Atkore International Group Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2016 ended June 24, 2016; comparatives are the periods ended June 26, 2015. Atkore manufactures Electrical Raceway products and Mechanical Products & Solutions (MP&S) for construction, renovation and industrial markets.
Financial performance
| Metric | Three months ended June 24, 2016 | Three months ended June 26, 2015 | Nine months ended June 24, 2016 | Nine months ended June 26, 2015 |
|---|---|---|---|---|
| Net sales | $395.7 million | $432.4 million | $1,107.1 million | $1,291.4 million |
| Gross profit / margin | $111.5 million / 28.2% | $78.7 million / 18.2% | $275.3 million / 24.9% | $202.0 million / 15.6% |
| Operating income / margin | $41.6 million / 10.5% | $27.6 million / 6.4% | $96.3 million / 8.7% | $55.5 million / 4.3% |
| Net income | $20.6 million | $19.1 million | $43.2 million | $22.1 million |
| Diluted EPS | $0.33 | $0.30 | $0.69 | $0.35 |
| Adjusted EBITDA / margin | $67.2 million / 17.0% | $46.7 million / 12.1% | $173.6 million / 15.8% | $110.0 million / 9.5% |
Quarterly sales fell 8.5%, chiefly reflecting the exit from Fence and Sprinkler product lines; excluding those sales, adjusted net sales rose 2.2%. Nine-month reported sales declined 14.3%, while adjusted net sales fell 4.8%. Management attributed stronger profitability mainly to lower raw-material costs, pricing execution, higher quarterly volumes, manufacturing productivity and freight and warehouse savings. Average raw-material prices were down approximately 27% year over year for both comparison periods.
Segment results: Electrical Raceway quarterly sales increased 3.2% to $259.8 million and Adjusted EBITDA rose 68.6% to $52.4 million. MP&S adjusted net sales increased 0.7% to $136.5 million in the quarter, and Adjusted EBITDA rose 3.2% to $23.0 million. For nine months, both segments’ Adjusted EBITDA increased, while adjusted sales declined.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $85.0 million, versus $30.2 million a year earlier. Investing used $13.0 million, including $13.5 million of capital expenditures; financing used $21.7 million. Cash increased $50.5 million to $131.1 million.
- At June 24, reported total debt was $631.5 million, including deferred financing costs; cash-adjusted debt was approximately $500.4 million. The company repaid $19.0 million of second-lien principal during the period and recorded a $1.7 million debt-extinguishment gain.
- No ABL Credit Facility borrowings were outstanding. Approximately $244.7 million was available, after letters of credit. Management said cash and available borrowing capacity should cover expected operating, capital and debt-service needs for at least the next 12 months.
- The IPO was completed at $16 per share on June 15. It was a secondary sale by CD&R: the company received no proceeds, and CD&R retained 80.1% ownership.
Notable items, outlook and risks
- Quarterly SG&A included a $12.8 million payment to CD&R to terminate its consulting agreement. Stock-based compensation also rose substantially, reflecting remeasurement of outstanding awards; nine-month expense was $16.9 million versus $2.5 million.
- The nine-month tax provision was $24.1 million, compared with a $0.2 million tax benefit in the prior-year period. The filing cites higher U.S. earnings and state taxes, nondeductible IPO costs, and a prior-year release of indemnified liabilities. The company also released a $1.36 million Asia-Pacific deferred-tax valuation allowance in the quarter.
- Management provided no specific financial guidance. It cited risks including economic and non-residential construction weakness, raw-material and freight cost changes, pricing and competition, customer and working-capital exposure, debt restrictions, and operational, labor and international risks.
- Atkore faces product-liability claims involving previously sold antimicrobial-coated sprinkler pipe (ABF) and CPVC systems. Reserves for these and other product-liability matters were recorded; management said reserves were adequate and did not expect a material adverse effect, but additional losses could be material and were not reasonably estimable.
- Purchase commitments for materials were $79.0 million for the remainder of fiscal 2016. Letters of credit and surety bonds were also outstanding. The company reported compliance with debt covenants.
Investor verification priorities
- Assess whether margin and Adjusted EBITDA gains persist as raw-material prices, selling prices and product mix change; review the substantial non-GAAP adjustments.
- Verify cash conversion and working-capital trends, given the period’s operating cash-flow improvement and changes in receivables and payables.
- Review debt principal, interest costs, covenant and dividend restrictions, and actual ABL availability.
- Monitor the ABF/CPVC litigation, related reserves and any subsequent developments or additional exposures.
- Consider the continuing impact of the Fence and Sprinkler exit, IPO-related expenses, stock compensation and CD&R’s controlling ownership.