Gibraltar Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. Financial statements are unaudited. Gibraltar manufactures products for renewable energy and conservation, residential, industrial, and infrastructure markets.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $249.4 million | $227.4 million | +9.7% |
| Gross profit / margin | $56.4 million / 22.6% | $43.9 million / 19.3% | Margin +3.3 percentage points |
| Operating income / margin | $15.2 million / 6.1% | $10.6 million / 4.6% | — |
| Net income | $12.1 million | $6.3 million | — |
| Diluted EPS | $0.37 | $0.19 | — |
| Operating cash flow | $(43.0) million | $(37.5) million | More cash used |
| Cash and cash equivalents | $86.0 million | $191.4 million at Dec. 31, 2019 | — |
Interest expense was negligible in Q1 2020 versus $2.1 million in Q1 2019, following the 2019 redemption of the company’s 6.25% notes. The effective tax rate was 19.8% in both quarters. No long-term debt or revolving-credit borrowings were outstanding at March 31, 2020. The $400 million revolving facility had $394.1 million available, after letters of credit.
Cash used in operations reflected seasonal working-capital needs and a reported $37.5 million investment in Thermo, as well as payments for incentive plans, customer rebates, and pension settlements. Investing cash outflow was $57.3 million, principally for the Delta Separations and Thermo acquisitions and capital expenditures. Cash declined by $105.4 million during the quarter.
Segments and material changes
- Renewable Energy and Conservation: Sales rose 40.3% to $96.5 million; operating income was $5.7 million versus $1.6 million. Growth included acquisitions and stronger organic activity; backlog increased 58% year over year, or 13% organically.
- Residential Products: Sales were nearly flat at $103.4 million; operating income increased to $13.7 million from $12.1 million.
- Industrial and Infrastructure Products: Sales fell 9.7% to $49.5 million, mainly due to lower industrial demand and steel prices; operating income was $4.0 million versus $4.1 million.
Management attributed improved gross margin to stronger operating execution, favorable material-cost alignment, volume leverage, and 80/20 simplification initiatives. Q1 2019 had included $3.4 million of solar-tracking design and field-improvement costs. Higher SG&A, including acquisition-related costs and acquired-company expenses, partially offset improvements.
Outlook, risks, and unusual items
- COVID-19 had no significant operating impact during most of Q1, but management said demand began slowing in some markets after quarter-end. The company generally continued operating under essential-business designations and reported no supplier disruption as of the filing.
- Because of economic uncertainty and reduced visibility, Gibraltar rescinded its prior Q2 and full-year 2020 guidance. It expected positive earnings and cash from operations during 2020 but provided no numerical forecast.
- Management identified renewable energy, commercial greenhouse growing, and processing as higher-growth areas, together representing 39% of Q1 revenue. It said home-improvement and industrial businesses were among the most affected by the current environment and expected near-term demand to lag the prior year until consumer confidence and spending improved.
- The company paused acquisition activity, focused on working-capital management, and said cash, no outstanding debt, and borrowing availability provided liquidity to manage uncertainty. It also expected to retain about $4 million in 2020 through CARES Act employer Social Security tax deferrals, repayable equally in 2021 and 2022.
- Q1 acquisitions included Delta Separations and Thermo Energy Systems, funded with cash. Acquisition-related costs were $1.3 million. The filing reports preliminary Delta consideration of $47.2 million in the note, while MD&A describes an approximately $50 million all-cash transaction; Thermo’s consideration was approximately $7.3 million. The purchase allocations are preliminary.
- Foreign-currency translation reduced other comprehensive income by $5.9 million. Management said it did not identify a COVID-related goodwill impairment trigger as of March 31, 2020.
- The filing highlights potential COVID-19 effects on customer demand, supply chains, workforce availability, operations, and cash flows. Other risks include economic conditions, commodity prices, foreign exchange, competition, and acquisition and restructuring execution.
Important facts for investors to verify
- Whether post-quarter COVID-19 demand trends and backlog convert into sales and earnings, and when management may reinstate guidance.
- The sustainability of improved margins, particularly as acquisition-related costs and lower-margin acquired projects affect results.
- Working-capital requirements and cash generation, including the funding needs of Thermo and the seasonal cash-flow pattern.
- Final purchase consideration and purchase-price allocations for Delta Separations and Thermo; the filing’s Delta transaction amounts differ between the note and MD&A.
- Liquidity and covenant compliance if operating conditions deteriorate; the company reported compliance with all three credit-agreement covenants at quarter-end.