Gibraltar Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2010; comparisons are to the three and nine months ended September 30, 2009. Financial amounts below are in millions of dollars unless stated otherwise. Gibraltar now reports one segment and focuses on building products following its exit from steel processing.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $182.1 | $190.5 | $531.4 | $547.7 |
| Gross profit | $31.3 | $44.7 | $99.8 | $101.3 |
| Gross margin | 17.2% | 23.5% | 18.8% | 18.5% |
| Operating income (loss) | $5.5 | $18.3 | $19.7 | $(1.3) |
| Income (loss) from continuing operations | $1.3 | $7.6 | $2.8 | $(11.3) |
| Net income (loss) | $1.2 | $4.9 | $(16.6) | $(22.6) |
| Operating cash flow, continuing operations | Not provided for quarter | Not provided for quarter | $39.7 | $83.6 |
- Q3 diluted earnings per share were $0.04, compared with $0.16 a year earlier. Nine-month diluted loss per share was $0.54, versus a $0.75 loss.
- Q3 sales fell 4.4%; management attributed this primarily to a 7.0% volume decline, partly offset by 2.6% higher pricing. For the nine months, sales declined 3.0%, reflecting a 3.7% volume decline partly offset by 0.7% higher pricing.
- Q3 gross margin contracted to 17.2% as competitive pricing and the timing mismatch between lower raw-material costs and inventory purchased at higher costs pressured margins. Nine-month margin improved modestly, which management attributed to cost-reduction initiatives.
- Q3 interest expense decreased to $4.7 million from $7.1 million, reflecting lower debt and the prior-year write-off of deferred financing costs. Nine-month interest expense was $16.5 million versus $17.4 million.
- Continuing-operations operating cash flow was $39.7 million for the nine months, down from $83.6 million. Total operating cash flow, including discontinued operations, was $54.4 million versus $111.6 million. Cash increased $24.7 million to $48.3 million.
Financial position and liquidity
- At September 30, 2010, total debt was $207.1 million, down from $257.3 million at December 31, 2009; the revolving credit facility had no borrowings outstanding. Long-term debt included $201.9 million of 8% subordinated notes, net of discount, due December 2015.
- Cash was $48.3 million; revolving-facility availability was $104.3 million, and reported liquidity was $152.6 million. Standby letters of credit of $13.7 million reduced facility availability. The $200 million revolving facility is committed through August 2012.
- The company reported compliance with its minimum fixed-charge coverage covenant of 1.25 to 1.00 at quarter-end. Shareholders’ equity was $514.7 million, down from $528.2 million at year-end 2009.
- Capital expenditures were $6.3 million for the nine-month period. Net investing cash flow was $22.1 million, including $29.2 million of proceeds from the Processed Metal Products sale.
Material changes, outlook, and risks
- On February 1, 2010, Gibraltar sold most Processed Metal Products assets for net proceeds of $29.2 million, completing its exit from steel processing. The sale generated a reported after-tax loss of $19.5 million; discontinued operations also include the remaining bath cabinet business and related costs. The nine-month discontinued-operations loss was $19.4 million.
- Demand remained depressed in residential and commercial construction. Management said order levels weakened after May amid the expiration of the first-time homebuyer tax credit, high unemployment, and weaker consumer confidence. It expected the fourth quarter to be seasonally slow and the economic outlook uncertain; no numerical earnings or revenue guidance was provided.
- Management expects cost and efficiency initiatives to lower the break-even point and support better profitability if markets recover. It planned to continue cost reductions and working-capital management.
- Management expected $0.3–$0.4 million of additional exit costs for two leased facilities scheduled to close in Q4 2010. A contingent liability related to withdrawal from an underfunded multi-employer pension plan was still being finalized, with an amount expected in Q4.
- The annual goodwill and indefinite-lived intangible impairment test was scheduled for Q4 2010. Management reported no new interim impairment indicators through September 30, but cautioned that weaker cash flows or stock value could result in further impairment charges.
- Other risks include building-market demand, raw-material availability and price volatility, energy costs, credit-market conditions, acquisition integration, and changes in interest or tax rates. Forecasted earnings near break-even make the effective tax rate sensitive to small changes; Q3 included a $0.6 million tax benefit due to a revised annual earnings and tax-rate forecast.
- Management stated disclosure controls were effective. A business unit implemented a new ERP system during Q3, a change considered material to internal control over financial reporting; management expected it to improve controls.
Important facts for investors to verify
- Whether building-market volumes and gross margins improve, particularly given Q3’s sharp year-over-year margin decline and inventory-cost timing effects.
- The final pension withdrawal liability and the total remaining costs associated with discontinued operations and facility closures.
- Results of the Q4 2010 goodwill and indefinite-lived intangible impairment testing and the assumptions underlying valuation forecasts.
- Availability under the revolving credit facility, covenant compliance, and the company’s ability to maintain cash generation as operating cash flow has declined year over year.
- The effect of near-break-even pretax earnings on full-year taxes; management noted that small forecast changes could materially affect the effective tax rate.