Banks / Small Cap

Expanded Purchase Recommendation: November 2018

The Turnaround Letter recommended this stock in November 2018:

stock pick

Jeld-wen Holding (NYSE: JELD)

SUMMARY

Jeld-Wen Holding is one of the world’s largest makers of residential windows and doors. The company was founded in 1960 by Richard Wendt, whose family had used the Jeld-Wen name for other properties. In 2011, private equity firm Onex acquired the company, transitioning it from a family-run operation to a global business with professional leadership. It returned to public ownership with its February 2017 initial public offering.  Onex currently holds about 31% of Jeld-Wen’s shares. Today, the company has the #1 or #2 market share in North America, Europe and Australia, with manufacturing, distribution and showrooms in 24 countries.

Several issues plague Jeld-Wen in investors’ eyes. First, the company’s recent acquisition spree, including 12 deals in the past three years across a wide range of geographies, has stressed its results. Too many of the acquired companies had subpar margins while the overall integration into Jeld-Wen was poorly executed. In response, the board removed the CEO this past February.

Also, an unfavorable legal verdict in an anti-trust case threatens not only a financial penalty but also divestiture of an important component factory. While the company is appealing the ruling, a final outcome could be years away, adding to investor worries.

With the company’s shares already tumbling from their post-IPO highs near $42, further bad news rattled investors a few weeks ago. Dismal pre-announced third quarter results, combined with the CFO’s departure, produced a 19% one-day price drop. Rising labor, materials and tariff-related costs, combined with Jeld-Wen’s difficulties in integrating its mergers, has left investors wondering if the company will be able to restore its margins.  

Adding to the market’s list of worries are fears about the end of the housing cycle and the economic expansion. The doubts have left JELD shares 60% below their peak and 30% below their $23 IPO price. 

While the narrative suggests that Jeld-Wen is a broken company, we believe the reality is much brighter. The selection of a new CEO, Gary Michel, who joined in June, is promising. Michel brings valuable operational and turnaround leadership from his successful experiences at building products makers Ingersoll-Rand and Honeywell. 

His focus is to restore the company’s delivery and service levels, improve its cost structure, simplify its manufacturing complexity and ultimately boost EBITDA margins to the 15% level. Recent price increases should help offset rising cost inflation and the new tariffs. Importantly, Michel will de-emphasize acquisitions for a while, likely bolstering the company’s already reasonably strong balance sheet.

Jeld-Wen has a strong position in an industry that, while cyclical, has enduring long-term secular growth. The company should benefit from any strengthening of the U.S. housing market. Its leading market shares in other regions offer growth potential while dampening any weakness in the domestic market. More-over, about 44% of its revenues come from repair and remodels, further supporting its revenue stability.

Most of the downside risk from the antitrust litigation appears to be priced into the stock. The company makes a reasonable case that divestiture isn’t an appropriate legal remedy, and so a favorable outcome could provide a lift. The large ownership stake by a highly-regarded and patient private equity owner brings focus and results-driven governance that is well aligned with all shareholders.

Jeld-Wen’s shares trade at an unchallenging 6.8x 2018 estimated EBITDA, among the cheapest in the building products industry. While the market may have closed the door on Jeld-Wen, we think the recent share price weakness offers a window of opportunity for turnaround investors. 

We recommend the PURCHASE of shares of Jeld-Wen Holding (JELD) up to 25.


IMPORTANT INFORMATION REGARDING THIS REPORT

This report accompanies and supplements the October 30, 2018 initiation of Jeld-Wen Holding as a BUY in the November 2018 Edition (Volume 33, Number 5) of The Turnaround Letter. Material events subsequent to the Initiation Date may be incorporated into this report. This report may also correct any inaccuracies in the Initiation recommendation. As of the publishing date of this report, November 14, 2018, we reiterate our Buy recommendation on Jeld-Wen Holding (NYSE: JELD) shares up to 25.

