Atkore Inc. (Atkore International Group Inc.) — Q3 FY2018 Form 10-Q
Business context and period: Atkore manufactures electrical raceway products and mechanical products and solutions for construction and industrial markets. The third quarter ended June 29, 2018; comparisons are with the quarter ended June 30, 2017. Fiscal year-to-date figures cover nine months. Prior-period operating results were adjusted for adoption of pension-cost presentation guidance.
Key financial results
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $498.0 million | $397.7 million | $1,357.6 million | $1,108.1 million |
| Gross profit | $120.3 million | $92.5 million | $326.4 million | $271.8 million |
| Operating income | $55.2 million | $44.4 million | $133.0 million | $117.0 million |
| Net income | $34.2 million | $27.5 million | $103.9 million | $63.8 million |
| Diluted EPS | $0.70 | $0.41 | $1.84 | $0.96 |
| Adjusted EBITDA (non-GAAP) | $76.7 million | $62.0 million | $200.5 million | $168.0 million |
| Adjusted EBITDA margin | 15.4% | 15.6% | 14.8% | 15.2% |
Q3 sales rose 25.2% and net income rose 24.5%; nine-month sales increased 22.5% and net income increased 63.0%. Q3 gross margin was approximately 24.2% versus 23.3%; nine-month gross margin was approximately 24.0% versus 24.5%.
- Segment performance: Q3 Electrical Raceway sales increased 28.5% to $370.3 million and Adjusted EBITDA increased 49.9% to $74.5 million; its margin improved to 20.1% from 17.2%. MP&S sales increased 16.9% to $128.2 million, but Adjusted EBITDA fell 30.8% to $12.0 million and margin declined to 9.4% from 15.8%.
- Cash flow: Nine-month operating cash flow was $120.6 million, versus $65.8 million. Investing activities provided $14.4 million, including $42.6 million from the Flexhead sale, offset in part by $26.3 million of capital expenditures. Financing activities used $71.0 million, including substantial share repurchases.
- Liquidity: Cash was $109.5 million at June 29, 2018, up from $45.7 million at September 30, 2017. The ABL had no borrowings and approximately $286.2 million available, after letters of credit. Management expected cash from operations and ABL capacity to meet operating, capital-spending and debt-service needs for at least 12 months.
- Debt: Total debt carrying value was $906.1 million, up from $576.1 million at September 30, 2017; long-term debt was $898.5 million. Cash less debt was approximately $796.6 million. The First Lien Term Loan is due December 2023. AII reported covenant compliance.
Material changes and unusual items
- Sales growth reflected higher selling prices and pass-through of higher copper, steel and freight costs, acquisitions, and higher volume. The company said higher input and freight costs pressured profitability, notably in MP&S.
- In February 2018, Atkore borrowed an additional $425 million under its First Lien Term Loan. Proceeds funded a $375 million repurchase from related-party CD&R, repayment of $42 million of ABL borrowings, and fees. Nine-month financing cash flows also include $410.2 million of common-stock repurchases; shares outstanding fell from 63.3 million to 46.0 million.
- Interest expense rose 114.1% in Q3 to $12.4 million, primarily due to the incremental borrowing. Nine-month interest expense increased 35.7% to $28.3 million.
- The March sale of Flexhead generated $42.6 million cash proceeds and a $27.6 million gain. The gain substantially contributed to nine-month net income; nine-month Adjusted EBITDA excludes it.
- The U.S. Tax Cuts and Jobs Act reduced the federal corporate rate. The company reported effective tax rates of 23.2% for Q3 and 21.4% for nine months, and estimated a $5.5 million reduction in net deferred tax liabilities. The estimate remained provisional.
- MP&S profitability fell as input-cost increases exceeded selling-price increases; Electrical Raceway benefited from market pricing and acquisition contributions. Consolidated Q3 and nine-month Adjusted EBITDA margins were lower year over year.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management stated it expected cash on hand, operating cash flow and available ABL capacity to fund operations, expected capital expenditures and liquidity needs for at least the next 12 months. It cautioned that results depend on construction demand, commodity and freight costs, pricing and competition, working-capital needs, customer health, and the ability to generate cash and service debt.
- Product-liability reserves for the identified sprinkler-pipe claims and other product matters were $4.8 million; management estimated a loss range of $3 million to $10 million and said additional reserves could be required, though it did not expect a material adverse effect.
- A court ruling on August 3, 2018 sustained Commerce’s amended determination that specified ASCI products were outside the scope of an antidumping duty order. Atkore said it would seek recovery of certain duties; Commerce could appeal, and the company would review related accruals.
- Open purchase commitments were $145.9 million for the remainder of FY2018 and $2.6 million for FY2019. Letters of credit totaled $9.9 million and surety bonds $27.5 million.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess how much sales and earnings growth is attributable to price pass-through, acquisitions and the Flexhead gain, versus underlying volume and recurring operations.
- Track whether MP&S input-cost pressure and the decline in segment margin persist, and whether Electrical Raceway pricing keeps pace with costs.
- Review debt service and leverage following the $425 million borrowing and share repurchase; confirm future ABL availability and covenant headroom.
- Monitor working capital, especially receivables and inventory, alongside capital spending and operating cash conversion.
- Follow the Flexhead-related antidumping-duty appeal and recovery process, product-liability claims, and any changes to tax-reform estimates.