Business context and reporting period
Atkore International Group Inc. (NYSE: ATKR) filed this Form 10-K for the fiscal year ended September 30, 2019. It manufactures Electrical Raceway products and Mechanical Products & Solutions (MP&S), primarily for construction, renovation and industrial markets. Approximately 88% of fiscal 2019 sales were to U.S. customers. This is an annual filing, not a standalone fourth-quarter filing.
Financial performance and liquidity
Unless otherwise stated, amounts are in millions of dollars.
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $1,916.5 | $1,835.1 | +4.4% |
| Gross profit | $497.2 | $438.1 | +13.5% |
| Gross margin | 25.9% | 23.9% | +2.1 percentage points |
| Operating income | $223.7 | $179.7 | +24.5% |
| Net income | $139.1 | $136.6 | +1.8% |
| Diluted EPS | $2.83 | $2.48 | +14.1% |
| Operating cash flow | $209.7 | $145.7 | +43.9% |
| Capital expenditures | $34.9 | $38.5 | −9.5% |
- Operating cash flow less capital expenditures was approximately $174.8 million, up from $107.2 million. Cash increased $123.4 million at year-end versus $126.7 million a year earlier.
- Gross long-term debt under the term loan was $851.4 million; the balance-sheet carrying amount was $845.3 million after deferred financing costs. Cash less gross debt implies net debt of approximately $727.9 million. The company prepaid $40 million voluntarily in the fourth quarter and reported no remaining scheduled principal payments before maturity in December 2023.
- The $325 million ABL facility had no borrowings outstanding; available capacity was approximately $301.9 million, net of letters of credit. Management said cash and available borrowing capacity should fund operations, expected capital expenditures and debt service for at least 12 months.
- Segment results: Electrical Raceway sales rose 5.6% to $1,443.5 million and Adjusted EBITDA increased 14.6% to $292.6 million; its margin rose to 20.3% from 18.7%. MP&S sales increased 0.9% to $474.3 million, while Adjusted EBITDA grew 36.4% to $70.0 million and margin improved to 14.8% from 10.9%.
- Fourth-quarter sales were $501.7 million, gross profit $143.7 million and net income $46.0 million, compared with $477.6 million, $111.7 million and $32.7 million, respectively, in the prior-year quarter.
Material changes versus the prior year
- Sales growth reflected acquisitions, higher volume and higher average selling prices; acquisitions net of divestitures contributed 2.6 percentage points to reported sales growth. Lower steel and other material input costs supported gross profit, alongside operational efficiencies.
- Interest expense rose 24.0% to $50.5 million, primarily following the 2018 debt refinancing and additional borrowing. The effective tax rate increased to 24.7% from 17.9%, partly because the prior year included tax benefits related to U.S. tax reform and other items; consequently, net income grew more slowly than operating income.
- Other income was $11.5 million, including a $7.4 million bargain-purchase gain on Cor-Tek. Fiscal 2018 included a $27.6 million gain from the FlexHead sale, making year-over-year comparisons of other income nonrecurring-item sensitive.
- Fiscal 2019 acquisitions included Vergokan, U.S. Tray, Flytec and Cor-Tek. Cash used for acquisitions was $98.0 million. The company reported $3.8 million of restructuring charges.
Outlook, commentary, risks and contingencies
- No quantified fiscal 2020 earnings or sales guidance is provided in the filing. Management expects to pursue synergistic acquisitions and views data centers, building automation and energy-efficient lighting as potential demand drivers. It cited U.S. non-residential construction recovery as an opportunity, while noting the market remained below historical levels.
- Key sensitivities include cyclical construction demand and seasonality, steel/copper/PVC and freight cost movements, pricing pressure, customer credit and concentration, weather, and foreign exchange. The ten largest customers represented about 33% of sales; no individual customer exceeded 10%.
- Debt is largely floating-rate: the filing estimates that a 1 percentage point rate change would affect annual term-loan interest expense by approximately $8.6 million. Management also disclosed uncertainty around the planned transition away from LIBOR after 2021.
- Product-liability claims include allegations involving antimicrobial-coated sprinkler pipe and CPVC. Reserves for special and other product-liability matters were $2.4 million; management estimated reasonably possible losses of $1 million to $8 million and did not expect a material adverse effect. Tyco/Johnson Controls has an indemnification obligation for remaining and future special-product claims after the company met the agreed $12 million deductible.
- Environmental compliance and potential remediation at current and former sites remain risks, including groundwater monitoring at Wayne, Michigan. Management did not expect currently described permit and remediation work to be material, but future obligations could arise.
- U.S. pension plans were underfunded by $34.5 million at year-end; projected fiscal 2020 contributions were approximately $2.1 million. The company also disclosed $18.2 million of surety bonds and $10.5 million of letters of credit.
- Management and the auditor concluded internal control over financial reporting was effective; the financial-statement audit opinion was unqualified. Goodwill impairment was identified as a critical audit matter, particularly assumptions about acquisition effects, revenue growth, EBITDA margins and discount rates. No goodwill impairment was recorded.
- The company adopted revenue-recognition guidance in fiscal 2019 without changing historical revenue or earnings. It expected to adopt lease accounting in fiscal 2020, estimating $42 million to $52 million of lease liabilities and corresponding right-of-use assets.
- No common dividends are planned for the foreseeable future. A $50 million repurchase authorization approved in February 2019 remained entirely unused at September 30, 2019.
Important facts for investors to verify
- Separate organic sales and profit growth from acquisition contributions, and review the final purchase-price allocations for fiscal 2019 acquisitions.
- Confirm the sustainability of improved gross and segment margins if steel, freight or other input costs change, and track volume and pricing trends by segment.
- Review debt balances, floating-rate exposure, debt covenants, the December 2023 term-loan maturity and refinancing options.
- Assess the assumptions supporting goodwill valuations and monitor integration and performance of acquired businesses.
- Track developments and reserve adequacy for product-liability claims, environmental matters and the pension deficit.
- Reconcile reported net income and cash generation for nonrecurring gains, tax-rate changes, working-capital movements and acquisition spending.