THE MARKET’S CURRENT VIEW

Several issues plague Jeld-Wen in investors’ eyes. At our Initiation Date (October 30, 2018), JELD shares had fallen 59% year-to-date to $16.20, nearly 30% below their $23 IPO price of February 2017. The shares recently recovered about 9%, to $17.67, as of the date of this report.

Acquisition spree has stressed its results

Since 2015, Jeld-Wen has completed at least 13 acquisitions with an aggregate value totaling over $530 million1. This compares to the company’s Initiation Date enterprise value of $3.1 billion.

Acquisition

Date                                Company                              Country                   Rationale

August 2015                    Dooria                                    Norway                    Expansion

August 2015                    Aneeta                                    Australia                  Expansion

Sept 2015                        Karona                                  US/Michigan            Expansion

Oct 2015                          LaCantina                             US/California           Expansion

Feb 2016                         Trend                                      Australia                 Consolidation

August 2016                    Arcpac                                    Australia                  Expansion/consolidation

June 2017                        Mattiovi                                 Finland                    Consolidation

August 2017                    MMI Door                               US/Michigan            Expansion/consolidation

August 2017                    Kolder Group                          Australia                  Consolidation

Feb 2018                         Demoferm                               Austria                      Expansion

Feb 2018                         A&L Windows                          Australia                  Consolidation

March 2018                     American Bldg Supply            US/California           Expansion

Apr 2018                          D&K                                        Australia?                Expansion

  1. Sources: Jeld-Wen Holdings; New Generation Research analysis.

Jeld-Wen’s acquisition strategy has focused on three types of opportunities

  1. Expanding its range of products. The company wants to provide the broadest range of doors and windows, allowing it to capture a higher share their customers’ overall spending. These acquisitions bring unique products, technologies, or value-added services that complement Jeld-Wen’s internal new product development.
  2. Market consolidation. These allow the company to increase its share in existing markets and realize savings by reducing redundant costs.
  3. Adjacent product categories and new geographic markets. These would expand the company’s overall opportunity. Not a focus in recent years.

While these strategic rationales make sense, particularly the first two, Jeld-Wen has over-extended its ability to effectively integrate these operations. Currently, it operates 115 manufacturing facilities in 19 countries. This sprawl is likely a major driver behind the decay in its financial results.

Further weakening its performance: many of the acquired companies had subpar margins, which, combined with poorly executed integration, has pulled down the company’s EBITDA margins. The dilutive impact from acquisitions is expected to reduce EBITDA margins by 40 basis points (.4 percentage points) in 2018. While the motivation for moving at this accelerated pace of deals is unclear, what is clear is that this pace was too fast.

Uncertainty regarding new leadership

Many investors are deterred by the abrupt departure of the CEO in February and the CFO in November, preferring to wait until new leadership has proven itself.

Overhang of unfavorable legal verdict

Texas-based door manufacturer Steves and Sons sued Jeld-Wen in 2016, alleging that Jeld-Wen’s acquisition of CMI in 2012 substantially lessened competition in the molded door skins market. In February 2018, a jury in the Eastern District of Virginia found that the acquisition violated the Clayton Act and that Jeld-Wen breached a supply contract with Steves. The jury awarded $12.2 million in damages plus $46.5 million in future lost profits to Steves. Clayton Act violations can result in triple damages. In October 2018, the presiding judge reduced the contract damages by $2.2 million.

Furthermore, in October 2018 the presiding judge issued an opinion finding that the divestiture of the CMI door skin facility is an appropriate remedy. A divestiture could have a material adverse effect on Jeld-Wen and put an important facility into the hands of a competitor.

A final outcome is potentially a year or more away. Jeld-Wen recently took a $76.5 million charge for the potential triple damages and related legal fees but not for the lost-profits or divestiture costs.

