Atkore Inc. (Atkore International Group Inc.) — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended June 28, 2019; fiscal year ends September 30. Unaudited results. Dollar amounts below are in millions unless stated otherwise.
Business context and financial results
Atkore manufactures Electrical Raceway products and Mechanical Products & Solutions (MP&S) for construction, industrial and related markets.
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $493.5 | $498.0 | $1,414.8 | $1,357.6 |
| Gross profit | $126.1 | $120.3 | $353.5 | $326.4 |
| Operating income | $59.2 | $55.2 | $157.4 | $133.0 |
| Net income | $36.6 | $34.2 | $93.1 | $103.9 |
| Diluted EPS | $0.75 | $0.70 | $1.90 | $1.84 |
| Adjusted EBITDA (non-GAAP) | $88.5 | $76.7 | $235.6 | $200.5 |
| Adjusted EBITDA margin | 17.9% | 15.4% | 16.7% | 14.8% |
Q3 gross margin was approximately 25.6%, versus 24.2% a year earlier. Nine-month gross margin was approximately 25.0%, versus 24.0%. These percentages are calculated from reported sales and gross profit.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $120.2, essentially unchanged from $120.6 a year earlier. Capital expenditures were $21.6, versus $26.3.
- Investing activities used $105.2, principally reflecting the Vergokan and United Structural Products acquisitions; the prior-year period included $42.6 of proceeds from the FlexHead divestiture.
- Financing activities used $40.3, including $24.4 of share repurchases and debt repayments, partly offset by credit-facility borrowings.
- Cash was $100.7 at June 28, 2019, down from $126.7 at September 30, 2018. Total reported debt was $884.5, compared with $904.2 at fiscal year-end. The debt balance was primarily the First Lien Term Loan, due December 2023.
- No borrowings were outstanding under the ABL facility; approximately $312.6 was available. Management stated that cash on hand, operating cash flow and ABL availability should fund operations, expected capital expenditures and liquidity needs for at least the next 12 months.
Material changes and management commentary
- Q3 sales declined 0.9%. Lower average selling prices, largely reflecting pass-through of lower steel and resin costs, offset acquisition contributions and higher volume. Cost of sales fell 2.7%, supported by lower input costs and operating efficiencies; management also cited inventory adjustments that partly offset the savings.
- Q3 net income rose 6.9% and Adjusted EBITDA increased 15.4%. Electrical Raceway sales increased 0.8% and segment Adjusted EBITDA rose 3.0%; MP&S sales fell 6.0%, while its segment Adjusted EBITDA rose 71.4%, which management attributed primarily to pricing strategies and efficiencies.
- For the first nine months, sales increased 4.2% and Adjusted EBITDA rose 17.5%, but net income declined 10.5%. The comparison was affected by a $27.6 gain on the prior-year FlexHead sale and higher current-year interest expense. Current-year sales benefited from acquisitions and higher selling prices; lower MP&S volume was a partial offset.
- Atkore acquired Vergokan in October 2018 for $57.9 net of cash received and United Structural Products in June 2019 for $25.5 net of cash received. The latter acquisition’s purchase-price allocation was not final at quarter-end.
The filing provides no specific earnings or revenue guidance. Management’s liquidity outlook is not a forecast of operating results. Principal stated risks include construction-market weakness, raw-material price changes, competition and pricing pressure, freight and energy costs, customer concentration and collections, working-capital needs, operational disruptions, acquisitions, debt restrictions and litigation.
Contingencies and unusual items
- Product-liability reserves were $1.2 at June 28, 2019; the stated estimated range of losses was $1.0 to $8.0. Atkore said it did not expect the identified Special Products Claims to have a material adverse effect and stated that Johnson Controls International is contractually obligated to indemnify it for covered claims after the negotiated deductible cap was satisfied.
- Nine-month restructuring charges were $3.2, primarily related to facility closures and severance; $0.1 of restructuring accruals remained at quarter-end.
- Interest expense increased 35.1% year over year for the nine-month period, primarily due to additional borrowings from 2018 debt transactions and, in Q3, higher market rates on variable-rate debt.
- Management reported compliance with credit-facility covenants. The filing also lists $129.8 of open purchase orders for the remainder of FY2019 and $3.3 for FY2020 and beyond.
Important facts for investors to verify
- Whether lower commodity prices and pass-through pricing continue to pressure reported sales or affect margins and inventory adjustments.
- How Vergokan and United Structural Products perform and integrate, including final purchase-price allocations and acquisition-related costs.
- Exposure to variable interest rates, debt covenants, and the adequacy of cash and ABL availability as working-capital needs change.
- Developments in product-liability and other legal matters, including the scope and application of the Johnson Controls indemnity.
- The sustainability of Adjusted EBITDA improvement, noting that it is a non-GAAP measure and excludes items that affect reported earnings and cash requirements.