Gibraltar Industries, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company manufactures and distributes products serving residential, industrial and infrastructure, renewable energy, and conservation markets. Results are seasonal, with colder weather typically reducing activity in the first and fourth quarters.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $263.1 million | $253.2 million | $496.8 million | $453.8 million |
| Gross profit / margin | $66.2 million / 25.2% | $44.1 million / 17.4% | $116.4 million / 23.4% | $74.0 million / 16.3% |
| Operating income / margin | $25.8 million / 9.8% | $11.2 million / 4.4% | $39.4 million / 7.9% | $20.2 million / 4.4% |
| Net income | $17.0 million | $4.1 million | $23.5 million | $9.6 million |
| Diluted EPS | $0.53 | $0.13 | $0.74 | $0.31 |
- Q2 sales increased 3.9%; first-half sales increased 9.5%. Growth was chiefly attributable to Renewable Energy and Conservation, including RBI, acquired in June 2015.
- Q2 gross margin rose 7.8 percentage points and operating margin rose 5.4 points. Management attributed improvements to manufacturing efficiencies, better material-cost alignment, and the company-wide 80/20 simplification initiative.
- Q2 SG&A increased 22.8% to $40.4 million; first-half SG&A increased 42.9% to $77.0 million. Increases included RBI costs and higher performance-based compensation.
- Residential Products sales declined 10.9% in Q2 and 8.9% for the first half, mainly reflecting lower postal and parcel product demand after a cluster-mailbox contract ended. Industrial and Infrastructure Products sales declined 20.1% and 17.7%, respectively, amid the divestiture, lower energy-related demand, and pricing pressure. Renewable Energy and Conservation sales were $62.1 million in Q2 and $116.0 million in the first half, compared with $17.1 million in each 2015 period.
Cash flow, debt, and liquidity
- First-half operating cash flow was $49.1 million, versus $11.8 million in 2015. Capital expenditures were $4.0 million. Investing activities provided $3.4 million, including $8.5 million net proceeds from the European business sale; financing activities provided $1.4 million.
- Cash and cash equivalents were $124.1 million at June 30, 2016, up from $68.9 million at year-end 2015. Current assets were $384.6 million and current liabilities were $162.9 million.
- Total debt carrying value was $209.2 million, including $210 million of 6.25% senior subordinated notes due February 2021, net of issuance costs and other debt. No revolving-credit borrowings were outstanding.
- The $300 million secured revolving facility had $280.2 million available after $19.8 million of letters of credit. Reported total liquidity was $404.4 million, including cash and facility availability.
Material changes, outlook, and other items
- On April 15, 2016, Gibraltar sold its European industrial manufacturing business for $9.3 million gross cash consideration ($8.5 million net proceeds). The sale generated an $8.5 million pretax loss, recorded in other expense, and an $11.4 million discrete tax benefit; the company reported an after-tax gain of $2.9 million. The business had contributed $36 million of 2015 revenue and nearly break-even operating results. It was not classified as discontinued operations.
- Management’s 2016 outlook was revenue of $1.02–$1.03 billion, approximately 1% below 2015, and diluted EPS of $1.38–$1.48, versus $0.74 in 2015. The EPS outlook includes an estimated $0.09 per-share benefit from the divestiture and $0.08 per-share impact from restructuring charges. Management cited nearly $100 million of 2015 revenue not expected to recur, including the divested business, the completed mailbox contract, and products discontinued under 80/20.
- Management expects higher full-year after-tax earnings from operational excellence and 80/20 initiatives. It estimates 200–300 basis points of operating-margin improvement over the first three years of the simplification program, which remains in early implementation.
- Risks highlighted include soft industrial end markets tied to lower oil and gas prices, demand and pricing pressures, commodity and foreign-exchange exposure, and the possibility that lower operating cash flow or unavailable/less favorable financing could constrain liquidity. Foreign subsidiaries held $23.4 million of cash; repatriation for domestic use could have significant tax consequences.
- The company said Brexit was not expected to have a material impact. It held no derivative instruments at June 30. Management reported effective disclosure controls and no material change in internal control over financial reporting; no legal proceedings were reported.
Important facts for investors to verify
- How much of earnings improvement is sustainable operational performance versus the $11.4 million discrete tax benefit and other unusual items, particularly the disposal loss?
- Whether the 80/20 margin gains can continue while residential and industrial volumes remain under pressure, and whether the 2016 revenue and EPS outlook is achieved.
- The extent to which reported sales and profit comparisons reflect RBI’s inclusion for a longer period in 2016 than in 2015, alongside the European divestiture and discontinued products.
- Future cash generation, restructuring costs, working-capital requirements, and the use of revolving-credit capacity or other financing for acquisitions.