Gibraltar Industries, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. The company manufactures and distributes building products across Residential Products, Industrial and Infrastructure Products, and Renewable Energy and Conservation. Results are seasonal, with reduced activity generally in the first and fourth quarters.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $247.6 million | $265.7 million | $454.2 million | $503.4 million |
| Gross profit / margin | $61.8 million / 25.0% | $68.8 million / 25.9% | $111.1 million / 24.5% | $123.0 million / 24.4% |
| Operating income / margin | $24.9 million / 10.1% | $28.6 million / 10.8% | $34.6 million / 7.6% | $46.3 million / 9.2% |
| Income from continuing operations | $13.2 million | $18.6 million | $17.2 million | $27.6 million |
| Net income | $12.8 million | $18.6 million | $16.8 million | $27.6 million |
| Diluted EPS | $0.40 | $0.58 | $0.52 | $0.87 |
| Operating cash flow | — | $21.7 million | $49.4 million |
Quarterly sales declined 6.8%, operating income declined 12.8%, and net income declined 31.4%. First-half sales declined 9.8%, operating income 25.3%, and net income 39.3%. First-half operating cash flow was lower primarily amid working-capital investment and lower earnings. Capital expenditures were $3.3 million; cash increased $12.2 million to $182.4 million.
At June 30, cash was $182.4 million and total current assets were $415.7 million versus current liabilities of $171.8 million. Debt carrying value was $209.6 million, including $210 million of 6.25% senior subordinated notes due February 2021; no revolving-credit borrowings were outstanding. The company reported $288.9 million of revolver availability, net of $11.1 million in letters of credit, and compliance with all credit covenants.
Performance changes and business drivers
- Management attributed most of the sales decline to portfolio exits and divestitures, which reduced revenue by $20.6 million in Q2 and $49.1 million in the first half. Comparable volumes also declined 3% in Q2 and 4% in the first half; customer pricing increased approximately 2%.
- Residential Products: Q2 sales rose 6.1% to $127.3 million; operating margin increased to 17.7%. First-half sales rose 5.3% to $231.8 million and operating margin reached 16.5%. Package Concierge acquisition contributions, pricing, demand, and operational efficiencies supported results.
- Renewable Energy and Conservation: Q2 sales fell 3.1% to $62.8 million, while operating margin fell to 5.6% from 15.9%. First-half sales fell 6.6% to $114.6 million and margin was 6.0% versus 15.2%. Lower volume, international softness, material-cost/pricing mismatch, Q2 installation issues, and exit costs weighed on results; Nexus contributed sales. Backlog increased in Q2 and exceeded the prior-year level at first-half end.
- Industrial and Infrastructure Products: Q2 sales fell 28.9% to $57.6 million and operating margin was 5.9%; first-half sales fell 32.9% to $107.9 million and margin was 3.1%. Exits and divestitures, lower volume, and delayed bridge and highway projects contributed to declines. Management cited increased backlog and anticipated funding availability as reasons it expected the decline to be temporary.
- Q2 gross margin fell 0.9 percentage point, with steel and aluminum cost increases, less favorable input-cost recovery, and pricing competition partly offset by portfolio actions. First-half gross margin was broadly stable. SG&A declined in dollars in both comparison periods, but rose to 16.9% of first-half sales from 15.2%, partly reflecting portfolio-management and leadership-transition costs.
Outlook, risks, and unusual items
- Management maintained 2017 guidance of revenue of $970–$980 million and diluted EPS of $1.37–$1.50, versus $1.05 in 2016. Q3 guidance was revenue of $275–$280 million and diluted EPS of $0.51–$0.58, versus $0.43 in Q3 2016.
- Management expected generally favorable second-half market conditions, increased bidding activity, and continued backlog growth in Industrial and Infrastructure and Renewable Energy and Conservation. Priorities included product innovation, selective acquisitions, and continued 80/20 simplification.
- The company said it had exceeded its initial five-year target of $25 million in pretax savings from its 80/20 initiative and expected additional benefits from manufacturing and inventory improvements. It reported no additional portfolio changes expected in 2017.
- Q2 2016 included an $8.5 million pretax loss on the sale of the European industrial business and an $11.4 million discrete tax benefit. Consequently, prior-year comparisons are affected by unusual items. In 2017, discontinued operations recorded a $0.4 million after-tax loss; the filing also notes approximately $2.0 million of pretax losses from the European solar-racking business for which no tax benefit was recorded.
- First-half exit and impairment charges, net, were $3.2 million; the company closed three facilities. It recorded a contingent liability for claims under indemnification provisions related to prior divestitures, but management did not expect the claims to materially affect financial condition or results.
- Risks highlighted include economic and end-market conditions, infrastructure project delays, raw-material prices and availability, competition, foreign exchange, and financing-market availability. The company noted that repatriating $23.5 million of foreign-subsidiary cash could have significant tax consequences. It also identified a prior immaterial correction to 2016 interim contract-cost estimates related to percentage-of-completion revenue accounting.
Key facts for investors to verify
- Whether the revenue and EPS guidance is achieved, particularly given seasonality and lower first-half operating cash flow.
- Whether segment backlogs convert to sales and whether delayed infrastructure projects resume as management expected.
- Whether input-cost increases, pricing, and Renewable Energy and Conservation execution issues continue to pressure margins.
- Progress and realized financial benefits from 80/20 initiatives, facility exits, and the Package Concierge and Nexus acquisitions.
- Debt terms, covenant compliance, liquidity needs, and any tax effects from potential repatriation of foreign cash.
- The scale and resolution of divestiture-related indemnification claims and the impact of upcoming revenue-recognition and lease-accounting standards.