Gibraltar Industries, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless stated otherwise. Gibraltar manufactures and distributes products serving residential, industrial and infrastructure, renewable energy, and conservation markets. The company notes that colder weather can reduce activity in the first and fourth quarters.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $206.6 million | $237.7 million | Down 13.1% |
| Gross profit / margin | $49.3 million / 23.8% | $54.2 million / 22.8% | Margin up 1.0 percentage point |
| Operating income / margin | $9.7 million / 4.7% | $17.8 million / 7.5% | Down $8.1 million |
| Net income | $4.0 million | $9.0 million | Down 55.7% |
| Diluted EPS | $0.12 | $0.28 | Down $0.16 |
| Operating cash flow | $2.3 million | $15.5 million | Down $13.2 million |
SG&A increased 8.8% to $39.6 million and rose to 19.1% of sales from 15.3%, reflecting restructuring, leadership transition and acquisition costs, and higher performance-based compensation. Interest expense was $3.6 million; the effective tax rate was 33.9%, compared with 36.0%.
Cash and equivalents were $160.9 million at March 31, down from $170.2 million at year-end. Total debt, net of issuance costs, was $209.8 million, including $210.0 million principal of 6.25% senior subordinated notes due February 2021 and $2.8 million of other debt. No revolver borrowings were outstanding; $286.9 million was available after letters of credit. Management reported total liquidity of $447.8 million and compliance with credit covenants. Current assets were $382.3 million and current liabilities $158.0 million.
Operating cash flow was reduced by an $8.1 million investment in working capital and other net assets, including a $12.1 million decrease in accrued expenses and other non-current liabilities. Investing activities used $10.8 million, mainly for the Package Concierge acquisition, partly offset by $9.2 million in asset-sale proceeds. Cash declined by $9.3 million during the quarter.
Material changes and operating developments
- Revenue fell $31.1 million. Portfolio exits and divestitures accounted for a $28.5 million reduction; comparable revenue streams declined 5.0%. Acquisitions added $4.9 million and customer pricing increased 1.3%.
- Residential Products sales rose 4.4% to $104.6 million, with operating income increasing to $15.6 million from $12.2 million. The company cited Package Concierge, pricing, demand for parcel products, and operational efficiencies.
- Industrial and Infrastructure Products sales fell 36.9% to $50.3 million; operating income declined to a $37,000 loss from $3.3 million. Exited product lines and divested operations reduced sales, while infrastructure-project delays also weighed on volume.
- Renewable Energy and Conservation sales decreased 10.5% to $51.8 million; operating income fell to $3.3 million from $8.3 million. Lower volume, project timing, and unfavorable material-cost alignment contributed; Nexus partially offset declines. The segment entered 2017 with lower backlog than a year earlier, but reported backlog above prior-year levels at Q1-end.
- Gibraltar acquired Package Concierge on February 22 for preliminary consideration of $18.9 million, funded with cash. The preliminary allocation included $16.7 million of goodwill, not deductible for tax purposes. The company also completed the sale of substantially all U.S. bar-grating assets in February and continued closing facilities tied to portfolio exits.
Outlook, risks, and notable items
Management reduced full-year 2017 guidance. It expects revenue approximately 3% below 2016, reflecting an estimated 8% revenue reduction from portfolio actions, nearly 2% contribution from acquisitions, and 3% growth in continuing revenue streams. Diluted EPS guidance is $1.37–$1.50, versus $1.05 in 2016. Management expects difficult Q2 comparisons, a delayed Renewable Energy and Conservation recovery, continued industrial and infrastructure weakness, and higher raw-material prices; it anticipates stronger top- and bottom-line growth in Q3 and Q4, easing raw-material pressure, and generally favorable residential conditions.
The company reported $3.0 million of net exit-activity and impairment charges in Q1 2017, versus $1.7 million in Q1 2016. Q1 2017 included $3.9 million of exit costs, partly offset by $0.9 million of impairment recoveries; three facilities closed during the quarter. Management’s five-year transformation and 80/20 initiatives had delivered nearly 250 basis points of operating-margin improvement since 2015 and exceeded the initial $25 million pretax-savings target ahead of schedule.
Risks cited include economic and end-market conditions, interest and foreign-exchange rates, raw-material costs and availability, customer demand, and government policies or funding. Management cautioned that forward-looking statements are subject to uncertainty and said foreign cash repatriation could have significant tax consequences. No material change in market-risk exposure was reported; no material off-balance-sheet arrangements other than operating leases were identified. Legal proceedings were reported as not applicable.
The company adopted stock-compensation accounting changes in Q1 2017, including a $254,000 cumulative adjustment between retained earnings and additional paid-in capital. It also disclosed an immaterial correction to Q1 2016 interim results related to estimated contract costs and percentage-of-completion revenue recognition. The company expects the new revenue-recognition standard, effective for it in Q1 2018, to change recognition timing for custom-fabricated products in Industrial and Infrastructure Products; the adoption method and quantified impact were still under evaluation.
After quarter-end, CFO Kenneth W. Smith retired effective May 3 and agreed to provide consulting services through October 31, 2017. Timothy F. Murphy became CFO effective April 1; a change-in-control agreement was entered into on May 4. Management stated disclosure controls were effective and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the expected second-half recovery materializes, particularly in renewable energy and infrastructure, and whether backlog converts to sales.
- Progress against revised 2017 revenue and diluted-EPS guidance, including the impact of raw-material costs, pricing, and portfolio exits.
- Whether working-capital demands and lower operating cash generation persist, and how cash is allocated among acquisitions, restructuring, and other uses.
- Package Concierge’s contribution and the assumptions underlying its preliminary purchase-price allocation and goodwill.
- The final transition approach and financial effects of the new revenue-recognition standard, and any future effects of lease-accounting adoption.