Dismal pre-announced third quarter results

On October 15, Jeld-Wen pre-announced dismal third quarter results, indicating that EBITDA would be more than 10% below analyst expectations. Additionally, the company’s full-year guidance implied that fourth quarter EBITDA would be over 20% worse than consensus expectations. Management attributed the weak earnings to rising labor, materials and tariff-related costs, combined with JELD-WEN’s difficulties in integrating its mergers. Investors were left wondering if the company will be able to restore its margins. These, plus news of the CFO’s departure, drove JELD’s share price down 19%.

Investor worries about the end of the housing cycle and the economic expansion

Most broad indicators of trends in the housing industry are weakening. While many factors may be contributing to the slowdown, a primary reason is likely the rising mortgage interest rates, now approaching 5%. The combination of elevated housing prices in many markets and new limits on the tax deductibility of property taxes have similarly pressured home affordability.

Weighing on investors’ minds is the likelihood that mortgage interest rates keep rising, which could produce sharp reductions in demand for homes and building supplies (like doors and windows). The 2008-2009 collapse of the U.S. housing market remains firmly in investors’ minds.

Similarly, the U.S. economic expansion is entering its 10th year, making it one of the longest on record. Combined with growing financial excesses and other pressures, investors worry that a recession is on the horizon.  

THE OPPORTUNITY

While the narrative suggests that JELD-WEN is a broken company, we believe the reality is much brighter. 

New CEO with a mandate to restore margins and competitiveness

The CEO associated with the company’s acquisition spree and weak integration was fired in February 2018, replaced in June by Gary Michel, a 30+ year industry veteran. Michel brings valuable operational and turnaround leadership from his experiences in the building products and supply industry at Ingersoll-Rand and Honeywell. We like that his background is in engineering – a core skill set that will help him in executing the Jeld-Wen turnaround.

Prior to Jeld-Wen, Michel (age 56) was president and chief executive officer of Honeywell’s $10 billion (revenues) Home and Building Technologies business. We have little insight into why he was only in this role for less than a year. Clearly his turnaround experience at Ingersoll-Rand impressed Honeywell’s senior leadership enough to recruit him directly into a top position. No doubt the appeal of becoming the CEO of a publicly-traded company was a compelling motivation to switch.

During his 32-year career with Ingersoll-Rand, Michel turned around their Residential Heating, Ventilation, Air Conditioning (HVAC) business from 2011-2017 through market share gains and margin expansion. Prior to this, from 2007-2011, he was president of Ingersoll-Rand’s Club Car golf cart business which he successfully led through the deep recession. Before Club Car, Michel executed an operational and financial turnaround of I-R’s Construction Technologies business.

The large ownership stake by Onex, the highly-regarded and patient private equity owner, brings focus and results-driven governance that is well aligned with all shareholders.

Turnaround strategy

Michel’s strategy, initially outlined on August 7 and further detailed on November 6, focuses on restoring the company’s delivery and service levels, improving its cost structure, simplifying its manufacturing complexity and ultimately boosting EBITDA margins to the 15% level. The acquisition pace will likely be curtailed, as well.

We view this plan as bringing efficiency and effectiveness to a company whose acquisition strategy led to a globally sprawling roster of manufacturing facilities with an overly complex distribution network. These improvements fall into the self-help category and should be executable by the new and capable leadership.

