Gibraltar Industries, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Amounts below are in millions of dollars except per-share data.
Business context
Gibraltar manufactures products for residential, industrial and infrastructure markets. Its Residential Products business includes ventilation, postal and roofing products; Industrial and Infrastructure Products includes grating, metal products and bridge components. On June 9, the company acquired greenhouse and solar-racking business RBI for approximately $142.7 million. RBI contributed $17.1 million of reported revenue from acquisition through quarter-end. The company was reassessing its reportable segments and presented RBI separately for this period.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $253.2 | $235.0 | $453.8 | $426.0 |
| Gross profit / margin | $44.1 / 17.4% | $40.1 / 17.1% | $74.0 / 16.3% | $70.0 / 16.4% |
| Operating income / margin | $11.2 / 4.4% | $14.7 / 6.3% | $20.2 / 4.4% | $15.1 / 3.5% |
| Net income | $4.1 | $6.4 | $9.6 | $4.3 |
| Diluted EPS | $0.13 | $0.21 | $0.31 | $0.14 |
| Operating cash flow | Not separately stated | Not separately stated | $11.8 | $(3.8) |
| Capital expenditures | Not separately stated | Not separately stated | $4.6 | $11.5 |
Q2 sales rose 7.7%, reflecting RBI, higher volume and modest pricing gains, partly offset by $4.7 million of foreign-exchange headwinds. Residential Products sales increased 14.7%; Industrial and Infrastructure sales declined 13.7%, largely due to weaker industrial demand, including energy-related markets, and lower infrastructure demand. Despite higher Q2 gross margin, operating income fell as SG&A rose 29.5%, including increased performance compensation, RBI-related expense and leadership-transition costs.
First-half sales increased 6.5%; reported results included RBI and were reduced by $9.1 million from currency effects. Operating income and net income improved year over year, supported by Residential Products growth, lower SG&A as a percentage of sales, a sale-leaseback gain, and $2.5 million of other income, primarily derivative gains. First-half net income included a $28,000 discontinued-operations loss.
Liquidity, debt and cash flow
- At June 30, cash was $39.4 million, total debt was $243.2 million, and shareholders’ equity was $396.6 million. Cash had been $110.6 million and debt $213.6 million at December 31, 2014.
- Liquidity, as defined by the company, was $121.9 million: $39.4 million cash plus $82.5 million available under the revolving credit facility. The company also had $20.6 million in outstanding letters of credit.
- First-half operating cash flow of $11.8 million compared with cash use of $3.8 million in 2014. Investing activities used $111.6 million, principally for the $134.3 million acquisition outlay, partly offset by $26.2 million of property-sale proceeds. Financing activities provided $29.4 million, including net debt proceeds.
- Debt included $210.0 million of 6.25% notes due February 2021 and $30.0 million drawn on the revolving facility. The revolver commitment runs through October 10, 2016; the company said it anticipated extending or amending it during the next six months. It was in compliance with the 1.25:1.00 fixed-charge coverage covenant at quarter-end.
Outlook, commentary and risks
- Management forecast 2015 consolidated revenue of $980–$990 million, including $130–$140 million of incremental RBI revenue after its June acquisition. Core-business revenue was expected to be approximately 2% below 2014.
- Management expected 2015 diluted EPS of $0.50–$0.60 and capital expenditures of $12–$15 million. The EPS comparison was with a 2014 loss of $2.63 per share, which included a $3.09-per-share asset-impairment charge.
- Management expected residential housing markets to improve gradually, while industrial and transportation infrastructure demand would remain unfavorable. Postal-products growth was forecast at 10%–14%; Industrial and Infrastructure Products revenue was expected to decline nearly 10% year over year.
- The company’s strategy emphasized operational excellence, product innovation, portfolio management and acquisitions. Management targeted 200–300 basis points of operating-margin improvement over the first three years from its 80/20 simplification program; this is a stated target, not reported achievement.
- Risks include weak energy and infrastructure end markets, currency and commodity exposure, seasonality, and execution of the RBI integration. The filing identifies potential adverse effects if solar rebates, tax credits or other incentives expire or are reduced, including the scheduled reduction of the U.S. solar investment tax credit after 2016.
- RBI’s percentage-of-completion revenue accounting depends on estimates of contract costs and completion; revisions could materially affect results. The acquisition purchase-price allocation was preliminary. The company also disclosed potential foreign-tax indemnification items and claims related to prior divestitures, which management did not expect to significantly affect financial condition or results.
- Management said foreign-subsidiary cash of $22.3 million supported overseas operations; repatriation for domestic use could result in significant tax consequences. Disclosure controls were reported effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether RBI delivers the forecast $130–$140 million of 2015 revenue and its contribution to earnings and cash generation after integration.
- Progress toward the $0.50–$0.60 EPS outlook and the 80/20 margin-improvement target, separating recurring operating performance from gains, compensation and transition costs.
- Cash conversion and working-capital needs, particularly receivables and seasonal inventory, alongside debt, revolver availability and the planned credit-agreement extension.
- Solar incentive changes and their possible effect on RBI demand, as well as continued softness in energy-related and infrastructure markets.
- The filing gives different sale-leaseback gain figures in its disclosures: $7.379 million recognized after deferral in the transaction note and $6.799 million cited in the exit-activity discussion. Investors should check the company’s reconciliation and the impact on reported earnings.