Atkore Inc. — Q3 Fiscal 2020 Form 10-Q
Business context and period: Atkore manufactures Electrical Raceway products and Mechanical Products & Solutions (MP&S), primarily serving construction, renovation and industrial markets. This unaudited quarter ended June 26, 2020; nine-month results cover the period from the start of fiscal 2020 through that date. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Quarter ended June 26, 2020 | Prior-year quarter | Nine months ended June 26, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $384.9 | $493.5 | $1,288.0 | $1,414.8 |
| Gross profit | $95.8 | $126.1 | $344.3 | $353.5 |
| Gross margin | 24.9% | 25.6% | 26.7% | 25.0% |
| Operating income | $41.6 | $59.2 | $155.3 | $157.4 |
| Net income | $24.1 | $36.6 | $98.1 | $93.1 |
| Diluted EPS | $0.49 | $0.75 | $1.99 | $1.90 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $156.0 | $120.2 |
- Quarterly sales fell 22.0%; net income fell 34.1%. Quarterly operating margin was 10.8%, versus 12.0% a year earlier; net margin was 6.3%, versus 7.4%.
- For the nine-month period, sales declined 9.0%, while net income increased 5.4%. Operating margin was 12.1%, compared with 11.1%; net margin was 7.6%, compared with 6.6%.
- Nine-month operating cash flow was $156.0 million. Capital expenditures were $25.6 million, implying approximate cash flow after capital expenditures of $130.4 million. Cash increased to $237.3 million from $123.4 million at fiscal year-end, mainly reflecting improved working-capital cash flows.
- At June 26, cash was $237.3 million and long-term debt, net of financing costs, was $846.1 million; approximate net debt was $608.8 million. The $851.5 million First Lien Term Loan is due December 2023. No ABL borrowings were outstanding; about $247.8 million was available under the facility.
- Current assets were $755.5 million and current liabilities $229.5 million. The company reported $39.5 million of lease obligations following adoption of lease accounting in fiscal 2020.
Material changes versus comparable periods
- Management attributed most of the quarterly sales decrease to $102.3 million of lower volume, predominantly related to COVID-19, with declines concentrated in armored cable and metal electrical conduit and fittings and in certain MP&S categories. Lower steel and resin input costs reduced average selling prices by $9.1 million; 2019 acquisitions added $5.1 million of sales.
- Quarterly segment performance weakened: Electrical Raceway sales declined 23.4% and Adjusted EBITDA declined 25.1% to $57.5 million; its margin was 20.1% versus 20.6%. MP&S sales declined 17.5% and Adjusted EBITDA declined 40.6% to $12.2 million; its margin was 12.3% versus 17.1%.
- Across nine months, Electrical Raceway Adjusted EBITDA declined 2.8% to $206.6 million, but margin rose to 21.4% from 19.9%. MP&S Adjusted EBITDA fell 7.9% to $45.0 million, with margin at 14.0% versus 14.2%.
- Nine-month interest expense declined 20.0% to $30.6 million, primarily reflecting a lower debt principal balance following fiscal 2019 repayments. The prior-year period included $83.4 million of acquisition spending; no business acquisition cash outflow was reported in the current nine months.
Outlook, commentary, risks and unusual items
- Management said COVID-19 had caused volume declines, project delays and some construction-site closures, but described the company as an essential business with no COVID-related facility closures as of the filing. It said the pandemic’s future effect was too uncertain to assess and provided no quantified earnings or revenue guidance in the supplied filing text.
- The company expects cash from operations and available ABL capacity to fund operations, expected capital expenditures and liquidity needs for at least the next 12 months. It reported compliance with credit-facility covenants.
- Management tested EMEA goodwill for impairment as of March 27, 2020 after identifying a COVID-related triggering event. Estimated fair value exceeded carrying value by less than 10%; no impairment was recorded. EMEA goodwill was $34.8 million, and management warned that changed assumptions or further deterioration could result in a potentially material future impairment.
- Quarterly restructuring charges were $0.5 million; nine-month charges were $3.3 million, including workforce reductions and facility closures. A manufacturing-site flood led to a $6.0 million estimated loss and $5.0 million insurance recovery for the nine months; the filing estimated total property and equipment losses of $6.0–$13.0 million, excluding business-interruption losses, and expected insurance reimbursement beyond a $1.0 million deductible.
- Product-liability reserves were $0.8 million; reasonably possible aggregate losses were estimated at $1–$8 million. The company said it did not expect the specified product claims to have a material adverse effect and noted Johnson Controls’ indemnification obligation for remaining and future specified claims.
- On July 14, 2020, after quarter-end, the company reached a new collective bargaining agreement for its Harvey, Illinois facility, expiring in April 2024.
Investor verification priorities
- Confirm whether subsequent results support management’s assessment of COVID-19 demand, project timing and the durability of cost reductions.
- Track segment volumes, selling prices, input costs and margins, especially the steep quarterly decline in MP&S Adjusted EBITDA.
- Monitor cash conversion and working capital, and verify ongoing liquidity, ABL availability and compliance with debt covenants.
- Review EMEA goodwill valuation assumptions and headroom, given the less-than-10% fair-value cushion disclosed in the impairment test.
- Follow the flood-loss estimate and insurance recovery, as well as developments in product-liability claims and the stated potential loss range.