Gibraltar Industries, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data. Gibraltar manufactures and distributes products for residential, industrial and infrastructure, renewable energy, and conservation markets.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $272.7 | $305.0 | $776.1 | $758.8 |
| Gross profit / margin | $67.9 / 24.9% | $61.4 / 20.1% | $190.9 / 24.6% | $135.4 / 17.8% |
| Operating income / margin | $26.4 / 9.7% | $23.4 / 7.7% | $72.4 / 9.3% | $43.6 / 5.7% |
| Net income | $13.8 | $13.6 | $41.4 | $23.2 |
| Diluted EPS | $0.43 | $0.43 | $1.29 | $0.74 |
| Interest expense | $3.6 | $3.9 | $11.0 | $11.4 |
- Cash flow: Nine-month operating cash flow was $101.2 million, versus $44.5 million in 2015. Investing activities used $0.3 million, compared with $119.9 million used in 2015; financing provided $2.2 million. Cash increased $104.2 million to $173.1 million.
- Balance sheet and liquidity: At September 30, cash was $173.1 million, total debt was $209.4 million, and shareholders’ equity was $469.6 million. The company reported $287.5 million available on its $300 million revolving facility, net of $12.5 million in letters of credit, with no revolver borrowings outstanding. Reported liquidity was $460.5 million.
- Margins and expenses: Q3 gross margin improved 4.8 percentage points year over year; operating margin rose 2.0 points. Nine-month SG&A rose 29% to $118.5 million and increased to 15.3% of sales from 12.1%, mainly reflecting RBI expenses, higher performance compensation, and comparison with a prior-year facility sale-leaseback gain.
Material changes versus comparable periods
- Q3 sales fell 10.6%, primarily from lower volume in Residential Products and Industrial & Infrastructure Products and the European business divestiture. Residential sales declined 7.1%; Industrial & Infrastructure sales declined 24.5%; Renewable Energy & Conservation sales were essentially flat.
- For nine months, sales increased 2.3%, reflecting the inclusion of RBI Solar and related businesses for more of the period than in 2015, partly offset by lower sales in the other segments and the European divestiture. Renewable Energy & Conservation sales rose 107.3% to $204.6 million; Industrial & Infrastructure sales fell 20.0% and Residential sales fell 8.3%.
- Operating income improved despite lower Q3 sales, led by stronger Residential and Renewable Energy & Conservation results. Industrial & Infrastructure operating income declined to $1.9 million in Q3 from $8.1 million. Corporate expenses increased, including $1.5 million of senior leadership and management transition costs in Q3.
- Nine-month earnings benefited from a lower effective tax rate, 22.7% versus 36.1%, including an $11.5 million discrete tax benefit associated with the European business sale. The sale also generated an $8.8 million pretax loss. The 2016 nine-month results include these items; 2015 results included gains on derivatives and a facility sale-leaseback.
Outlook, management commentary, and notable risks
- 2016 outlook: Management expected revenue of $1.00–$1.01 billion, about 3% below 2015, and diluted EPS of $1.43–$1.48, versus $0.74 in 2015. The EPS range includes an estimated $0.09 per-share benefit from the European divestiture and $0.23 per share of restructuring charges, including anticipated Q4 costs. Management expected operational efficiencies to offset much of the Industrial & Infrastructure end-market softness and stated it remained on track for its 2016 financial objectives.
- Strategy and market conditions: The company is pursuing operational excellence, product innovation, portfolio management, and strategic acquisitions. Management cited lower oil and commodity prices and weaker demand in industrial energy-related markets, as well as reduced demand for postal and parcel products after completion of a large mailbox contract. The business is seasonal, with reduced activity typically in the first and fourth quarters.
- Transactions: Gibraltar sold its European industrial manufacturing business in April 2016 for approximately $9.1 million gross and $8.3 million net proceeds. On October 11, 2016, after the quarter end, it acquired greenhouse provider Nexus for $25 million, funded with cash; purchase accounting was not complete in this filing.
- Revenue recognition and controls: The company identified errors in estimating total contract costs under percentage-of-completion accounting at its acquired business. It corrected prior 2016 interim results: six-month sales and net income increased by $6.6 million and $4.2 million, respectively; management considered the adjustments immaterial to the affected prior periods individually but said their cumulative effect would have been material to Q3 results. The company did not amend prior filings. Management disclosed a material weakness in internal control over financial reporting and ineffective disclosure controls as of September 30, 2016; remediation was underway, with completion expected by year-end.
- Other risks: Results remain exposed to economic conditions, customer demand, commodity prices and availability, foreign exchange, interest rates, and access to financing. Cash held by foreign subsidiaries was $23.3 million; repatriating it for domestic use could have significant tax consequences. Management cautioned that forward-looking statements are subject to risks and actual results may differ.
Important facts for investors to verify
- Track remediation and testing of controls over percentage-of-completion revenue recognition, and whether further corrections or restatements are required.
- Assess the quality and durability of the 2016 earnings improvement, including the $11.5 million tax benefit, divestiture loss and tax effect, restructuring costs, and performance-based compensation.
- Compare reported results with the 2016 revenue and EPS outlook, including the stated per-share effects of the divestiture and restructuring charges.
- Monitor Industrial & Infrastructure demand and pricing, Residential postal-product volumes, and Renewable Energy & Conservation backlog, execution, and acquired-business contribution.
- Review Nexus integration, purchase accounting, cash use, and the effect of the acquisition on liquidity and future results.