Gibraltar Industries, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Financial statements are unaudited; amounts below are in millions of dollars except per-share data.
Business context
Gibraltar manufactures and distributes products for building markets in North America and Europe. In February 2010, it sold most of its Processed Metal Products business, completing its exit from steel processing and leaving building products as its sole operating segment. The company operated 48 facilities in 22 states, Canada, England, Germany, and Poland.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $191.8 | $190.8 | $349.3 | $357.1 |
| Gross profit / margin | $39.1 / 20.4% | $38.0 / 19.9% | $68.5 / 19.6% | $56.6 / 15.8% |
| Operating income (loss) | $11.7 | $13.9 | $14.3 | $(19.6) |
| Continuing operations income (loss) | $3.8 | $2.1 | $1.5 | $(18.9) |
| Net income (loss) | $3.5 | $0.1 | $(17.8) | $(27.5) |
| Basic earnings (loss) per share | $0.12 | $0.00 | $(0.59) | $(0.91) |
Q2 sales rose 0.5%; pricing gains were partly offset by lower volume and an unfavorable sales mix. Gross margin improved, but operating income declined as selling, general, and administrative expense rose 14.2% to $27.4 million, including higher health claims and incentive compensation. For the half-year, sales fell 2.2%, while gross margin improved substantially. The prior-year period included a $25.5 million impairment charge; 2010 included a $0.2 million impairment recovery. Excluding impairment effects, management reported operating income of $14.1 million versus $5.9 million.
Six-month interest expense was $11.7 million versus $10.4 million, including $1.9 million of swap-related losses reclassified to interest expense. The effective tax rate was 44.8% for the first half of 2010, compared with a tax benefit in the prior-year period. Discontinued operations generated a six-month loss of $19.2 million in 2010, including the sale-related loss; the sale itself produced an after-tax loss of $19.5 million.
Cash flow, debt, and liquidity
- First-half operating cash flow was $30.8 million in total, comprising $15.9 million from continuing operations and $14.9 million from discontinued operations; total operating cash flow was $65.1 million in the prior-year period.
- Continuing-operations investing cash flow was positive $24.1 million, principally reflecting $29.2 million net proceeds from the business sale, offset by $4.4 million of capital expenditures and a $0.8 million investment.
- Financing activities used $51.2 million, primarily for net debt repayments. Cash increased $3.2 million to $26.8 million.
- At June 30, total debt was $207.0 million, down from $257.3 million at year-end 2009. No revolving-credit borrowings remained; reported revolver availability was $116.1 million, after letters of credit. Management reported total liquidity of $142.9 million.
- The $200 million revolving facility is committed through August 30, 2012. The company reported compliance with its 1.25-to-1.00 minimum fixed-charge coverage covenant at quarter-end. Its 8% senior subordinated notes, due December 2015, had a carrying amount of $201.8 million.
Changes, outlook, and risks
Management attributed improved first-half margins to better alignment of selling prices with raw-material costs and cost reductions. It cited weak building-market demand, first-quarter inclement weather, unemployment, and lower consumer confidence as factors weighing on volumes. It expected only a modest improvement in housing starts in 2010 and challenging repair-and-remodel activity, but anticipated income from continuing operations in Q3 and a return to full-year profitability. Gibraltar did not provide numerical EPS guidance.
The company expected approximately $0.5–$0.6 million of further exit costs for two leased facilities scheduled to close in Q3. The amount payable to exit an underfunded multi-employer pension plan related to the divested business remained an estimate and was expected to be finalized in Q4. Management warned that further impairment charges could arise if cash flows or the company’s market value weaken. Other cited risks include customer demand, raw-material availability and prices, energy costs, credit-market conditions, acquisitions, and interest and tax rates. Management stated that disclosure controls were effective and that contractual obligations had not materially changed from the 2009 Form 10-K.
Important facts for investors to verify
- Whether the expected Q3 and full-year return to profitability occurred, given the company’s dependence on building-market demand.
- The final multi-employer pension withdrawal liability and any additional costs associated with the Processed Metal Products divestiture.
- Cash conversion and working-capital trends: receivables and inventory rose during the first half, and continuing-operations operating cash flow was lower than a year earlier.
- Debt repayment capacity, revolver availability after letters of credit, and continued compliance with credit-facility covenants.
- Goodwill and other asset valuations, including the assumptions behind forecasts and any future impairment indicators.