Atkore Inc. — Q2 FY2018 Form 10-Q Summary
Reporting period: Quarter and six months ended March 30, 2018; figures are unaudited. Atkore manufactures electrical raceway products and mechanical products and solutions for construction, industrial and related markets. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $445.0 | $372.8 | $859.6 | $710.4 |
| Gross profit | $109.2 | $87.6 | $206.0 | $179.3 |
| Operating income | $41.3 | $30.4 | $77.9 | $72.5 |
| Net income | $42.6 | $18.9 | $69.7 | $36.3 |
| Diluted EPS | $0.79 | $0.28 | $1.16 | $0.55 |
| Adjusted EBITDA | $65.3 | $56.1 | $123.8 | $106.0 |
| Adjusted EBITDA margin | 14.7% | 15.1% | 14.4% | 14.9% |
Q2 sales grew 19.4%; management attributed growth to acquisitions, higher selling prices reflecting input-cost pass-throughs and market pricing, and higher MP&S volume. Six-month sales rose 21.0%, with contributions from acquisitions, pricing and volume. Q2 gross margin was approximately 24.5%, versus 23.5% a year earlier; operating margin was approximately 9.3%, versus 8.2%. Despite higher adjusted EBITDA, its margin declined in both the quarter and six-month period.
Electrical Raceway Q2 sales increased 19.8% to $324.8 million and Adjusted EBITDA rose 20.8% to $56.4 million; margin was 17.4% versus 17.2%. MP&S sales increased 17.7% to $120.3 million and Adjusted EBITDA rose 8.2% to $16.7 million; margin fell to 13.9% from 15.1%. For the six months, MP&S Adjusted EBITDA declined 11.9% to $27.5 million despite sales growth, reflecting a greater mix of lower-margin products.
Cash, debt and liquidity
- Six-month operating cash flow was $53.2 million, up from $25.1 million. Capital expenditures were $17.2 million.
- Investing activities provided $22.9 million, including $42.0 million from the Flexhead divestiture. Financing activities used $45.9 million, including $381.8 million for share repurchases, partly offset by incremental borrowing.
- At March 30, cash was $76.9 million, total debt was $908.2 million (including $900.6 million long-term), and equity was $62.1 million. Debt was $576.1 million at September 30, 2017.
- No borrowings were outstanding under the ABL facility; approximately $278.6 million was available. Management said cash, operating cash flow and ABL availability should meet operating, capital expenditure and debt-service needs for at least the next 12 months. The company reported compliance with credit-facility covenants.
Material changes and unusual items
- On March 30, Atkore sold the Flexhead businesses for $42.0 million and recorded a $26.7 million gain. The gain materially increased reported net income; it is excluded from Adjusted EBITDA.
- In February, Atkore incurred $425.0 million of incremental first-lien term debt. Proceeds funded a roughly $375 million repurchase of 17.2 million shares from related-party investor CD&R, repayment of $42.0 million of ABL borrowings, and fees. The term-loan amendment reduced applicable interest margins to LIBOR plus 2.75%. Q2 net interest expense increased 77.5% year over year to $9.3 million, primarily due to the added debt.
- Acquisitions over the prior 12 months, including Marco, Flexicon, Calpipe and Cii, supported sales growth and increased SG&A and amortization. Cii was acquired in January 2018 for approximately $4.0 million, including contingent consideration.
- The Tax Cuts and Jobs Act lowered the company’s estimated FY2018 blended federal statutory rate to 24.5%, with 21% thereafter. Atkore recorded a provisional $4.8 million benefit from remeasuring deferred tax liabilities; the six-month effective tax rate was 20.4%, versus 33.0%.
Outlook, risks and contingencies
The filing provides no specific full-year earnings or revenue guidance. Management cited sufficient liquidity for at least 12 months, but cautioned that actual results may vary and that quarterly results are not necessarily indicative of the full year. Risks include nonresidential construction weakness, commodity and freight cost changes, pricing pressure, working-capital needs, customer credit exposure, acquisition integration, debt restrictions and interest obligations.
Product-liability reserves, including claims concerning legacy sprinkler products, were $5.4 million; management estimated probable losses in a range of $3 million to $10 million and said additional reserves could be required, though the outcome was not expected to be materially adverse. A separate antidumping-duty matter had a $7.5 million accrual, and the company was appealing the scope decision. Open production-material purchase orders totaled $152.9 million for the remainder of FY2018. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Separate underlying operating performance from the $26.7 million Flexhead sale gain and the provisional tax benefit.
- Assess whether higher raw-material and freight costs can continue to be passed through, particularly in MP&S and armored cable products.
- Track the impact of the debt-funded repurchase on interest expense, leverage, liquidity and future debt repayment capacity.
- Review acquisition integration and the preliminary purchase-price allocations, as well as the ongoing performance of both segments.
- Monitor developments in the product-liability and antidumping matters, including potential changes to reserves.