Gibraltar Industries, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Financial statements are unaudited; dollar amounts below are in millions unless otherwise stated. Gibraltar manufactures and distributes products for building and industrial markets.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $220.1 | $169.7 | $592.5 | $493.3 |
| Gross profit / margin | $43.0 / 19.5% | $27.5 / 16.2% | $118.4 / 20.0% | $87.9 / 17.8% |
| Operating income / margin | $18.4 / 8.3% | $4.2 / 2.5% | $43.0 / 7.3% | $15.9 / 3.2% |
| Continuing-operations income | $7.4 | $0.8 | $16.1 | $1.0 |
| Net income (loss) | $6.9 | $1.2 | $23.1 | $(16.6) |
| Diluted EPS | $0.23 | $0.04 | $0.76 | $(0.54) |
- Nine-month continuing-operations cash from operations was $30.5, versus $32.7 a year earlier. Total operating cash flow, including discontinued operations, was $27.0, versus $54.4.
- Cash was $33.1 at September 30, down from $60.9 at year-end 2010. Current assets were $286.7 and current liabilities $147.7.
- Total debt was $207.1, including $202.2 of 8% notes; net debt was approximately $174.0. The revolving facility had no borrowings at quarter-end, with $125.4 available after letters of credit.
Changes and business developments
- Q3 sales rose 29.7%; management attributed $28.9 of the increase to acquisitions, with the remainder mainly from 7.8% higher volume and 4.9% higher pricing. For nine months, sales rose 20.1%, including $51.4 from acquisitions; pricing increased 5.9% and volume 3.8%.
- Management cited improved alignment of material costs and selling prices, higher-value acquired product mix, volume, and cost-reduction work as drivers of margin gains. SG&A as a share of sales fell to 11.2% for Q3 and 12.7% for nine months.
- Acquired D.S. Brown on April 1 for $97.6 and Award Metals on June 3 for $13.4. Together, the acquisitions added $50.6 of goodwill. Their purchase prices were funded with cash and revolving-credit borrowings, which were repaid during Q3.
- Sold United Steel Products in March for $59.0 cash proceeds and recorded a $14.0 pretax gain. Nine-month discontinued-operations income of $7.1 included the gain; therefore, consolidated net income is not solely a measure of ongoing operations.
- Nine-month investing cash outflow from continuing operations was $55.7, including $107.6 for acquisitions and $7.8 in capital expenditures, partly offset by the $59.0 business-sale proceeds. Working capital absorbed cash, including increases in receivables and inventory.
Outlook, risks and notable items
- Management expected the seasonally slow fourth quarter to have sales and profitability above Q4 2010, citing acquired businesses, continued cost reductions, and greater market stability. No specific numerical full-year guidance was provided.
- Management described housing and commercial construction recovery as uneven and modest, with housing starts below long-term averages. Risks include raw-material availability and price volatility, energy costs, demand, credit-market liquidity, acquisition integration, and interest and tax rates.
- On October 11, 2011, the company amended and extended its credit agreement. The $200 facility can potentially increase to $250; a conditional $35 term loan is also available. Revolver maturity is June 8, 2015, subject to agreement terms. The covenant requires a minimum 1.25 fixed-charge ratio; the company reported compliance at September 30.
- The company reported no new goodwill impairment indicators at September 30, but warned that changes in cash-flow outlook or stock-market value could lead to future impairment charges. Goodwill was $348.6, and accumulated prior impairment losses were $125.6.
- The nine-month effective tax rate on continuing operations was 44.0%, above the 35% federal statutory rate, primarily due to state taxes and nondeductible items; management noted the full-year rate could differ from its interim estimate. No material changes in critical accounting policies or internal controls were reported; disclosure controls were deemed effective. Legal proceedings were reported as not applicable.
Key facts for investors to verify
- Separate ongoing operating performance from discontinued operations and the $14.0 pretax divestiture gain.
- Assess how much sales and margin growth is organic and sustainable after the 2011 acquisitions, pricing increases, and seasonal effects.
- Monitor working-capital conversion, particularly receivables and inventory, and the decline in cash despite positive continuing-operations operating cash flow.
- Review the amended credit agreement’s availability, maturity provisions, covenant headroom, and the 8% notes’ December 2015 maturity.
- Evaluate goodwill and acquired intangible balances against future business performance and impairment assumptions.