Atkore International Group Inc. — Q1 FY2017 Form 10-Q
Business context and period: Atkore manufactures Electrical Raceway products for non-residential construction and renovation, and Mechanical Products & Solutions (MP&S) for construction and industrial markets. The fiscal quarter ended December 30, 2016; comparisons are with the three months ended December 25, 2015. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Quarter ended Dec. 30, 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $337.6 million | $358.4 million | Down 5.8% |
| Gross profit | $92.0 million | $72.4 million | Up 27.1% |
| Gross margin | 27.3% | 20.2% | Up 7.1 percentage points |
| Operating income | $42.5 million | $23.1 million | Up 84.5% |
| Net income | $17.4 million | $8.6 million | Up 102.8% |
| Diluted EPS | $0.26 | $0.14 | Up $0.12 |
| Adjusted EBITDA (non-GAAP) | $49.9 million | $48.1 million | Up 3.8% |
| Adjusted EBITDA margin (non-GAAP) | 14.8% | 13.7% | Up 1.1 percentage points |
| Cash from operating activities | $32.2 million | $51.9 million | Down $19.8 million |
| Capital expenditures | $4.0 million | $4.7 million | Down $0.7 million |
Gross margin is calculated from reported gross profit and net sales. Adjusted EBITDA and its margin are non-GAAP measures; the company cautions that they should not be considered substitutes for GAAP results or cash flows.
Cash and cash equivalents were $88.0 million at December 30, 2016, down from $200.3 million at September 30, 2016, principally reflecting the refinancing and use of approximately $155 million of cash to repay debt and related costs. Net cash used in financing was $142.4 million. Working-capital changes, including higher inventory associated with higher material costs, contributed to the year-over-year decline in operating cash flow.
At quarter-end, total debt was $493.7 million net of deferred financing costs, compared with $630.3 million at September 30, 2016. Cash was $88.0 million; the filing does not present a net-debt figure. There were no ABL borrowings outstanding, and approximately $181.0 million of ABL availability remained, after letters of credit. Total current assets were $447.9 million and current liabilities $177.1 million.
Material changes versus the prior-year quarter
- Sales fell as lower volume—particularly mechanical pipe—more than offset higher average selling prices. The company cited $30.6 million of lower volume, $7.8 million related to the Fence and Sprinkler exit, $2.5 million of unfavorable foreign-exchange impact, and $2.3 million of lower freight revenue; higher average selling prices contributed $22.4 million.
- Gross profit and operating income increased substantially, primarily from passing through higher raw-material costs, strategic pricing, and lower freight and warehouse costs. Adjusted EBITDA rose more modestly, as lower volume partly offset these benefits.
- Electrical Raceway sales were nearly flat at $223.0 million, while segment Adjusted EBITDA increased 17.1% to $40.3 million. MP&S adjusted net sales declined 9.5% to $115.2 million and Adjusted EBITDA declined 9.3% to $17.6 million, mainly reflecting lower mechanical-pipe volume.
- The effective tax rate declined to 24.1% from 34.9%, primarily due to a tax benefit related to exercised stock options and a larger domestic manufacturing deduction.
Financing, outlook, risks and unusual items
- On December 22, 2016, the company refinanced its prior first- and second-lien term loans with a $500 million first-lien term loan due December 2023. The new facility bears interest at LIBOR plus 3.0% (or an alternate base rate plus 2.0%) and amortizes at 1.0% annually. The refinancing generated a $9.8 million loss on debt extinguishment, a significant one-time expense in the quarter.
- The ABL facility was amended, its maturity extended to December 2021, and its interest margins reduced. The facility has $325 million of commitments; availability is subject to borrowing-base calculations. Credit agreements impose customary restrictions, including on additional debt, distributions, liens and asset sales. The company reported covenant compliance and said it was not subject to the ABL minimum fixed-charge coverage test during the period.
- Management stated that cash from operations and available ABL capacity are expected to fund operations, expected capital expenditures and liquidity needs for at least the next 12 months. No specific revenue or earnings guidance was provided; the filing cautions that quarterly results are not necessarily indicative of full-year results.
- Product-liability matters include claims concerning previously sold ABF sprinkler pipe. Reserves for Special Products Claims were $3.4 million and for other product-liability matters $1.8 million; the company estimated probable losses across these matters at $3 million to $10 million. Management considered reserves adequate and did not expect a material adverse effect, but noted additional reserves could be required and any further loss range was not reasonably estimable.
- Other disclosed exposures include $1.4 million of legal liabilities for non-product matters, letters of credit and surety bonds, and purchase commitments of $153.8 million for the remainder of fiscal 2017. Management cited risks from construction demand, raw-material prices, competition, freight and energy costs, working-capital needs, customer credit, litigation, pensions, and debt restrictions.
- The company sold land and a building associated with a Philadelphia facility exit for $3.0 million in proceeds and recorded a $0.3 million loss. A Saudi joint-venture ownership transfer remained incomplete; the related investment was carried at $3.3 million, with an expected sale consideration of approximately $10 million, and the gain was not yet recognized.
Important facts for investors to verify
- Whether lower mechanical-pipe and construction-market volumes persist, and whether price increases continue to offset volume and input-cost pressures.
- Whether operating cash flow recovers as inventory and other working-capital requirements change.
- The realized interest cost and debt-repayment trajectory under the new term loan, and continued access to ABL availability subject to its borrowing base and covenants.
- Future developments in ABF and other product-liability claims, including whether reserves require adjustment.
- Completion and proceeds of the Saudi ownership transfer, and any related gain recognition.
- The composition and recurrence of items excluded from Adjusted EBITDA, including the unusual negative $10.9 million “Other” adjustment in the quarter’s reconciliation; assess reported GAAP results alongside this non-GAAP measure.