Gibraltar Industries, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. Unless noted otherwise, figures are in millions of dollars. Gibraltar manufactures and distributes products for building, industrial, and infrastructure markets across North America and Europe.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $208.8 | $176.9 | $372.4 | $323.6 |
| Gross profit / margin | $45.4 / 21.8% | $34.0 / 19.2% | $75.5 / 20.3% | $60.4 / 18.7% |
| Operating income / margin | $17.4 / 8.3% | $9.4 / 5.3% | $24.6 / 6.6% | $11.6 / 3.6% |
| Continuing-operations income | $7.2 | $2.6 | $8.7 | $0.2 |
| Net income (loss), including discontinued operations | $7.8 | $3.5 | $16.2 | $(17.8) |
| Diluted EPS | $0.25 | $0.11 | $0.53 | $(0.58) |
| Interest expense | $5.0 | $4.4 | $9.5 | $10.9 |
Q2 sales rose 18.0%; management attributed $22.5 million of the increase to acquisitions, with higher pricing more than offsetting lower volume. First-half sales rose 15.1%, reflecting acquisitions, higher prices, and 3.1% volume growth. Gross and operating margins improved as material costs aligned better with selling prices, acquired products improved mix, and cost reductions and facility consolidations contributed. Q2 continuing-operations effective tax rate was 41.7%; first-half rate was 42.9%.
Cash flow, balance sheet, and debt
- First-half operating cash flow from continuing operations was $(2.5) million, versus $12.0 million generated in 2010. Management cited a $29.3 million working-capital investment, including higher receivables and inventory, partly offset by increased payables.
- Investing cash flow was $(52.9) million, including $107.6 million paid for acquisitions and $4.5 million of capital expenditures, offset in part by $59.0 million of USP sale proceeds. Financing cash flow was $18.8 million. Cash declined $39.8 million to $21.1 million.
- At June 30, cash was $21.1 million, current assets $288.8 million, and current liabilities $139.9 million. Total debt was $227.0 million, compared with $207.2 million at year-end 2010. Shareholders’ equity was $462.6 million.
- Liquidity was reported as $128.8 million: $21.1 million cash plus $107.7 million available under the revolving credit facility. The company had $20.0 million drawn on the revolver and $13.9 million of outstanding letters of credit. It was in compliance with its 1.25-to-1.00 fixed-charge-coverage covenant.
- The $202.1 million carrying value of 8% senior subordinated notes is due December 2015. The revolver was committed through August 30, 2012; management expected to refinance it in the second half of 2011 to extend maturity. Debt fair value was $234.8 million versus carrying value of $227.0 million.
Material developments, outlook, and risks
- Gibraltar acquired D.S. Brown on April 1 for $97.6 million and Award Metals on June 3 for $13.4 million, funded with cash and revolver borrowings. These acquisitions expanded infrastructure and building-products offerings. Goodwill increased to $350.4 million, including $50.6 million from the acquisitions.
- The company sold United Steel Products in March for $59.0 million and recorded a $14.0 million pretax gain. Discontinued operations contributed $7.5 million of first-half after-tax income, compared with a $18.0 million loss in the prior-year period; this makes reported net-income comparisons materially affected by divestitures.
- Acquisition-related inventory fair-value costs were $2.5 million in Q2 and first-half 2011; acquisition transaction costs were $0.2 million in Q2 and $0.6 million year to date. First-half SG&A also included a $0.9 million accelerated compensation charge after the CEO surrendered part of a restricted-stock-unit award.
- Management expected an uneven recovery in building and industrial markets to continue. For Q3 2011, it expected sales and profitability to exceed Q3 2010, based on acquired businesses and stable markets. No full-year numerical guidance was provided. Management cited long-term opportunity from improved efficiency and a lower break-even point.
- Risks highlighted include weak or uneven construction demand, raw-material availability and price volatility, energy costs, credit-market liquidity, acquisition integration, and interest- and tax-rate changes. Management noted that housing starts remained well below long-term averages. Goodwill impairment remained a risk if cash flows or the company’s share price weakened; no new impairment indicators were identified at June 30. The company consolidated two facilities in the first half and continued restructuring activity.
- Management stated that available liquidity and expected operating cash generation should support requirements for the next 12 months, but warned that weaker operating cash flows or unavailable or costly financing could adversely affect liquidity. Disclosure controls were deemed effective; no material legal proceedings were reported.
Key facts for investors to verify
- Whether Q3 sales and profitability exceeded the prior-year quarter and whether the two acquisitions delivered expected contributions and integration benefits.
- Working-capital conversion and operating cash flow, given the first-half cash use and seasonal inventory and receivables build.
- Progress and terms of the planned revolver refinancing before its August 2012 maturity, as well as continued covenant compliance and available borrowing capacity.
- Underlying earnings trends excluding the USP gain and other discontinued-operation effects, plus the recurring impact of acquisition and restructuring costs.
- Goodwill and acquired-intangible recoverability, and exposure to construction-market weakness, commodity costs, and tax-rate variability.