JELD-WEN Holding, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing. JELD-WEN manufactures and distributes doors, windows and related products, with North America, Europe and Australasia as its reportable segments.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | $4.347 billion | $3.764 billion |
| Gross margin | $923.7 million; 21.3% | $849.4 million; 22.6% |
| Operating income | $172.7 million; 4.0% | $263.9 million; 7.0% |
| Net income | $144.3 million | $10.8 million |
| Adjusted EBITDA | $465.3 million; 10.7% of revenue | $437.6 million; 11.6% of revenue |
| Cash from operating activities | $219.7 million | $265.8 million |
| Capital expenditures | $118.7 million | $63.0 million |
| Total debt | $1.478 billion | $1.274 billion |
| Total liquidity | $380.2 million | $512.2 million |
Revenue rose 15.5%, driven mainly by acquisitions (15 percentage points); core revenue growth was 1%, reflecting 2% pricing partly offset by a 1% decline in volume/mix. Materials and freight inflation, acquisition dilution and lower volumes pressured margins. Operating income fell despite higher sales. Net income increased substantially, but comparisons are affected by the prior-year tax expense and 2018 tax benefits and other unusual items. Adjusted EBITDA is a non-GAAP measure; the company added back $117.9 million of “other items” in 2018, including the Steves litigation accrual and legal costs.
Operating cash flow less capital expenditures was approximately $101.0 million in 2018, versus approximately $202.7 million in 2017. Cash and cash equivalents were $117.0 million at year-end. Liquidity included cash and available borrowing under credit facilities; the €39 million Euro Revolving Facility expired in January 2019. Management said cash from operations and other liquidity sources should be adequate for operations, planned spending and debt service for at least 12 months.
Fourth quarter: Revenue was $1.091 billion, gross margin $227.3 million, operating income $55.8 million and net income $39.7 million. Q4 2017 net loss was $93.7 million, including substantial tax-related effects. The filing does not provide a clear standalone Q4 cash-flow figure.
Material changes and segment results
- 2018 acquisitions included ABS, A&L, Domoferm and D&K. Acquisitions materially contributed to consolidated and regional revenue growth.
- North America revenue increased 14.0% to $2.461 billion; Adjusted EBITDA rose 2.0% to $279.0 million, while segment EBITDA margin declined to 11.3% from 12.7%.
- Europe revenue increased 16.6% to $1.216 billion; Adjusted EBITDA declined 2.8% to $129.2 million, with margin falling to 10.6% from 12.7%.
- Australasia revenue increased 19.0% to $669.9 million; Adjusted EBITDA rose 22.0% to $91.2 million, with margin improving to 13.6% from 13.3%.
- The company repurchased $125.0 million of shares under a $250.0 million authorization and ended 2018 with 101.3 million shares outstanding, down from 106.0 million.
Outlook, risks and unusual items
- Management emphasized operational improvement through JELD-WEN Excellence Model (JEM), facility rationalization, sourcing, pricing discipline, innovation and selective acquisitions. The filing provides no specific quantified earnings or revenue guidance.
- Key business risks include cyclicality in construction and remodeling, a forecast housing recession in Australasia, raw-material and freight inflation, tariffs, customer concentration, seasonality, foreign exchange and execution risks from restructuring and acquisitions.
- The Steves & Sons litigation produced an unfavorable jury verdict and a December 2018 final judgment ordering divestiture, with conditional monetary damages if that order is overturned. The company accrued $76.5 million for anticipated damages and legal fees, excluding future lost profits and divestiture costs; it was pursuing post-trial relief and appeal. A separate molded-door antitrust class action had unquantified claims, and the company said loss probability and magnitude could not yet be estimated.
- Management and the auditor reported material weaknesses in European financial reporting controls, including controls over customer pricing, journal entries and subsidiary-ledger reconciliations. The weaknesses resulted in immaterial out-of-period adjustments, but could permit a material misstatement. Management had begun remediation; the auditor’s opinion on the financial statements was unqualified, while its opinion on internal control was adverse.
- The 2018 tax benefit included a $40.2 million benefit from finalizing Tax Act estimates; the effective tax rate was a 5.9% benefit. The filing notes continuing GILTI effects and uncertainty around evolving tax guidance.
- Other exposures include unfunded pension liabilities, environmental obligations and potential remediation costs, product warranties, and covenant and refinancing risks. U.S. pension underfunding was $81.2 million; foreign unfunded pension liabilities were $31.6 million.
Most important facts for investors to verify
- How much of revenue and EBITDA growth reflects durable organic demand versus acquisitions, and whether pricing can offset material and freight inflation.
- The status and potential financial consequences of the Steves divestiture order, appeals, and separate antitrust litigation.
- Progress in remediating European internal-control material weaknesses and the controls excluded from assessment at recently acquired businesses.
- Cash conversion, working-capital needs, capital spending and liquidity after the Euro Revolving Facility expired; also review debt maturities, covenants and interest-rate exposure.
- The sustainability of reported earnings after tax adjustments and the sizable exclusions used in Adjusted EBITDA.