Gibraltar Industries, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. Gibraltar manufactures and distributes products for building and industrial markets, operating 40 facilities across the U.S., Canada, England, and Germany. Comparisons are with the corresponding 2011 periods.
Financial performance
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Net sales | $219.7 million | $208.8 million | $411.9 million | $372.4 million |
| Gross profit / margin | $41.7 million / 19.0% | $45.4 million / 21.8% | $77.2 million / 18.7% | $75.5 million / 20.3% |
| Operating income / margin | $16.3 million / 7.4% | $17.4 million / 8.3% | $23.3 million / 5.7% | $24.6 million / 6.6% |
| Income from continuing operations | $7.9 million | $7.2 million | $9.4 million | $8.7 million |
| Net income | $7.9 million | $7.8 million | $9.3 million | $16.2 million |
| Diluted EPS | $0.26 | $0.25 | $0.30 | $0.53 |
For the first half, cash used in operating activities was $2.0 million, compared with $3.1 million used in 2011. Continuing-operations investing cash use was $6.9 million, including $2.7 million for the Edvan acquisition and $4.6 million of capital expenditures. Cash declined by $10.1 million to $44.1 million.
At June 30, cash was $44.1 million and total debt was $206.9 million, including $202.5 million of 8% senior subordinated notes, net of discount. The company had no revolver borrowings, $149.8 million of revolver availability after letters of credit, and reported total liquidity of $193.9 million. The fixed-charge coverage covenant minimum was 1.25x; the company reported compliance. Current assets were $289.6 million and current liabilities were $126.6 million.
Changes and drivers
- Q2 sales rose 5.2%; management attributed $4.3 million of the increase to acquisitions and $6.6 million to operations. Organic sales growth was 3.2%, with volume up 5.9% and pricing down 2.6%.
- H1 sales grew 10.6%; acquisitions contributed $26.1 million and operations $13.4 million. Management cited 3.6% growth from businesses operating in both periods, with volume up 2.6% and pricing up 1.1%.
- Gross margin contracted in both periods, principally from less favorable alignment of material costs and selling prices and West Coast consolidation/integration costs. Q2 included a $2.2 million inventory charge connected with the Award Metals integration. Higher organic volume partly offset the pressure.
- Q2 SG&A fell 9.3% to $25.4 million, including lower equity-compensation and restructuring/acquisition costs; H1 SG&A rose 6.0% to $53.9 million, mainly reflecting acquired businesses.
- H1 2012 net income was lower than H1 2011 largely because the prior-year period included a $14.0 million pretax gain on the sale of United Steel Products. Continuing-operations income increased year over year.
Outlook, risks, and notable items
- For full-year 2012, management expected approximately 2% organic revenue growth and about $30 million of incremental revenue from recent acquisitions; gross margin of approximately 20%; SG&A of about $26 million per quarter, or 13% of revenue; quarterly net interest expense of $4.7–$4.8 million; a 37% effective tax rate; and capital expenditures of $16 million.
- Management expected modest improvement across markets but emphasized uncertainty around the timing and extent of recovery. U.S. construction remained weak relative to long-term levels; West Coast residential and European demand were soft.
- Risks identified include raw-material availability and price changes, energy costs, product demand, credit-market liquidity, acquisition integration, and interest and tax rates. Management said it expected West Coast restructuring costs to subside and believed the reorganization could improve future gross margins.
- During H1, Gibraltar consolidated two facilities and discontinued an uncompetitive product line. Exit costs and asset impairments totaled $2.9 million; impairment charges were $1.5 million.
- A $0.6 million uncertain-tax-position reversal helped reduce the Q2 2012 effective tax rate to 33.9% (34.8% for H1). The company recorded an environmental-remediation contingent liability related to a discontinued operation; management did not expect this or other indemnification claims to materially affect results or financial condition.
- The company reported no applicable legal proceedings, no material change in market-risk exposure, and effective disclosure controls. It disclosed related-party legal fees of $0.7 million for H1 2012 to a law firm whose partner sits on the board.
Key facts for investors to verify
- Whether the guided 20% full-year gross margin and 2% organic growth remain attainable given Q2 margin compression and end-market weakness.
- Whether West Coast consolidation and Award Metals integration costs subside as expected, and whether the inventory charge is nonrecurring.
- Working-capital conversion and cash generation: continuing operations used cash in H1 amid seasonal receivables and inventory investment.
- Debt refinancing and liquidity plans ahead of the 8% notes’ December 2015 maturity; confirm revolver availability and covenant headroom.
- Developments in discontinued-operation indemnities and environmental remediation, and the assumptions underlying the 37% full-year tax-rate outlook.