Business context and reporting period
Atkore International Group Inc. manufactures electrical raceway products and mechanical products and solutions, primarily for construction, renovation and industrial markets. This Form 10-K covers the fiscal year ended September 30, 2016, a 53-week year, compared with 52-week fiscal 2015. Fiscal Q4 ended September 30, 2016. The company completed its IPO in June 2016; shares were sold by CD&R, and Atkore received no proceeds.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $1,523.4 million | $1,729.2 million |
| Adjusted net sales, excluding Fence and Sprinkler | $1,515.6 million | $1,550.6 million |
| Gross profit | $368.7 million | $272.8 million |
| Operating income | $126.9 million | $36.9 million |
| Net income (loss) | $58.8 million | $(5.0) million |
| Adjusted EBITDA | $235.0 million | $164.0 million |
| Adjusted EBITDA margin | 15.5% | 10.6% |
| Cash from operating activities | $156.6 million | $141.1 million |
Reported sales fell 11.9%, largely reflecting the exit from Fence and Sprinkler; comparable Adjusted net sales declined 2.3%. Gross margin was approximately 24.2%, versus 15.8% in FY 2015. Management attributed improved profitability primarily to material costs declining faster than selling prices, productivity gains, and lower freight and warehouse costs. Adjusted EBITDA is a non-GAAP measure and excludes significant expenses.
In fiscal Q4, net sales were $416.2 million, gross profit $93.3 million and net income $15.6 million. The comparable FY 2015 quarter had sales of $437.8 million, gross profit of $70.8 million and a net loss of $27.1 million.
At year-end, cash and cash equivalents were $200.3 million, total debt was $630.3 million and net debt was approximately $430.0 million. The ABL facility had no borrowings and approximately $206.9 million available, after letters of credit. Operating cash flow less capital expenditures was approximately $139.8 million. The company reported $257.2 million of equity and $582.9 million of current assets against $204.8 million of current liabilities.
Material changes versus the prior period
- Operating income rose to $126.9 million from $36.9 million and net income turned positive. FY 2015 included $27.9 million in asset impairment charges; FY 2016 recorded $0.1 million.
- Adjusted EBITDA increased 43.3%. Excluding discontinued Fence and Sprinkler sales, sales declined modestly, while both segments improved Adjusted EBITDA: Electrical Raceway to $174.6 million from $106.7 million; MP&S to $88.6 million from $79.6 million.
- SG&A increased $33.6 million, including a $12.8 million fee to terminate CD&R’s consulting agreement, higher stock-based compensation and IPO-related transaction costs.
- Cash increased $119.7 million. Debt declined to $630.3 million from $652.2 million, including the discounted redemption of $19.0 million of second-lien debt, which generated a $1.7 million gain.
Outlook, commentary, risks and unusual items
Management said cash from operations and available ABL capacity should be sufficient for operations, expected capital expenditures and liquidity needs for at least the next 12 months. The filing provides no specific earnings or revenue guidance. Management cited U.S. non-residential construction recovery and growth opportunities in areas such as healthcare and data centers, while noting the business is cyclical and seasonal.
- Key exposures include construction-market weakness, steel, copper and PVC price changes, pricing competition, freight and energy costs, weather, customer credit and concentration, and labor or supply interruptions. Ten largest customers represented about 31% of FY 2016 sales; no single customer exceeded 7%.
- Debt is principally floating-rate and subject to restrictive covenants. A one-percentage-point rate increase would add approximately $6.4 million of annual term-loan interest expense at the stated assumptions. Term loans mature in 2021; the ABL facility matures in 2018.
- Environmental matters include an Illinois stormwater permit and compliance plan at the Harvey facility, with a four-year compliance schedule; management did not expect compliance to materially affect results or cash flows. Further remediation at current or former sites remains a potential risk.
- Product-liability claims concerning antimicrobial-coated sprinkler pipe and CPVC had recorded reserves; the company estimated probable losses in a $3 million to $10 million range, while additional losses were not reasonably estimable. Management considered reserves adequate but could not rule out future material charges.
- The U.S. pension plans were underfunded by approximately $35.2 million. CD&R retained about 80.1% ownership after the IPO; the company does not intend to pay dividends for the foreseeable future.
- FY 2016 was affected by the additional fiscal week, lower input costs, the Fence and Sprinkler exit, IPO costs and the consulting-fee termination. The company reported no goodwill impairment in FY 2016.
Important facts for investors to verify
- Reconcile the 11.9% reported sales decline with the 2.3% decrease in Adjusted net sales and assess ongoing segment volumes and pricing.
- Review the sustainability of margin and EBITDA gains as commodity prices and selling prices change; compare non-GAAP Adjusted EBITDA with GAAP cash generation.
- Assess debt service, variable-rate exposure, maturities, covenant restrictions and the reliability of the reported ABL availability.
- Track the Harvey stormwater compliance plan, product-liability claims, pension funding and any new environmental or legal exposures.
- Consider CD&R’s control, potential share sales after lock-up expiration, the absence of dividends and the possibility of dilution from equity awards.