Atkore Inc. (Atkore International Group Inc.) — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended March 29, 2019. Atkore manufactures electrical raceway products and mechanical products and solutions for construction and industrial markets. Figures below are in USD millions unless noted.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $469.3 | $445.0 | $921.3 | $859.6 |
| Gross profit / margin | $117.1 / 24.9% | $109.2 / 24.5% | $227.3 / 24.7% | $206.0 / 24.0% |
| Operating income / margin | $52.5 / 11.2% | $41.3 / 9.3% | $98.2 / 10.7% | $77.9 / 9.1% |
| Net income | $29.6 | $42.6 | $56.5 | $69.7 |
| Diluted EPS | $0.61 | $0.79 | $1.15 | $1.16 |
| Adjusted EBITDA / margin | $77.1 / 16.4% | $65.3 / 14.7% | $147.1 / 16.0% | $123.8 / 14.4% |
- Revenue and operating trends: Q2 sales rose 5.5%; six-month sales rose 7.2%. Higher selling prices and the Vergokan acquisition more than offset lower volumes and foreign-exchange effects. Q2 Electrical Raceway sales rose 8.8%, while MP&S sales fell 3.4%, mainly due to lower mechanical-pipe volumes and the FlexHead divestiture. For six months, Electrical Raceway sales increased 8.7% and MP&S increased 2.8%.
- Cash flow: Six-month operating cash flow was $42.8, down from $53.2. Capital expenditures were $14.7. Investing activities used $72.8, including $57.9 for Vergokan; financing activities used $44.8, including $24.4 of share repurchases and debt repayments. Cash declined $75.2 from September 30, 2018 to $51.5.
- Liquidity and debt: Long-term debt was $884.1 carrying value at March 29, 2019; the First Lien Term Loan principal was $891.3. Atkore made an accelerated $18.7 principal payment during the quarter; no principal was due within the next 12 months. The $325.0 ABL facility had no borrowings and approximately $304.3 available, after letters of credit. Management reported compliance with debt covenants.
- Balance sheet: Current assets were $639.4 and current liabilities were $252.7. Accounts receivable was $319.8 and inventory $220.8. Equity was $158.5.
Material changes and unusual items
- Operating income improved 27.3% in Q2 and 26.1% for six months, supported by higher gross profit and pricing. Adjusted EBITDA increased 18.0% in Q2 and 18.8% year to date.
- Reported net income declined 30.6% in Q2 and 19.0% year to date, primarily because the comparable prior-year periods included a $26.7 gain on the FlexHead sale. Higher interest expense also weighed on year-to-date income; it rose 60.5% to $25.5, mainly reflecting the February 2018 debt refinancing and additional borrowings.
- Higher steel, copper and freight costs affected cost of sales; management said selling-price increases passed through higher input costs. Six-month volume was lower, particularly in metal conduit and mechanical pipe.
- Atkore acquired Vergokan, a European cable-tray and cable-management manufacturer, for $57.9 net of cash received. The purchase-price allocation remained preliminary.
- Q2 restructuring charges were $1.1; six-month charges were $2.5, principally facility-closure and severance costs. The remaining $0.3 accrual was expected to be used within 12 months.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided in the filing. Management expected operating cash flow and available ABL capacity to be sufficient for operations, planned capital expenditures and liquidity needs for at least the next 12 months.
- Key disclosed risks include non-residential construction weakness, commodity-price changes, pricing pressure and competition, freight and energy costs, working-capital needs, customer credit and concentration, international operations and foreign exchange, and acquisition integration.
- Product-liability claims include allegations concerning older antimicrobial-coated sprinkler pipe. Product-liability reserves were $1.2 at quarter-end, and the company estimated a possible loss range of $1.0–$9.0. Management did not expect the claims to have a material adverse effect and considered reserves adequate; it also said Johnson Controls was contractually obligated to indemnify the company for specified claims after the agreed deductible cap was satisfied.
- Purchase commitments for materials were $170.5 for the remainder of FY2019 and $3.6 for FY2020 and beyond. Management noted that litigation outcomes are unpredictable and could adversely affect results.
- The filing added Brexit-related uncertainty as a risk, including potential effects on economic conditions, foreign exchange, revenue and regulatory costs.
Investor verification priorities
- Assess whether pricing and input-cost pass-through can continue to support margins as volumes remain pressured, especially in MP&S mechanical pipe.
- Review debt service costs, the term-loan balance and the company’s capacity to preserve liquidity after the Vergokan acquisition, share repurchases and cash decline.
- Track Vergokan integration, preliminary purchase accounting and the contribution of the acquisition to sales and earnings.
- Monitor product-liability claims, reserve adequacy and the scope and collectability of the Johnson Controls indemnification.
- Distinguish recurring operating performance from prior-year FlexHead sale gains and from non-GAAP Adjusted EBITDA, which excludes items including interest, taxes and restructuring.