Atkore Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Atkore International Group Inc. manufactures electrical raceway products and Mechanical Products & Solutions (MP&S), primarily for construction, renovation and industrial markets. Its fiscal year ended September 30, 2018; this annual filing also reports unaudited fourth-quarter results. Fiscal 2018 and 2017 each comprised 52 weeks. About 90% of FY2018 sales were to U.S. customers.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1,835.1 million | $1,503.9 million |
| Gross profit / margin | $438.1 million / 23.9% | $361.3 million / 24.0% |
| Operating income / margin | $179.7 million / 9.8% | $156.0 million / 10.4% |
| Net income | $136.6 million | $84.6 million |
| Diluted EPS | $2.48 | $1.27 |
| Adjusted EBITDA / margin | $271.5 million / 14.8% | $227.6 million / 15.1% |
| Operating cash flow | $145.7 million | $121.7 million |
| Capital expenditures | $38.5 million | $25.1 million |
Operating cash flow less capital expenditures was approximately $107.2 million in FY2018, a calculated measure, versus $96.5 million in FY2017. Cash and equivalents at year-end were $126.7 million, including $97.4 million held outside the U.S. Current assets were $647.1 million and current liabilities $272.7 million.
Debt at September 30, 2018 included $912.2 million principal outstanding on the first-lien term loan; reported debt net of deferred financing costs was $904.2 million. The ABL revolver had no borrowings and approximately $315.1 million of available capacity, excluding $9.9 million of letters of credit. The term loan matures in 2023 and the ABL facility in 2021. Debt bears floating rates; reported annual interest expense was $40.7 million.
Fourth-quarter FY2018 revenue was $477.6 million, gross profit $111.7 million and net income $32.7 million; corresponding FY2017 fourth-quarter figures were $395.8 million, $89.5 million and $20.9 million.
Material changes versus the prior comparable period
- Revenue rose 22.0%, reflecting 11.0% higher average selling prices, 7.2% from acquisitions, and 3.4% higher volume. Price increases largely passed through higher steel, copper and freight costs.
- Net income increased 61.4%; the improvement included the $27.6 million pre-tax gain on the FlexHead divestiture, higher operating income and lower income tax expense. FY2018 effective tax rate was 17.9%, versus 32.9%, influenced by U.S. tax reform and tax benefits.
- Adjusted EBITDA rose 19.3%, but its margin declined from 15.1% to 14.8%. Gross margin was approximately flat and operating margin contracted.
- Electrical Raceway sales grew 24.8% and segment Adjusted EBITDA grew 34.8%, with margin up to 18.7% from 17.3%. MP&S sales grew 14.5%, but Adjusted EBITDA fell 19.4% and margin declined to 10.9% from 15.5%, as input-cost increases outpaced selling-price increases and the FlexHead sale reduced contribution.
- Interest expense increased 53.0%, primarily after $425 million of incremental term-loan borrowings in February 2018. Proceeds funded a $375 million repurchase of approximately 17.2 million shares from CD&R, repayment of $42 million of ABL borrowings and transaction costs. CD&R exited its investment during FY2018.
- Operating cash flow increased, while working capital absorbed cash as receivables and inventory grew. Capital expenditures increased by $13.4 million year over year.
Outlook, risks, contingencies and unusual items
- Management said operating cash flow and available ABL capacity should fund operations, expected capital expenditures and liquidity needs for at least the next 12 months. No specific revenue or earnings guidance is provided in the filing.
- Atkore completed its acquisition of Vergokan on October 1, 2018, for $58.7 million, after signing the agreement before fiscal year-end. Purchase-price allocation and pro forma results were not yet complete.
- Management sees potential demand support from non-residential construction recovery, data centers, healthcare and building-technology trends. Results remain exposed to construction cyclicality, weather and seasonality, with historically stronger sales in the third and fourth fiscal quarters.
- Principal operating risks include volatility in steel, copper and PVC costs; the ability to pass through input and freight increases; competition and imports; customer credit and concentration; labor or production disruptions; and environmental, product-liability and other legal exposures. The ten largest customers represented about 33% of sales. One customer represented 11% of year-end receivables, all of which was collected by November 28, 2018.
- Interest-rate exposure is significant: a one-percentage-point rate change was estimated to affect annual term-loan interest expense by about $9.3 million. Debt covenants restrict distributions, dividends and other actions; management reported compliance.
- Product-liability reserves for special sprinkler-pipe claims and other product matters totaled $6.8 million; management estimated probable losses of $3 million to $10 million and stated it did not expect a material adverse effect. The filing describes a $12 million cap on Atkore’s deductible under the Tyco/JCI indemnity for the specified claims.
- A court sustained a determination that certain imported fittings were outside the antidumping order; Atkore reversed $7.2 million of the prior accrual. The FlexHead sale generated a $27.6 million pre-tax gain. The filing says goodwill impairment tests found fair values at least 10% above carrying values and no goodwill impairment was recorded.
- Environmental obligations include a multi-year stormwater compliance plan at the Harvey, Illinois facility and ongoing groundwater monitoring at a former/current facility in Wayne, Michigan; management did not expect the specified permit plans to have a material financial effect but noted future remediation could arise.
Most important facts for investors to verify
- Whether price increases continue to offset commodity and freight costs, and whether MP&S margins recover after FY2018 compression.
- How much of sales and EBITDA growth reflects acquisitions and price pass-through versus underlying volume growth.
- Debt-service capacity and sensitivity to interest rates, including the effect of the large share repurchase financed principally with incremental debt.
- Post-year-end Vergokan acquisition financing, integration, purchase accounting and contribution to results.
- Developments in sprinkler-pipe product claims, environmental matters and the remaining obligations or indemnification coverage.
- The contribution of unusual gains, tax benefits and legal-accrual reversals to reported earnings; compare GAAP results with Adjusted EBITDA, a non-GAAP measure.