Gibraltar Industries, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Gibraltar manufactures and distributes products for residential, industrial and infrastructure, and renewable energy and conservation markets. Dollar amounts below are in millions unless otherwise noted.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $280.1 | $274.6 | $761.5 | $728.8 |
| Gross profit / margin | $70.3 / 25.1% | $68.7 / 25.0% | $189.1 / 24.8% | $179.8 / 24.7% |
| Operating income / margin | $29.4 / 10.5% | $35.7 / 13.0% | $75.5 / 9.9% | $70.3 / 9.7% |
| Net income | $19.5 | $20.6 | $50.7 | $37.4 |
| Diluted EPS | $0.60 | $0.64 | $1.56 | $1.16 |
| Operating cash flow | Not separately presented | Not separately presented | $38.2 | $48.8 |
- Q3 revenue rose 2.0%, but operating income declined 17.6% and net income fell 5.4%. Higher SG&A outweighed increased sales and a modestly improved gross margin.
- Nine-month revenue increased 4.5%; operating income rose 7.4%, and net income increased from $37.4 million to $50.7 million. The prior-year comparison included a $0.4 million discontinued-operations loss; lower taxes also supported 2018 earnings.
- Nine-month cash from investing was a use of $8.9 million, including $6.8 million of capital spending and $5.2 million net cash paid for SolarBOS, partly offset by $3.2 million of property-sale proceeds. Financing used $5.6 million, including $6.5 million of treasury-stock purchases.
- Cash was $245.4 million at September 30, 2018, versus $222.3 million at year-end 2017. Current assets were $532.7 million and current liabilities $191.6 million.
- Total debt was $210.2 million, principally $210.0 million of 6.25% notes due February 2021. No revolver borrowings were outstanding; $290.5 million remained available after letters of credit. Reported liquidity was $535.9 million. The company was in compliance with all three credit-agreement financial covenants.
Material changes and segment performance
- Q3 sales growth was driven by Renewable Energy and Conservation (up 11.8% to $98.5 million); Residential Products declined 2.9% to $125.8 million and Industrial and Infrastructure Products declined 2.1% to $55.8 million. For the first nine months, Renewable Energy and Conservation sales increased 13.1% to $229.2 million, Industrial and Infrastructure Products rose 3.9% to $171.4 million, and Residential Products was nearly flat at $360.9 million.
- Nine-month operating income improved in Industrial and Infrastructure Products ($12.1 million versus $5.9 million) and Renewable Energy and Conservation ($28.7 million versus $18.4 million). Residential Products operating income fell to $57.6 million from $62.0 million. Unallocated corporate expenses increased to $22.8 million from $16.0 million.
- Q3 SG&A increased $7.8 million to $40.9 million, including $5.0 million higher performance-based compensation, $1.3 million higher restructuring charges, and $1.0 million higher senior-leadership transition costs. Nine-month SG&A rose 3.7% to $113.6 million, principally reflecting performance compensation and transition costs, partly offset by lower restructuring charges.
- Operating cash flow declined by $10.6 million year over year for the first nine months. The company reported a $37.0 million investment in working capital and other net assets, notably higher receivables and inventory, which management attributed mainly to seasonality and material-cost increases.
Outlook, risks, and notable items
- Management expected 2018 revenue to exceed $1 billion, but lowered its full-year revenue-growth outlook from 2–4% to 1–2%, citing activity levels across end markets. Full-year GAAP diluted EPS guidance was narrowed to $1.82–$1.87; Q4 revenue guidance was $239–$249 million and Q4 diluted EPS guidance was $0.26–$0.31. Management cited innovative products and 80/20 simplification initiatives as earnings supports.
- Management’s priorities included new-product development, managing customer cost volatility, simplifying operations, and pursuing value-added acquisitions. It described demand for innovative products as an opportunity and noted seasonality in operations.
- Steel and aluminum tariffs were identified as a risk: U.S. tariffs imposed in June 2018 increased input-cost volatility. The company may be unable to pass on price increases or secure alternative supplies, potentially affecting margins, demand, and cash flows.
- SolarBOS was acquired on August 21, 2018 for preliminary consideration of $6.5 million, funded with cash, and included in Renewable Energy and Conservation. The company also reported $3.4 million of nine-month exit-activity and asset-impairment charges, including a $1.3 million impairment related to discontinuing lower-margin Residential Products sales; two facilities were closed and a facility was sold and leased back.
- ASC 606 was adopted using the modified retrospective method, increasing opening retained earnings by $0.274 million. Adoption increased reported nine-month 2018 net income by $0.620 million versus the prior accounting method; comparative periods were not restated. Management did not expect a material ongoing net-income impact. The company expected the January 2019 lease-standard adoption to increase balance-sheet assets and liabilities but not materially affect results.
- Prior-divestiture indemnification claims remained a contingent liability; management said their outcome was not expected to significantly affect financial condition or results. The filing reported no material change to previously disclosed risk factors other than the tariff discussion.
Important facts for investors to verify
- Whether the reduced 2018 revenue-growth outlook and stated full-year and Q4 EPS ranges were achieved.
- Whether the Q3 operating-income decline, higher corporate costs, and Residential Products margin pressure persisted or reversed.
- How seasonal receivables and inventory levels affected subsequent operating cash flow and working-capital needs.
- Whether tariffs and related steel and aluminum costs could be passed through to customers without weakening demand or margins.
- SolarBOS’s contribution and integration, and the remaining costs and benefits from restructuring and 80/20 initiatives.
- Debt repayment and refinancing plans ahead of the 2021 notes maturity, and continued compliance with credit covenants.