & Sons litigation: Following adverse jury findings and an October ruling that divestiture was an appropriate remedy, the company recorded a $76.5m loss-contingency charge. The accrual includes anticipated past-damage exposure (including trebling of $12.2m under the Clayton Act) and estimated legal fees, but excludes the jury’s $46.5m future-lost-profits award and any divestiture cost. Steves indicated it intended to elect divestiture; the company plans to oppose and appeal. The potential impact of a final divestiture order was not estimable.
- A putative class action filed October 19, 2018 alleges price-fixing and antitrust violations involving JELD-WEN and a competitor. The company said it could not yet determine whether a loss was probable or estimate potential loss; an adverse outcome could be material.
- Disclosure controls and procedures were deemed ineffective as of September 29, 2018. Management said tax-related material weaknesses remained until remediation controls had operated effectively for a sufficient period. The company also continued refining provisional Tax Act estimates; a $40.2m tax benefit was recorded in Q3.
- Other cited exposures include raw-material and freight inflation, housing-market and volume changes, foreign-exchange and interest-rate movements, warranty and product-liability claims, environmental matters, and acquisition integration. The company stated risk factors were unchanged from its 2017 Form 10-K.
Most important facts for investors to verify
- Developments in the Steves litigation, especially the final judgment, treble damages, attorney fees, lost-profits claim, and divestiture remedy.
- Whether underlying margins and operating performance recover from the Q3 and year-to-date declines after separating acquisition effects and the litigation accrual.
- Cash conversion and working-capital trends, given the sharp decline in operating cash flow and increased receivables and inventory.
- Acquisition contribution, integration performance, assumed debt, and the effect of acquired businesses on margins and leverage.
- Progress in remediating tax-related material weaknesses and finalization of provisional Tax Act and GILTI accounting.
- Liquidity, debt maturities, borrowing availability, and the pace of share repurchases relative to investment and debt-service needs.