Gibraltar Industries, Inc. — Q3 2020 Form 10-Q
Business context and period. The company manufactures products for renewable energy and conservation, residential, industrial and infrastructure markets. This unaudited filing covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $329.7 | $299.2 | $864.9 | $789.3 |
| Gross profit / margin | $85.4 / 25.9% | $76.6 / 25.6% | $214.1 / 24.8% | $184.0 / 23.3% |
| Operating income / margin | $43.9 / 13.3% | $31.4 / 10.5% | $93.6 / 10.8% | $68.6 / 8.7% |
| Net income | $33.8 | $24.5 | $73.1 | $50.7 |
| Diluted EPS | $1.02 | $0.75 | $2.22 | $1.55 |
Cash, debt and liquidity: Cash was $179.8 million at September 30, 2020, versus $191.4 million at year-end 2019. The company had no debt outstanding and reported $394.1 million available under its $400 million revolving facility, after $5.9 million of letters of credit. Total cash and facility availability was $573.9 million. Nine-month operating cash flow was $56.2 million, compared with $72.5 million in 2019; investing cash outflow was $61.2 million and financing cash outflow was $6.0 million. Cash declined $11.5 million during the period.
Changes and operating drivers
- Q3 sales increased 10.2%; nine-month sales increased 9.6%. Acquisitions contributed $24.1 million of Q3 growth and $58.9 million of nine-month growth; organic growth contributed $6.4 million and $16.8 million, respectively.
- Residential Products sales rose 20.1% in Q3 and 9.5% year to date, supported by repair-and-remodel demand and distribution gains. Its operating margin rose to 21.4% in Q3 from 13.5%, and to 18.8% year to date from 13.8%.
- Renewable Energy and Conservation sales rose 9.8% in Q3 and 23.5% year to date, largely reflecting acquisitions. Organic Q3 sales fell 10.8% amid softness in cannabis and hemp markets. Segment operating margin declined to 11.1% from 16.8% in Q3 and to 9.0% from 11.8% year to date, partly due to acquired businesses’ lower margins.
- Industrial and Infrastructure Products sales fell 11.6% in Q3 and 12.0% year to date, reflecting weaker industrial demand; lower steel prices also affected year-to-date sales. Segment operating margin nevertheless improved year to date to 10.7% from 8.2%.
- Management attributed improved consolidated margins to better execution, pricing and material-cost management, and 80/20 simplification initiatives. Lower acquired-business margins partly offset gains. SG&A as a percentage of sales declined to 12.6% from 15.1% in Q3 and to 14.0% from 14.6% year to date.
Outlook, risks and unusual items
- Management said fourth-quarter performance is expected to surpass 2019 results, but is providing qualitative rather than numerical guidance because of pandemic and economic uncertainty. It cited positive momentum and end-market trends, while continuing to monitor COVID-19 effects.
- Management reported no material adverse effect from COVID-19 on results through September 30, but warned prolonged disruption could harm demand, supply chains, workforce availability, operations, cash flows and financial condition.
- Nine-month operating cash flow included a $41.1 million investment in working capital and other net assets, including approximately $42.4 million invested in Thermo, which was undercapitalized when acquired. Acquisitions and capital expenditures drove investing outflows.
- In January and February 2020, the company acquired Thermo and Delta Separations for approximately $7.3 million and $47.1 million, respectively. On October 15, 2020, after quarter-end, it acquired Architectural Mailboxes for approximately $27 million; management expects annual revenue of about $26 million.
- The sale of a self-guided apartment-tour application business generated $2.0 million in proceeds and a $1.9 million pretax gain. Nine-month exit-activity and impairment costs were $1.9 million, versus $6.3 million in 2019.
- The company remained in compliance with its credit agreement’s financial covenants. It reported no material changes to previously disclosed risk factors other than the previously added COVID-19 risk. No material litigation or off-balance-sheet financing arrangements were reported.
Key facts for investors to verify
- Whether management’s expectation for Q4 results to exceed 2019 is borne out, given the lack of quantitative guidance and continuing COVID-19 uncertainty.
- How much growth and margin performance depend on acquisitions versus organic demand, including integration and profitability of recent acquisitions.
- Whether the working-capital investment, especially in Thermo, converts into operating cash flow and whether receivables remain collectible.
- Whether renewable-energy backlog strength and residential demand persist, and whether cannabis/hemp softness and industrial weakness continue.
- The final purchase-price allocation and actual contribution from Architectural Mailboxes, acquired after quarter-end.