Gibraltar Industries, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial amounts below are in millions of dollars unless stated otherwise. Gibraltar manufactures and distributes products for building and industrial markets across North America and internationally.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $217.4 | $205.5 | $638.7 | $617.4 |
| Gross profit | $41.8 | $40.2 | $122.6 | $117.4 |
| Gross margin | 19.2% | 19.6% | 19.2% | 19.0% |
| Operating income (loss) | $(6.2) | $15.7 | $15.3 | $39.1 |
| Net income (loss) | $(13.7) | $7.3 | $(9.6) | $16.6 |
| Diluted EPS | $(0.44) | $0.24 | $(0.31) | $0.54 |
- Sales and margins: Q3 sales rose 5.8%; nine-month sales rose 3.5%. Acquisitions added $13.5 million in Q3 and $42.0 million year to date. Sales from businesses operating in both periods fell 0.8% in Q3 and 3.3% year to date, reflecting lower pricing and, year to date, slightly lower volume. Q3 gross margin declined 0.4 percentage points; year-to-date margin improved 0.2 points.
- Profit and unusual charges: A $23.16 million intangible-asset impairment in Q3 drove the operating and net losses. Nine-month interest expense was $18.7 million versus $14.0 million, including a $7.17 million charge associated with redeeming the old notes. The effective tax rate was unusually high relative to pretax losses: (38.5)% for Q3 and (200.2)% year to date; management cited the non-deductible goodwill impairment and state taxes.
- Cash flow: Nine-month operating cash flow from continuing operations was $37.9 million, up from $26.6 million. The filing attributes cash generation partly to substantial noncash charges, while working capital absorbed cash. Capital expenditures were $8.8 million; acquisition payments were $5.3 million; proceeds from property sales were $12.4 million. Cash increased $32.8 million to $80.8 million.
- Liquidity and debt: At September 30, cash was $80.8 million and reported revolver availability was $120.4 million, for total liquidity of $201.2 million. Total debt was $214.0 million, including $210 million of 6.25% senior subordinated notes due 2021; no revolver borrowings were outstanding. The company reported compliance with its 1.25-to-1.00 fixed-charge coverage covenant. Current assets were $327.6 million and current liabilities $128.1 million.
Material changes and management commentary
- In January 2013, Gibraltar issued $210 million of 6.25% notes and tendered or redeemed its $204 million 8% notes. The lower coupon reduced quarterly interest expense year over year, but refinancing costs increased nine-month interest expense.
- In September, the company acquired a domestic solar-powered roof and attic ventilation products business for $7.52 million, including contingent consideration. The purchase-price allocation remained subject to final valuation.
- Management revised its 2013 forecast downward for revenue and operating margins, prompting interim impairment testing. The company recorded a $21.04 million goodwill impairment for its European industrial reporting unit and also disclosed trademark impairment charges. It warned that additional impairment could result from weaker cash flows or a lower stock price.
- For 2013, management expected sales growth of approximately 4.5%, led by acquisitions, and gross margins comparable to 2012. For 2014, it was cautiously optimistic about modest demand improvement and expected profitability to improve with modest volume growth.
- Management identified uneven construction-market recovery, competitive pricing, commodity-cost changes, and weak European industrial conditions as relevant pressures. A larger acquisition could require additional borrowing or securities issuance. The filing says there were no material changes in market-risk exposure, no material changes to internal controls, and no off-balance-sheet arrangements other than operating leases with a material effect.
Important facts for investors to verify
- Reconcile the reported $23.16 million Q3 intangible-impairment expense with the separately disclosed $21.04 million goodwill impairment and $2.454 million trademark impairment.
- Track European reporting-unit performance and assumptions used in future goodwill and intangible-asset impairment tests.
- Assess the quality and sustainability of operating cash flow, particularly the effects of working capital and noncash impairment charges.
- Compare the 4.5% 2013 sales-growth outlook and 2014 improvement expectations with subsequent results, including organic sales trends and margins.
- Review refinancing terms, debt restrictions, covenant headroom, and the availability of the revolving facility; the filing reports $120.4 million available after letters of credit.