  • Improve EBITDA margins to 15% by 2022 (run-rate). Jeld-Wen reasonably describes how its margins meaningfully lag its identified peer group of 20 companies:
    • Revenues are 55% higher yet its cost structure and labor productivity restrain EBITDA margins to only two-thirds of the peer average of 15.8%.
    • Adjusted EBITDA per employee is less than half that of peers.
    • No fundamental or competitive rationale for these vast differences in profitability.
  • Margin improvement strategy will emphasize:
  1. Rationalizing the global footprint – the essence of this component is to consolidate 25 facilities into other existing plants, resulting in $100 million in cost savings. Capital spending will increase about $45 million a year for the next two years to fund the consolidation, although the company believes that this incremental spending will have high returns. About $15 million (or 15%) of the cost savings will occur in 2019 with the balance occurring in 2020 and 2021. About 70% of the savings will come from North America.
  2. Improving productivity – using the Jeld-Wen Excellence Model (JEM) process, the company aims to establish a culture of continuous improvement. While culture change at any company can be difficult, Jeld-Wen appears to be a solid candidate: new leadership backed by its board of directors are driving the change, competitive urgency is providing a supportive rationale and incentive, the light industrial/heavy labor-intensive manufacturing process lends itself to quality-oriented process improvement.
  • Just as important as the financial benefits, the plan could bring a more enduring competitive posture to the company.
  • Jeld-Wen is implementing a company-wide Enterprise Resource Planning system which should allow for much greater standardization and consistency in its tools, controls and processes.
  • Near-term margin tailwinds: the company’s price increases appear to be holding, and the recent sharp decline in lumber prices may similarly support profitability.

New Chief Financial Officer

The new CFO is John Linker, formerly the company’s highly-regarded senior vice president and head of investor relations who joined Jeld-Wen six year ago. Earlier he was Jeld-Wen’s treasurer and interim finance leader for its Europe and Australasia operations. He also has held leadership roles in corporate development and finance with United Technologies and its predecessor, Goodrich Corporation.

Jeld-Wen has a strong position in an industry that, while cyclical and relatively mature, has enduring long-term secular growth. 

Today, the company has the #1 or #2 market share in North America, Europe and Australia, and is generally maintaining its shares. Demand for housing is closely related to changes in population and income, both of which have enduring and positive secular growth. Demand for housing is unlikely to be disrupted by technological advances or changing consumer preferences.

Any strengthening of the U.S. housing market would clearly benefit Jeld-Wen. Its leading market share in other regions offers growth potential while dampening any weakness in the domestic market.  Providing some additional revenue stability, about 44% of its revenues come from repair and remodels.

Litigation seems discounted with upside potential if impact is reduced

Most of the downside risk from the antitrust litigation appears to be priced into the stock. While we don’t provide a professional legal perspective on the litigation, the company makes a reasonable case that divestiture isn’t an appropriate legal remedy. A favorable outcome could provide a lift.

  • Jeld-Wen’s acquisition of the contested facility was reviewed twice by the Department of Justice. Neither time was any action required. Divesting this now fully-integrated facility acquired six years ago seems extraordinary if not unprecedented.
  • The plaintiff’s motives may be tainted. Their litigation started after Jeld-Wen notified them that it would legally terminate its contract to supply Steves with door skins. It appears that this follows a somewhat strained relationship between the two companies. The termination may pressure Steve’s ability to produce some of its own product line, whereas it could re-contract with a new owner of the facility, perhaps under better terms.
  • The jury found that Steves misappropriated eight of Jeld-Wen’s trade secrets, awarding Jeld-Wen $1.2 million.
  • Since damages for lost profits were already awarded, a divestiture would essentially be double-compensation.

The next steps:

  • The company anticipates a final judgment later this year.  Jeld-Wen will likely aggressively appealing both the outcome and the process

Housing industry and economy show few signs of collapse

In contrast to the excess-driven 2006-2008 housing crisis, there is currently little evidence of an impending collapse. The overall rate of home-ownership remains subdued, and new housing starts have only recently risen above the low rates typically seen in recessions (looking back as far as 1960).  Despite the weakening affordability, home buyers’ appetites remain strong, indicated by rising home prices, which increased 5.8% in August according to Case Shiller data.

Demand for housing in this cycle is supported by a robust economy growing at 3.5%. Unemployment at 3.7% is near its lowest rate in 50 years, employers are adding 250,000 new jobs every month, and wage growth of 3.1% is among the strongest rates in a decade.

Cash flow and balance sheet provide runway to allow time for recovery

Jeld-Wen is profitable and historically generates considerable free cash flow from its operations. While operating free cash flow in 2018 will be depressed, it will likely remain positive, then recover to healthier levels in 2019 and beyond.

