Gibraltar Industries, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Gibraltar manufactures and distributes products for residential, industrial, infrastructure, renewable energy, and conservation markets. The company notes that colder weather typically reduces activity in the first and fourth quarters, so interim results may not indicate full-year performance.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $274.6 million | $272.7 million | $728.8 million | $776.1 million |
| Gross margin | 25.0% | 24.9% | 24.7% | 24.6% |
| Operating income | $35.7 million | $26.5 million | $70.3 million | $72.9 million |
| Net income | $20.6 million | $13.8 million | $37.4 million | $41.4 million |
| Diluted EPS | $0.64 | $0.43 | $1.16 | $1.29 |
| Operating cash flow | Not separately provided | Not separately provided | $48.8 million | $102.2 million |
Q3 operating margin increased to 13.0% from 9.7%, while net margin rose to 7.5% from 5.1%. Lower performance-based compensation and senior leadership transition costs were major contributors to improved operating income. For the nine months, operating margin increased to 9.7% from 9.4%, but net income declined; the prior-year comparison included an $11.4 million discrete tax benefit, and 2017 included a higher effective tax rate (35.8% versus 22.7%).
Nine-month operating cash flow fell by $53.4 million year over year, primarily reflecting working-capital movements, including a $42.3 million increase in accounts receivable. Cash and cash equivalents were $208.0 million at September 30, 2017, compared with $170.2 million at December 31, 2016. Capital expenditures were $5.2 million; cash acquisitions totaled $18.5 million, partly offset by $12.9 million of proceeds from asset sales.
Total debt was $209.8 million, including $210.0 million of 6.25% senior subordinated notes due February 2021 and other debt, net of issuance costs. There were no revolver borrowings. The company reported $288.8 million of revolving-credit availability after letters of credit and total liquidity of $496.8 million. It was in compliance with its credit agreement covenants.
Changes and segment performance
- Q3 consolidated sales rose 0.7%; nine-month sales declined 6.1%. For the nine months, divestitures reduced sales by $66.2 million, partly offset by $19.3 million from acquisitions. Comparable revenue streams had a 2.0% volume decline, nearly offset by 2.0% pricing gains.
- Residential Products: Q3 sales increased 9.7% to $129.5 million and operating margin improved to 18.4% from 16.5%. Nine-month sales rose 6.9% to $361.3 million, with operating margin up to 17.2% from 15.5%, reflecting operational efficiencies and 80/20 initiatives, as well as Package Concierge.
- Renewable Energy and Conservation: Q3 sales increased 7.4% to $88.1 million, but operating margin fell to 13.1% from 20.0%, including pressure from material-cost alignment. Nine-month sales declined 1.0% to $202.7 million and margin fell to 9.1% from 17.1%, reflecting lower volume, cost alignment, and costs of exiting European solar racking. Management said backlog had recovered above prior-year levels.
- Industrial and Infrastructure Products: Q3 sales declined 21.7% to $56.9 million, primarily due to the bar-grating exit and delayed infrastructure projects; operating margin improved to 4.5% from 2.6%. Nine-month sales declined 29.4% to $164.8 million, reflecting divestitures and a 5.0% volume decline; operating margin was 3.6% versus 4.9%. Management cited increased backlog and expected the infrastructure decline to be temporary.
Outlook, commentary, and risks
- Management forecast 2017 revenue of $960–$965 million and diluted EPS of $1.40–$1.47, compared with $1.05 in 2016. Q4 guidance was revenue of $231–$236 million and diluted EPS of $0.23–$0.30, versus a $0.24 per-share loss in Q4 2016.
- Management expected generally favorable market conditions, increased bidding activity, and continued backlog growth in infrastructure and renewable energy, while noting some caution in certain end markets. Priorities included product development, acquisitions, and advancing 80/20 projects.
- The company said its 80/20 simplification program had already exceeded its original five-year target of $25 million in pretax savings. It remained in the third year of its broader transformation strategy.
- Exit and impairment activity produced $4.8 million of net charges for the first nine months, including $6.7 million of exit costs partly offset by $1.9 million of net impairment recoveries. Three facilities were closed during the period. A contingent liability remains for indemnification claims related to prior divestitures; management did not expect these claims to materially affect results or financial condition.
- Key exposures include economic conditions, customer demand, infrastructure project timing and funding, raw-material prices and availability, foreign exchange, and competition. The company also cautioned that foreign-held cash could incur significant tax consequences if repatriated. It reported no material change in market-risk exposure and no material off-balance-sheet arrangements other than operating leases.
- Revenue recognition standard adoption was planned for Q1 2018; Gibraltar expected a change to over-time recognition for custom-fabricated products in Industrial and Infrastructure Products, but had not quantified the full impact. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Q4 revenue and EPS guidance was achieved, and whether full-year guidance depended on seasonal demand and backlog conversion.
- Whether the weaker nine-month operating cash flow and accounts-receivable build reversed as expected; monitor working capital and cash conversion.
- Whether infrastructure demand and Renewable Energy and Conservation margins recovered, and how material-cost alignment affected profitability.
- The durability of lower corporate expenses, including the extent to which Q3 improvement reflected reduced performance-based compensation and transition costs.
- The eventual financial and disclosure impact of adopting the new revenue-recognition standard, along with any developments in divestiture indemnification claims.