Atkore International Group Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017; comparisons are to the periods ended March 25, 2016. Atkore manufactures electrical raceway products and mechanical pipe and solutions for construction and industrial markets. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended Mar. 31, 2017 | Prior-year quarter | Six months ended Mar. 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $372.8 | $353.0 | $710.4 | $711.4 |
| Gross profit | $87.9 | $91.4 | $180.0 | $163.8 |
| Gross margin | 23.6% | 25.9% | 25.3% | 23.0% |
| Operating income | $30.8 | $31.7 | $73.3 | $54.7 |
| Net income | $18.9 | $14.0 | $36.3 | $22.6 |
| Diluted EPS | $0.28 | $0.22 | $0.55 | $0.36 |
| Adjusted EBITDA | $56.1 | $58.4 | $106.0 | $106.4 |
| Adjusted EBITDA margin | 15.1% | 16.5% | 14.9% | 15.1% |
Cash flow and liquidity: Six-month operating cash flow was $25.1, down from $82.2, primarily because working capital increased as receivables and inventory rose with input costs. Capital expenditures were $8.4. Cash declined $122.3 from September 30, 2016, to $77.9, primarily due to refinancing activity. At March 31, 2017, balance-sheet debt was $492.7, net of deferred financing costs, and the company had $223.5 of ABL availability with no ABL borrowings. Current assets were $487.5 and current liabilities $185.1.
Changes and operating drivers
- Quarterly sales increased 5.6%, mainly from higher average selling prices reflecting steel-cost pass-through; lower sales volumes, particularly mechanical pipe demand in the solar market, partially offset the increase. Gross profit fell 3.8%, and Adjusted EBITDA fell 3.8%.
- For the six-month period, reported sales were essentially flat. Higher pricing and gross profit were offset by lower volumes, including weaker solar-market mechanical pipe demand and the prior-year Fence and Sprinkler business. Adjusted EBITDA was nearly flat.
- Electrical Raceway performed better: six-month sales rose 4.2% and Adjusted EBITDA rose 11.2%, supported by pricing, productivity and higher-value products.
- Mechanical Products & Solutions weakened: six-month adjusted sales fell 4.9% and Adjusted EBITDA fell 16.4%, chiefly because of lower solar-market mechanical pipe volumes. The reported comparison also reflects the Fence and Sprinkler exit.
- Quarterly net income benefited from a $5.8 gain on completing the sale of the Abahsain-Cope Saudi Arabia minority investment and lower interest expense. Six-month results also included a $9.8 debt-extinguishment loss from refinancing. The sale gain and refinancing items are not recurring operating performance indicators.
Debt, outlook and risks
- In December 2016, Atkore refinanced its prior first- and second-lien term loans with a $500.0 first-lien term loan due December 2023, bearing interest at LIBOR plus 3.0% or the alternate base rate plus 2.0%. The ABL facility was extended to December 2021; $223.5 was available at quarter-end. The company reported compliance with credit-facility covenants.
- Management said cash from operations and available ABL capacity should be sufficient for operations, expected capital spending and obligations for at least the next 12 months. The filing provides no specific earnings or revenue guidance.
- Management cited risks including non-residential construction weakness, commodity-price changes, competition and pricing pressure, freight and supply disruptions, working-capital needs, customer credit, and restrictions under debt agreements. $29.8 of cash was held at non-U.S. subsidiaries and could be subject to tax if repatriated.
- The company accrued $7.5 for incremental antidumping duties on certain imported conduit fittings following a Commerce Department scope ruling; it is appealing the decision. The filing does not state the appeal outcome.
- Product-liability reserves included $3.6 for Special Products Claims and $1.9 for other product claims. The company estimated probable losses across these matters at $3.0–$10.0 and said additional losses could become material, though not currently reasonably estimable.
- Open purchase orders for production materials totaled $128.3 for the remainder of fiscal 2017, plus $5.1 for fiscal 2018 and $0.8 thereafter.
Important facts for investors to verify
- Whether higher selling prices continue to offset raw-material cost changes without further margin pressure.
- Whether solar-market and other mechanical pipe demand stabilizes, and how segment volumes and margins develop.
- How working-capital growth affects operating cash generation and liquidity.
- The progress and potential financial impact of the antidumping-duty appeal and product-liability matters.
- The effects of refinancing, debt service, covenants and any future debt reduction on cash availability.
- How much reported earnings reflect one-time items, including the joint-venture sale gain and debt-extinguishment loss.