Its debt balance of about $1.5 billion is reasonable, at 3.3x EBITDA and is currently readily serviceable. In a downturn, we believe Jeld-Wen has the operating flexibility to adjust its cost structure and the financial flexibility to maintain its liquidity.

Valuation is attractive

JELD shares trade (as of the Initiation Date) at an unchallenging 6.8x 2018 estimated EBITDA, among the cheapest in the building products industry. 

RECENT FINANCIAL RESULTS

Jeld-Wen’s third quarter results were in-line with their pre-announcement. Revenues increased 14.7% year-over-year, entirely from acquired revenues and partly offset by weaker local currencies. Core revenue growth was flat in the quarter, with 2% better pricing offset by a 2% decline in volumes and unfavorable mix.

Despite the higher revenues, Adjusted EBITDA increased only $4.7 million, as the EBITDA margin shrank to 11.7% from 12.9% a year ago.

Management attributed some of the weakness to the lingering revenue and cost effects of prior service and delivery issues that will continue through the fourth quarter, even though the underlying problems have been resolved. The dilutive effect of recent acquisitions further weighed on margins. Rising freight and material inflation held back margins, as well.

Management’s guidance for fourth quarter Adjusted EBITDA to be $99 million to $114 million, compared to $103 million a year ago. However, on the higher revenue base, this would produce an EBITDA margin of approximately 9.7% compared to 10.6% in last year’s fourth quarter.

Cash flow is expected to improve in the fourth quarter due to seasonal changes in working capital.

SUMMARY FINANCIAL PROJECTIONS

This model has been updated to include the actual 3Q18 results. Our underlying assumptions remain essentially unchanged from our original recommendation.

Assumptions:

  1. Revenues – we assume no revenue growth during the turnaround period.
  2. Gross margins – we assume that gross margins return to their 2017 level of 22.5%. This would reflect $44 million of benefit from the two components of its turnaround plan.
  3. SG&A expenses – we assume a modest increase in SG&A costs in 2019, then a reduction in dollar terms to reflect efficiencies gained from the turnaround plan.
  4. Tax rate – based on company commentary, we are assuming a 34% income tax rate.
  5. Capital expenditures – an increase to $145 million, or an incremental 1.0% of revenues, reflects temporarily elevated outlays as part of the turnaround plan.

While the company’s strategy targets a 15% EBITDA margin run-rate by 2022, our analysis requires it to achieve only a 13% margin by 2021, closing just over half the distance to its 15% margin compared to its 2018 expected margin of 10.8%. We note that our peer group1 has an average EBITDA margin of 20.3%, and an average of 16.3% excluding the high-margin Armstrong World Industries.

Further evidence of the company achieving a 15% margin would lead us to increase our valuation estimate.

  1. Our group of close peers includes AWI, DOOR, MAS, MHK and PGTI.

VALUATION

JELD shares sell (on the Initiation Date) at a significant discount to its closest publicly-traded peers on several metrics:

Peers                                                                             EV/EBITDA1

AWI                                                                                          10.0x

DOOR                                                                                        7.3

MAS                                                                                           8.0

MHK                                                                                           6.6

PGTI                                                                                         12.9x

    Peer average                                                                          9.0x

JELD                                                                                          6.8x

Discount to peer average                                                       (25%)

  1. Based on estimated 2018 EBITDA. Multiples are as of the Initiation Date, October 30, 2018.

In April 2018, publicly-traded window and door manufacturer Ply Gem Holdings was acquired by private equity firm Clayton, Dubilier & Rice for $2.4 billion, at an implied valuation of 10.5x trailing EBITDA. Jeld-Wen’s valuation is considerably below this multiple.

We note that JELD shares have appreciated about 10% from our Initiation Date price and currently trade at $17.67, modestly narrowing its discount to (22%).

