Gibraltar Industries, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Comparisons are with Q1 2010. Unless noted otherwise, financial amounts are in millions of dollars.
Business context and results
Gibraltar manufactures and distributes products for building and industrial markets. During the quarter it sold United Steel Products (USP); the sale was reported as discontinued operations. On April 1, 2011, after quarter-end, the company completed its acquisition of The D.S. Brown Company.
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $163.6 | $146.7 |
| Gross profit / margin | $30.0 / 18.4% | $26.5 / 18.0% |
| Operating income / margin | $7.2 / 4.4% | $2.2 / 1.5% |
| Interest expense | $4.5 | $6.6 |
| Income (loss) from continuing operations | $1.4 | $(2.4) |
| Income (loss) from discontinued operations, after tax | $7.0 | $(18.8) |
| Net income (loss) | $8.4 | $(21.2) |
| Diluted EPS | $0.27 | $(0.70) |
| Operating cash flow, continuing operations | $(9.2) | $3.4 |
| Capital expenditures | $1.8 | $1.5 |
Financial position and liquidity
- At March 31, cash was $104.5, total debt was $207.3, and shareholders’ equity was $453.4. The company had no revolver borrowings, $103.5 of revolver availability, and $14.1 of letters of credit outstanding.
- Current assets were $316.0 and current liabilities $113.0. Cash increased $43.6 during the quarter, primarily because $58.0 of net proceeds from the USP sale more than offset operating cash use and other outflows.
- Continuing operations used $9.2 of operating cash, principally reflecting a $19.9 working-capital investment as receivables and inventories rose with sales and seasonal activity.
- The $204.0 principal amount of 8% senior subordinated notes is due December 2015. The company reported compliance with its 1.25:1.00 fixed-charge coverage covenant at quarter-end.
Changes, outlook and notable items
- Sales increased 11.5% year over year, reflecting a 5.8% increase in volume and 5.7% increase in pricing. Management attributed volume growth to improving repair-and-remodel and industrial markets, partly offset by an uneven new-home recovery; higher prices reflected rising steel, aluminum and resin costs.
- Operating income improved as SG&A fell 6.2%, including lower performance-based compensation and cost reductions. Gross margin rose modestly despite restructuring charges; management cited lower fixed and labor costs from efficiency efforts.
- Q1 net income included a $12.993 gain before tax on the USP sale. Q1 2010 included a substantial loss from the Processed Metal Products divestiture, making the year-over-year net-income comparison heavily affected by discontinued-operation transactions.
- The D.S. Brown acquisition cost $96.0, subject to a working-capital adjustment, and was funded with cash and revolver capacity. The filing did not include pro forma financial information because consolidation and purchase accounting were incomplete.
- Management expected modest improvement in building and industrial markets to continue in 2011, while emphasizing uncertainty about a sustained recovery. It expected Q2 2011 sales to exceed Q2 2010, citing D.S. Brown’s contribution and market stability. No numerical full-year earnings or sales guidance was provided.
- Unusual items included an $0.885 charge from the CEO’s surrender of time-based equity awards, $0.390 of D.S. Brown acquisition-related costs, and $0.868 of Q1 exit-activity costs and asset impairments. The quarter also included consolidation of two facilities; management said it had not identified further specific closures and did not expect material additional restructuring costs from then-identified plans.
- Risk factors include uncertain end-market demand, commodity availability and prices, energy costs, acquisition integration, credit-market conditions, and interest and tax rates. The company warned that changes in cash-flow forecasts or stock value could result in future goodwill or intangible-asset impairment; it reported no new goodwill impairment indicators at quarter-end.
Important facts for investors to verify
- How the D.S. Brown acquisition affects post-close revenue, margins, debt, and liquidity; Q1 statements do not include its operating results.
- Whether working-capital investment converts to cash and whether operating cash flow improves after the seasonal build.
- How commodity-cost pass-through, demand trends, and restructuring savings affect margins, particularly given uneven new-home construction recovery.
- Debt and covenant capacity after acquisition financing, including revolver use and compliance with the fixed-charge coverage requirement.
- The sustainability of reported earnings: Q1 net income included a significant divestiture gain, while continuing-operations income was $1.4.
- Potential impairment exposure, given substantial goodwill and the filing’s sensitivity to future cash-flow forecasts and share value.