Business context and reporting period
Atkore International Group Inc. manufactures electrical raceway products and mechanical products and solutions for construction and industrial markets. This unaudited Form 10-Q covers the three months ended December 28, 2018, the first quarter of fiscal 2019; comparisons are with the three months ended December 29, 2017. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $452.0 million | $414.6 million |
| Gross profit / margin | $110.3 million / 24.4% | $96.9 million / 23.4% |
| Operating income / margin | $45.7 million / 10.1% | $36.6 million / 8.8% |
| Net income | $26.9 million | $27.2 million |
| Diluted EPS | $0.54 | $0.41 |
| Adjusted EBITDA / margin | $70.0 million / 15.5% | $58.5 million / 14.1% |
| Operating cash flow | $40.3 million | $48.9 million |
Revenue rose 9.0%. Higher selling prices and acquisitions more than offset lower sales volume. Gross margin improved, while net income was nearly flat as higher operating income was offset primarily by increased interest expense and income taxes. Adjusted EBITDA is a non-GAAP measure; the filing cautions it should not be considered in isolation from GAAP results and cash flows.
- Electrical Raceway: Sales increased 8.5% to $343.4 million; Adjusted EBITDA grew 22.0% to $68.5 million and margin expanded to 19.9% from 17.7%. Price and acquisitions supported results, partly offset by lower volume.
- Mechanical Products & Solutions: Sales increased 10.4% to $108.8 million, but Adjusted EBITDA was nearly flat at $10.9 million and margin declined to 10.0% from 11.0%.
Liquidity, debt and cash flows
Cash was $75.9 million at December 28, 2018, down $50.7 million from September 30, 2018, mainly reflecting the Vergokan acquisition. Operating cash flow was $40.3 million; investing outflow was $64.9 million, including $57.9 million for Vergokan; financing outflow was $25.2 million, primarily from $24.4 million of share repurchases. Capital expenditures were $6.9 million.
Total debt, net of deferred financing costs, was $904.7 million, including $878.1 million long-term and $26.6 million current. Cash less reported debt was approximately $828.7 million. The company had no ABL borrowings and approximately $275.0 million available under its asset-based credit facility. Management said cash, operating cash flow and available facility capacity were expected to meet operating and liquidity needs for at least the next twelve months. The company reported compliance with its credit-facility covenants.
Material changes and notable items
- Average selling prices increased 9.6% company-wide; reported volume declined 2.6%. Higher steel, copper and freight costs contributed to higher sales prices and cost of sales. Management cited lower volume particularly in metal conduit and cable wire.
- Interest expense rose 84.4% to $12.2 million, primarily because of additional borrowings from February 2018 debt refinancing. The effective tax rate increased to 23.2% from 8.5%, largely due to prior-year tax benefits and deductions that did not recur.
- Atkore acquired Vergokan, a European cable-tray and cable-ladder manufacturer, on October 1, 2018, for $57.9 million net of cash acquired. Purchase accounting estimates were preliminary. Revenue recognition guidance was adopted using the modified retrospective method; management reported no change to revenue or earnings, with balance-sheet reclassifications.
- The company repurchased approximately 1.23 million shares for $24.4 million during the quarter at an average $19.85 per share; no authorization remained under the repurchase program at quarter-end.
- Restructuring charges were $1.4 million, primarily related to facility closures and realignment. Management expected to use the remaining $0.34 million restructuring accrual within twelve months.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management expressed confidence in liquidity, but cautioned that results are exposed to non-residential construction conditions, commodity prices, pricing pressure, freight and energy costs, working-capital needs, customer demand, and the company’s ability to service debt and integrate acquisitions. The filing states that risks described in prior reports had no material changes.
Atkore disclosed product-liability claims concerning discontinued antimicrobial-coated sprinkler pipe allegedly incompatible with third-party CPVC pipe. Product-liability reserves were $1.2 million, and the company estimated a $1 million to $9 million loss range for these and other product matters. The company reported cumulative expense of $12 million for the specified claims and stated that former parent Tyco/Johnson Controls has a contractual indemnification obligation for qualifying claims after that amount. Management did not expect the proceedings to have a material adverse effect, while noting litigation outcomes remain unpredictable.
Important facts for investors to verify
- Whether pricing gains continue to offset lower volume and increased steel, copper and freight costs, particularly in Electrical Raceway.
- How debt and interest costs affect earnings and cash generation; verify facility availability, covenant compliance and debt maturities in subsequent filings.
- Vergokan’s integration, contribution to results, and final purchase-price allocation.
- Whether working-capital requirements and acquisition or repurchase spending affect liquidity.
- Developments in product-liability claims, reserves and the stated indemnification arrangement.