Based on our analysis, we see Jeld-Wen’s post-turnaround position and valuation producing a $25 price target:

                                                                                                                                          2021

                                                                                                                               Turnaround Letter

                                                                                                       2018                      estimates

                                                                                                   Estimates1               ($ millions)

Revenues                                                         $4,350                            $4,350

x EBITDA margin                                               10.6%                            13.0%

= Adjusted EBITDA                                         $462                                  566

x Multiple                                                                                                   6.5x

= Enterprise value                                                                                    3,676

+ 6/30/18 cash balance                                                                               138         

+ Incremental cash accumulated                                                                 362

-  6/30/18 debt balance                                                                             1,512

= Equity value                                                                                           2,664

Shares outstanding                                                                                   107.7

Value per share                                                                                       $24.73

Price target (rounded)                                                                             $25.00

Current price1                                                                                          $16.20

Upside to price target                                                                                 +54%

  1. Data as of Recommendation Initiation Date of October 30, 2018.

Sources of value creation

If the turnaround is successful, we expect returns from holding JELD shares would be generated primarily from our two preferred sources, higher EBITDA margins (76% contribution) and the accumulation of cash (39% contribution). Our projections assume flat revenues with no contribution to a higher share price.

A conservative EBITDA multiple target detracts from our base case price potential. Improved investor sentiment from a stabilized housing market or from a successful turnaround could bolster this multiple, providing additional appreciation.

SUMMARY OF CHALLENGES/MAJOR RISKS

While we believe that the turnaround of Jeld-Wen will be successful and that the stock market will reward its shares with a significantly higher price, an investment in JELD shares carries significant risks, including:

Company-specific operating and financial risks:

  • The leadership may not be successful in turning around the company’s operations.
  • Rising labor, materials and/or freight costs or supply constraints may erode the company’s profitability.
  • The company is implementing a new enterprise resource planning (ERP) system, which could disrupt its operations if ineffective.
  • In difficult circumstances, the company may not be able to service its obligations.
  • The company may make acquisitions that prove unsuccessful.
  • The company’s material weakness in its internal controls may not be satisfactorily resolved.
  • Litigation related to Steves & Sons may be unfavorably resolved, creating competitive and/or cost difficulties for Jeld-Wen.

Market risks (risks related to public securities markets):

  • Investors may lose confidence in the magnitude or timing of a successful turnaround.
  • Changes in currency exchange rates or interest rates may impact profitability.

Economic risks (risks related to economic activity):

  • A slowdown in local or global economic activity or demand for housing, commercial buildings or for repair/renovations, would likely erode the company’s profits.
  • A change in weather patterns may change the demand for the company’s products.

Regulatory risks (risks from actions by governments and other entities):

  • Rising tariffs may negatively impact margins and possibly disrupt supply chains if the company transitions some of its sourcing to countries other than China.
  • Changes to and violations of local, state and federal/national laws in the United States or other markets, regulations, taxation and trade policies could adversely affect the company’s value.

COMPANY OVERVIEW

History

The company was founded in 1960 by Richard Wendt with the purchase of an Oregon millwork plant. His family had used the JELD-WEN name for other properties. Over the following decades the company expanded through internal growth and at least 40 acquisitions of related products. Since its first overseas acquisition, the 1992 purchase of Norma Doors of Spain, the company has completed numerous acquisitions in Europe, Australia, Asia, Canada, Mexico and Chile.

In 2011, private equity firm Onex acquired the company, transitioning it from a family-run operation to a global business, with an independent, professional leadership team installed in 2013.

Jeld-Wen returned to public ownership with its February 2017 initial public offering at $23/share.  Including the IPO and two subsequent offerings, Onex sold about 37 million shares at an average price of $30.56, nearly twice current share price. Onex currently holds about 31% of Jeld-Wen’s shares. 

