Atkore Inc. annual report, FY2017

Business context and reporting period

Atkore International Group Inc. manufactures Electrical Raceway products and Mechanical Products & Solutions (MP&S), primarily serving construction, renovation and industrial markets. This Form 10-K covers the fiscal year ended September 30, 2017; it also reports fourth-quarter results. The company generated 91% of fiscal 2017 sales in the United States and operated 30 manufacturing facilities.

Financial performance and liquidity

Sales declined 1.3%; higher selling prices, reflecting input-cost pass-through, were outweighed by lower volume and fewer working days. Operating income and net income increased despite lower sales, aided by reduced SG&A and interest expense. Cash from operations fell 22.3%, primarily due to higher working-capital investment.

At September 30, 2017, cash was $45.7 million, versus $200.3 million a year earlier; $40.9 million was held at non-U.S. subsidiaries. The company reported $580.1 million of gross debt under its credit facilities (balance-sheet debt carrying value: $576.1 million), including $85.0 million drawn on its asset-based revolver. Revolver availability was approximately $173.0 million, excluding $8.6 million of letters of credit. Management stated that operating cash flow and available revolver capacity were expected to fund operations, capital expenditures and liquidity needs for at least the next 12 months.

Fourth-quarter fiscal 2017 results were net sales of $395.8 million, gross profit of $89.9 million, net income of $20.9 million and diluted EPS of $0.31. The quarter included 14 weeks, compared with 13 weeks in the other reported quarters.

Material changes versus the prior year

• Electrical Raceway sales rose 2.4% to $1,094.8 million; segment Adjusted EBITDA increased 4.1% to $189.4 million, with margin improving to 17.3% from 17.0%.
• MP&S sales fell 10.1% to $410.5 million; Adjusted EBITDA declined 21.6% to $63.7 million, and margin decreased to 15.5% from 18.1%. Lower demand for mechanical pipe in the solar market was a principal factor.
• Adjusted EBITDA decreased 3.1% despite higher GAAP net income. Fiscal 2017 included a $9.8 million debt-extinguishment loss, compared with a $1.7 million gain in fiscal 2016, and a $5.8 million gain on sale of a joint-venture interest.
• Fiscal 2017 acquisitions of Marco, Flexicon and Calpipe used $183.9 million of cash, net of cash acquired. The international acquisitions broadened the Electrical Raceway portfolio and footprint; prior-year segment results were retrospectively realigned for comparability.
• The company repurchased 781,000 shares for approximately $13.9 million under a $75 million authorization, leaving approximately $61.1 million authorized at year-end.

Outlook, risks and unusual items

The filing provides no specific revenue, earnings or margin guidance. Management cited potential benefits from non-residential construction recovery, data-center and healthcare demand, and growth initiatives, including acquisitions. It also cautioned that construction is cyclical and seasonal, with weather typically affecting the first half of the fiscal year.

• Key exposures include fluctuations in steel, copper and PVC resin prices, freight and energy costs, pricing competition, construction-market weakness, customer credit and working-capital requirements. The company generally does not hedge raw-material purchases.
• Variable-rate debt exposes the company to interest-rate increases; management estimated that a one-percentage-point rate change would affect annual interest expense by approximately $5.0 million on the term loan, assuming LIBOR exceeded its floor.
• The company recorded a $7.5 million accrual for additional antidumping duties on certain imported conduit fittings and is appealing the scope ruling.
• Product-liability reserves, including claims concerning legacy antimicrobial-coated sprinkler pipe, totaled $5.9 million. Management estimated probable losses of $3.0 million to $10.0 million, while noting that additional losses could arise and were not reasonably estimable.
• Environmental matters include a consent order concerning the Harvey, Illinois facility and monitoring of groundwater contamination at the Wayne, Michigan site. Management did not expect the stated compliance obligations to be material, but future remediation needs could arise.
• U.S. defined-benefit pension plans were underfunded by $25.2 million; the estimated minimum fiscal 2018 contribution was $1.2 million.
• Management and Deloitte reported effective internal control over financial reporting and an unqualified audit opinion. The acquired Calpipe business was excluded from the internal-control assessment.

Most important facts for investors to verify

• Whether lower MP&S demand, particularly in solar-related mechanical pipe, persists and how it affects segment margins.
• Whether pricing continues to recover raw-material inflation and whether working-capital investment and operating cash flow improve.
• Debt terms, floating-rate exposure, covenant compliance and the durability of available revolver capacity after acquisition-related borrowing.
• Integration results and final purchase-price allocations for the 2017 acquisitions, which were preliminary for certain acquired assets and liabilities.
• Developments in the antidumping-duty appeal, sprinkler-pipe litigation and environmental remediation obligations, including any changes to reserves.
• Use of the remaining share-repurchase authorization, CD&R’s ownership and influence, and the restrictions on subsidiary distributions and dividends.