Gibraltar Industries, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; comparisons are primarily with FY2009. The company manufactures and distributes building products across North America and Europe. It completed its exit from steel processing with the February 2010 sale of most Processed Metal Products assets.
Financial performance and position
- Revenue: $685.1 million, down 1.0% from $691.8 million. Volume fell 2.6%, partly offset by 1.6% higher pricing.
- Margins: Gross profit was $118.4 million; gross margin declined to 17.3% from 18.8%. Lower volume, competitive pricing, higher raw-material costs late in the year, and increased restructuring charges pressured margins.
- Profitability: Operating loss was $68.1 million versus $37.7 million in 2009. Continuing-operations loss was $73.4 million, or $2.42 per diluted share, compared with $41.1 million, or $1.36 per diluted share. Net loss was $91.1 million, or $3.01 per diluted share, versus $52.0 million, or $1.73 per diluted share.
- Impairments and unusual items: The company recorded $77.0 million of intangible-asset impairment charges in 2010, compared with $60.1 million in 2009. The 2010 charges included $66.6 million of goodwill impairment and impairment of indefinite- and finite-lived intangibles. Discontinued operations generated a $17.7 million after-tax loss, including a loss on sale of the Processed Metal Products business.
- Cash flow: Continuing operating cash flow was $55.7 million, down from $99.8 million. Total operating cash flow, including discontinued operations, was $69.2 million versus $131.6 million. Investing activities provided $19.4 million overall, including $29.2 million of net proceeds from the business sale; capital expenditures were $8.5 million. Financing activities used $51.4 million, primarily for debt repayment. Cash increased $37.3 million to $60.9 million.
- Debt and liquidity: Total debt fell to $207.2 million from $257.3 million; the company repaid $50.0 million net on its revolving facility and had no revolver borrowings at year-end. Cash plus revolver availability of $85.8 million totaled reported liquidity of $146.7 million. The principal debt was $202.0 million of 8% senior subordinated notes, due December 2015. The company reported compliance with its 1.25:1.00 fixed-charge coverage covenant at year-end.
- Balance sheet: Current assets were $242.4 million and current liabilities $100.1 million; total assets were $810.9 million and shareholders’ equity $440.9 million. No cash dividends were declared in 2010 or 2009.
Changes versus the prior period
- Revenue was nearly flat year over year, but gross margin declined 1.5 percentage points and net loss widened by $39.0 million.
- Continuing operating cash flow decreased by $44.1 million, while debt declined by $50.1 million and cash rose by $37.3 million.
- Housing starts increased to 586,000 from 554,000 in 2009, but remained far below 900,000 in 2008; management said market demand remained weak.
- The Home Depot accounted for 15% of sales, compared with 16% in 2009. The company closed or consolidated six facilities during 2010 and 30 since January 2008.
Outlook, commentary, and risks
Management expected modest improvement in residential, repair-and-remodel, and non-residential building markets during 2011, while emphasizing uncertainty about a sustained recovery. First-quarter 2011 sales were expected to be modestly favorable to first-quarter 2010. Management said cost reductions, lean initiatives, and facility consolidation lowered the company’s break-even point and could support improved profitability if volumes recover.
- Key risks include continued weakness in construction markets, commodity-cost volatility and limited ability to pass increases through to customers, customer concentration and order-by-order sales, supplier disruptions, and competition.
- Debt-related risks include substantial fixed obligations, restrictive covenants, collateral securing the credit facility, and the need to repay or refinance the revolving facility by August 2012. The notes mature in December 2015.
- Additional risks include foreign operations and currency movements, seasonal cash-flow variability, labor negotiations, environmental compliance and potential liabilities, and the possibility of further asset impairments. Goodwill testing relied on forecasts and other significant valuation assumptions; further impairment could result if performance or market values weaken.
- Management expected approximately $0.8 million of additional exit costs for facilities closed in late 2010. It reported no pending legal proceedings expected to have a material adverse effect and no off-balance-sheet arrangements.
Investor verification priorities
- Review the impairment assumptions and sensitivity to revenue growth, margins, discount rates, and market multiples, as well as the potential for additional charges.
- Assess the durability of operating cash generation, the drivers of the decline from 2009, and the contribution of sale proceeds to debt reduction and liquidity.
- Confirm covenant headroom and borrowing-base availability, and evaluate the August 2012 revolver repayment/refinancing requirement and 2015 note maturity.
- Track housing and other end-market demand, raw-material pass-through timing, volume and pricing trends, and progress toward management’s 2011 outlook.
- Evaluate customer and supplier concentration, including The Home Depot’s sales share and the company’s exposure to major suppliers.
Audit and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2010.