Jeld-Wen today

Jeld-Wen is one of the world’s largest door and window manufacturers, with nearly all of its revenues being produced from these two product groups. It holds the #1 or #2 market share in North America (57% of 2017 sales), Europe (28% of 2017 sales) and Australasia (15% of 2017 sales), with manufacturing, distribution and showrooms operation in over 100 countries. The company’s products were sold in 81 countries in 2017.

Products

The company offers a broad range of interior and exterior doors and windows, and related products:

  • Windows (24% of 2017 sales) – window types include wood, vinyl and aluminum in a full range of styles, features and energy-savings options. Retail price points range from $100 to well over $1,000.
  • Doors (67% of 2017 sales) – a full line of interior and exterior residential doors, offered in a broad range of materials including wood veneer, composite wood, steel, glass and fiberglass. Retail price points range from $30 to several thousand dollars for high-end exterior doors. The highest volume products include molded interior doors made from two composite molded door skins joined by a wooden frame and filled with a solid core material. The non-residential line of door offerings is concentrated in Europe, featuring sound-proofing, fire and radiation resistance and added security.
  • Other (9% of 2017 revenues) – ancillary products and services.

Primary raw materials include wood, wood composites, steel, aluminum, glass, fiberglass compound and petroleum-based products such as vinyl, resins and binders. Sourcing is regional and decentralized. As a vertically-integrated manufacturer, materials represent about 50% of Jeld-Wen’s cost of sales. The company had 123 manufacturing facilities in 19 countries at year-end 2017.

Distribution channels

Approximately 50% of its revenues are generated from sales through wholesale distributors who then supply homebuilders, contractors and other professional customers. Retailers produce about 30% of the company’s sales. Jeld-Wen’s single largest customer, Home Depot, accounted for 17% of total revenues in 2017. Direct sales accounted for the balance (20%) of revenues. The top ten customers represented 36% of total sales in 2017.

About 44% of sales in 2017 were to the Repair & Replacement end market, 46% to the new residential construction end market and 10% to the non-residential end market.

Industry

The domestic door and window industry is estimated to be $22.2 billion, whereas the global market size is estimated at $200 billion for 2017.

The door and window industry is highly fragmented. In North America, major windows competitors include Andersen, Pella, Ply-Gem, Marvin, and Masco. Major North American door competitors include Masonite, Fortune Brands and Plastpro. Competition is based on functional and aesthetic quality, service quality, distribution capability and price.

Product markets tend to be local or regional, as doors and windows are generally bulky, expensive to ship and (with windows and glass doors) fragile, while customers demand short delivery times. Also, design and styling vary among countries.

Employees

At year-end 2017, Jeld-Wen employed about 21,000 people worldwide, with 10,900 in North America (~10% are union-members). The company has 6,000 employees in Europe and 4,100 in Australasia, with most facilities in these regions covered by collective bargaining agreements.

CAPITAL STRUCTURE

Jeld-Wen has a simple capital structure with a single class of common stock and conventional debt.

Equity

Jeld-Wen has a single class of common shares, with 107.7 million fully diluted shares as of June 30, 2018. Third quarter share repurchases reduced this to 105.9 million as of September 30, 2018.

Private equity firm Onex Corporation holds 31.1% of the common stock. Based in Toronto, Canada, and traded on the Toronto Stock Exchange (TSX: ONEX), Onex currently has approximately $33 billion in assets under management. It is currently led by Gerry Schwartz, who founded the firm in 1984. The company has a solid reputation for quality and strong returns.

Other major shareholders include:

Hound Partners                                       7.3%

Wellington Management                          7.2

Pzena Investment Management              6.6

The Vanguard Group                               5.8

Total                                                       26.9%

Top five including Onex                         58.0%

Hound Partners is a hedge fund managed by Jonathan Auerbach (a “Tiger Cub” who founded Hound in 2004). Wellington and Pzena Investment are respected value investment firms. We note that current Jeld-Wen board member Suzanne Stefany previously was a research analyst covering industrial stocks for Wellington. Vanguard is widely recognized for its index funds. We believe these investors, particularly as they hold a majority of the company’s shares, are likely to keep management focused on the turnaround.

