Gibraltar Industries, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Financial statements are unaudited. Unless noted otherwise, amounts are in millions of dollars.
Business context
Gibraltar manufactures residential, industrial and infrastructure products. On June 9, 2015, it acquired RBI, a greenhouse manufacturer and solar-racking provider, for approximately $142.5 million. RBI’s results are included from the acquisition date; the company was reassessing how it would report segments. Seasonal activity is typically lower in the first and fourth quarters.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $305.0 | $234.1 | $758.8 | $660.1 |
| Gross profit / margin | $61.4 / 20.1% | $41.6 / 17.8% | $135.4 / 17.8% | $111.6 / 16.9% |
| Operating income / margin | $23.4 / 7.7% | $18.4 / 7.9% | $43.6 / 5.7% | $33.4 / 5.1% |
| Net income | $13.6 | $9.5 | $23.2 | $13.9 |
| Diluted EPS | $0.43 | $0.30 | $0.74 | $0.44 |
| Interest expense | $3.9 | $3.7 | $11.4 | $11.0 |
- Q3 sales rose 30.3%; nine-month sales increased 15.0%. RBI contributed $81.6 million in Q3 and $98.7 million year to date, so reported growth substantially reflects the acquisition.
- Q3 gross margin improved, but operating margin edged down as SG&A rose to $38.0 million from $23.2 million. Management attributed the increase mainly to RBI expenses and higher performance-based compensation.
- Nine-month operating cash flow was $44.5 million, versus $18.2 million. Investing cash outflow was $119.9 million, including $140.6 million for acquisitions and $6.8 million of capital expenditures, partly offset by $26.4 million in property-sale proceeds.
- Cash was $43.3 million at September 30, down from $110.6 million at December 31, 2014. Total debt was $221.2 million, including $210.0 million of 6.25% notes and $11.0 million drawn on the revolving facility.
- Reported liquidity was $131.5 million: $43.3 million cash plus $88.2 million of revolver availability. The company was in compliance with its 1.25-to-1.00 fixed-charge coverage covenant. The credit agreement was scheduled to expire October 10, 2016.
Changes and management commentary
- Residential Products sales grew 4.0% in Q3 and 12.9% year to date, led by postal and parcel products. Industrial and Infrastructure Products sales declined 14.0% in Q3 and 12.6% year to date, reflecting weaker energy-related demand, lower commodity prices and uncertainty around transportation project funding.
- Management cited margin benefits from cost reductions and better alignment of material costs with selling prices. Its “80/20” simplification program was in early implementation; management estimated it could improve operating margin by 200–300 basis points over three years.
- Restructuring during the first nine months included eliminating three product lines and closing three facilities. The period included impairment and exit costs, as well as gains related to property sales and sale-leaseback transactions. The filing reports a $7.4 million sale-leaseback gain recognized in Q1 and separately discusses a $6.8 million gain; investors should review the transaction details and their reconciliation.
- Other income was $4.2 million for the first nine months, compared with $0.2 million a year earlier, primarily reflecting derivative gains partly offset by foreign-currency translation losses. Q3 other income was $1.8 million.
Outlook, risks and contingencies
- For full-year 2015, management expected revenue of $990 million–$1.0 billion, approximately 15% above 2014. It forecast RBI revenue of $155 million–$160 million from acquisition through year-end.
- Management expected base-business organic sales to be slightly lower year over year: residential growth offset by industrial declines. It forecast approximately 7% growth in Residential Products revenue and approximately 12% lower Industrial and Infrastructure Products revenue.
- Management anticipated seasonally lower Q4 orders and no meaningful change in end-market conditions. Forecasts are forward-looking and subject to market, execution and financing risks.
- Solar business demand could be affected by the expiration or reduction of government incentives, including the scheduled reduction of the U.S. solar investment tax credit after 2016. Other exposures include foreign exchange, raw-material prices, economic conditions and infrastructure funding.
- RBI contract revenue uses percentage-of-completion accounting based on estimated costs. Changes in contract cost estimates can affect reported revenue and profit. The company also recorded an indemnification asset and liability of $3.0 million for potential foreign tax liabilities related to RBI; realization is uncertain.
- Cash held by foreign subsidiaries was $24.4 million; repatriation for domestic use could have significant tax consequences. Management anticipated extending or amending the revolving credit agreement within six months.
Key facts for investors to verify
- RBI’s post-acquisition performance, integration progress, preliminary purchase-price allocation and contribution to reported growth.
- Whether the 2015 revenue outlook and segment forecasts were achieved, and how much growth was organic versus acquisition-driven.
- The sustainability of margin improvement after restructuring, sale-leaseback gains, derivative results and elevated performance compensation.
- Cash conversion, working-capital needs, revolver availability, covenant headroom and the outcome of the anticipated credit-agreement extension.
- Solar incentive changes, especially the scheduled U.S. tax-credit reduction, and their potential effect on RBI demand.