Atkore International Group Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017; comparisons are to the quarter and nine months ended June 24, 2016. Amounts below are in millions of dollars unless stated otherwise. The financial statements are unaudited.
Business context and key financial metrics
Atkore manufactures Electrical Raceway products and Mechanical Products & Solutions (MP&S), serving non-residential construction, renovation and industrial markets.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $397.7 | $395.7 | $1,108.1 | $1,107.1 |
| Gross profit | $92.8 | $111.5 | $272.8 | $275.3 |
| Gross margin | 23.3% | 28.2% | 24.6% | 24.9% |
| Operating income | $44.8 | $41.6 | $118.1 | $96.3 |
| Net income | $27.5 | $20.6 | $63.8 | $43.2 |
| Diluted EPS | $0.41 | $0.33 | $0.96 | $0.69 |
| Adjusted EBITDA | $62.0 | $67.2 | $168.0 | $173.6 |
| Adjusted EBITDA margin | 15.6% | 17.0% | 15.2% | 15.8% |
For the nine-month period, operating cash flow was $65.8 million, capital expenditures were $15.3 million, and cash used in investing activities was $31.8 million, including $19.6 million for the Marco Cable Management acquisition. Cash used in financing activities was $137.6 million, principally reflecting debt refinancing. Cash declined from $200.3 million at September 30, 2016 to $96.2 million at June 30, 2017.
At June 30, 2017, total debt was $492.1 million, including $487.9 million of long-term debt and $4.2 million current. Cash less reported debt was approximately $395.9 million. The company had no ABL borrowings and reported $237.9 million of ABL availability. Current assets were $519.4 million and current liabilities were $190.7 million.
Material changes and operating performance
- Quarterly sales rose 0.5%, while gross profit fell 16.8%; nine-month sales were nearly flat and gross profit declined 0.9%. Higher selling prices largely reflected pass-through of steel, resin and copper costs, but input-cost increases outpaced price increases in several product lines.
- Quarterly net income increased 33.0%, supported by lower SG&A and interest expense despite lower gross profit. Nine-month net income increased 47.6%; comparisons also reflect lower prior-year SG&A, a $9.8 million debt-extinguishment loss in 2017, lower interest expense and a $5.8 million gain on sale of a joint venture.
- Quarterly Adjusted EBITDA declined 7.7%, and nine-month Adjusted EBITDA declined 3.2%. Management cited weaker volume, particularly lower demand for higher-margin solar-related mechanical pipe, and input costs outpacing pricing; productivity partially offset the pressure.
- For the quarter, Electrical Raceway sales increased 2.5% but segment Adjusted EBITDA fell 8.4%. MP&S sales fell 3.5% and Adjusted EBITDA fell 17.5%. For the nine months, Electrical Raceway sales and Adjusted EBITDA increased 3.6% and 3.2%, respectively; MP&S adjusted sales declined 4.4% and Adjusted EBITDA declined 16.8%.
- The December 2016 refinancing replaced the former first- and second-lien term loans with a $500 million first-lien facility due December 2023. The company reported lower interest expense but recorded a $9.8 million extinguishment loss during the nine months.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management stated that cash from operations and available ABL capacity were expected to fund operations, expected capital spending and liquidity needs for at least the next 12 months.
- Raw-material price volatility and the timing of price pass-through, lower demand in solar-related mechanical pipe and metal conduit/fittings, and working-capital fluctuations are key operating sensitivities.
- The company recorded a $7.5 million accrual related to antidumping duties on certain imported conduit fittings and is appealing the U.S. Department of Commerce scope decision. Product-liability reserves, including claims concerning previously sold antimicrobial sprinkler pipe, totaled $6.1 million; management estimated probable losses across product-liability matters at $3 million to $10 million and said additional losses could be material but were not reasonably estimable.
- Atkore acquired Marco Cable Management on May 18, 2017; its reported contribution to sales and net income through June 30 was insignificant. The company also completed the sale of its minority interest in Abahsain-Cope Saudi Arabia Ltd., recognizing a $5.8 million pretax gain.
- Management reported compliance with debt covenants. Debt agreements restrict certain additional borrowing, distributions, dividends and other actions. The company also identified general risks including construction-market weakness, competition, commodity costs, litigation, acquisition integration, and the ability to generate cash to service debt.
Important facts for investors to verify
- Whether price increases can catch up with raw-material inflation and restore gross and Adjusted EBITDA margins.
- Whether demand and margins in solar-related mechanical pipe and other lower-volume product lines recover.
- The outcome and potential additional exposure from the antidumping-duty appeal and product-liability claims.
- Post-refinancing cash generation, debt repayment, ABL availability and compliance with financing covenants.
- Final purchase-price allocation and integration performance for Marco Cable Management.