In April, 2018, the company initiated a $250 million share repurchase program. Through 3Q18, it had repurchased 3.1 million shares at an average price of $27.14. We would not be surprised to see more aggressive repurchases given the stock’s recent declines.

Jeld-Wen does not currently pay a dividend, nor do we anticipate one in the foreseeable future.

Debt

Jeld-Wen has a total of $1.53 billion in debt outstanding as of September 30, 20181:

                                                                       Balance                                  Interest

Debt                                               Outstanding1                                Rate                            Maturity

Senior notes                                 $400 million                                4.63%                            Dec 2027

Senior notes                                    400 million                               4.88%                            Dec 2027

Term loans                                      486 million                        1.25%-4.80%                    Dec 2024

Revolving credit facilities                 152 million                        0.85%-3.91%                   Dec 20222

Mortgage notes                                 31 million                             1.65%                            Dec 2037

Installment notes                               74 million                        1.90%-8.10%                  2018-2035

Installment notes for stock                   1 million                        3.25%-5.25%                      Various

Unamortized debt issue costs          (12) million                                  na                                                        

Total                                               $1,532 million

  1. Debt net of original issue discount and unamortized debt issue costs.
  2. Within this category is the Euro Revolving Facility which has its $26 million balance due in July 2019, as well as other immaterial balances due within the next two years.

 

Jeld-Wen is in compliance with the terms of all of its credit facilities.

 

Based on the company’s third quarter financials and current consensus (as of November 14, 2018) estimates for full-year EBITDA of $462 million, Jeld-Wen’s total debt is a reasonable 3.3x EBITDA. The company recently stated that is it comfortable with leverage in the 2.5x-3.0x range, so we would expect some modest debt paydown in the coming quarters.

Although the company has stated that it would consider highly attractive bolt-on acquisitions, we don’t expect the company to meaningfully increase its debt level over the foreseeable horizon to fund these acquisitions or for other reasons.

ESG PRACTICES

While difficult to directly quantify the impact of strong Environmental, Social and Governance (ESG) practices, we believe these matter to investor relevancy, economic sustainability and business quality, which drive long-term revenues, profits and valuation. Increasingly, solid ESG practices indicate well-run companies, and the lack of attention to ESG issues may indicate other unseen shortcomings.

Based on MSCI ESG Research, Jeld-Wen has an average Overall ESG rating, with average ratings in each of the Environmental stewardship, Social policies and practices, and Governance components.

AUDITOR’S REPORT

Auditor PricewaterhouseCoopers LLP gave Jeld-Wen an unqualified opinion on its December 31, 2017 and December 31, 2016 full-year financial statements.

At year-end December 2017, the company concluded that disclosure controls and procedures were ineffective due to a material weakness related to the 2016 income tax reporting and other financial reporting. The corrected financials, released in the 2017 10-K, did not indicate any significant impact on Adjusted EBITDA or cash flow. Our analysis relied upon the corrected information. Jeld-Wen has implemented a remediation plan. While the company believes they currently have adequate internal controls, they have indicated that they require a sustained period of time to conclude this. PriceWaterhouseCoopers did not issue an opinion on Jeld-Wen’s internal controls.

 

SOURCES

This report uses sources which we believe to be reliable. However, we cannot guarantee its entire accuracy.  Sources include: Jeld-Wen Holding news releases, quarterly and annual reports and other regulatory filings, and company website; Capital IQ; National Association of Home Builders; Window and Door Manufacturers Association; Door & Windows Market Magazine; FDMC Wood Industry Almanac; The Freedonia Group; International Trade Association; MSCI ESG Research; Financial Times; tradingeconomics.com; Bloomberg; Schwab research; Nasdaq; The Wall Street Journal; The Turnaround Letter analysis and other sources.

 

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