Atkore Inc. (Atkore International Group Inc.) — Q1 FY2020 10-Q
Reporting period: Three months ended December 27, 2019; comparisons are with the three months ended December 28, 2018. Atkore manufactures Electrical Raceway and Mechanical Products & Solutions (MP&S) for construction and industrial markets. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 FY2020 | Prior period | Change |
|---|---|---|---|
| Net sales | $447.4 | $452.0 | Down 1.0% |
| Gross profit / margin | $116.8 / 26.1% | $110.3 / 24.4% | Gross profit up 6.0% |
| Operating income / margin | $52.5 / 11.7% | $45.7 / 10.1% | Up 15.0% |
| Net income | $34.8 | $26.9 | Up 29.1% |
| Diluted EPS | $0.71 | $0.54 | Up $0.17 |
| Operating cash flow | $52.2 | $40.3 | Up $11.9 |
| Capital expenditures | $9.8 | $6.9 | — |
Operating cash flow less capital expenditures was approximately $42.4 million. Cash increased to $164.1 million from $123.4 million at September 30, 2019.
Segments and material changes
- Electrical Raceway: Sales were $341.4 million, down 0.6%; Adjusted EBITDA was $70.2 million, up 2.5%, and margin rose to 20.6% from 19.9%.
- MP&S: Sales were $106.7 million, down 2.0%; Adjusted EBITDA was $16.7 million, up 53.0%, and margin rose to 15.6% from 10.0%.
- Consolidated sales fell as lower average selling prices reduced revenue by about $30.0 million, chiefly reflecting lower steel and resin costs. Higher volume and $12.4 million of sales from fiscal 2019 acquisitions partially offset the decline.
- Cost of sales declined $11.2 million, principally from $38.9 million of lower steel and resin input costs, partly offset by volume, acquisition costs, freight and inventory adjustments. Management cited operational efficiencies, volume and acquisition contributions in explaining segment EBITDA improvements.
- Interest expense declined to $10.6 million from $12.2 million, primarily reflecting principal repayments made in fiscal 2019. The effective tax rate fell to 17.4% from 23.2%, mainly due to a greater excess tax benefit from stock compensation.
Debt, liquidity and balance sheet
- Long-term debt, net of deferred financing costs, was $845.2 million; the First Lien Term Loan principal was $851.4 million and matures December 22, 2023. Cash less reported debt was approximately $681.1 million.
- No borrowings were outstanding under the $325 million ABL facility; availability was approximately $282.6 million after letters of credit.
- Current assets were $731.0 million and current liabilities $280.0 million. Lease obligations of $45.7 million were recognized following adoption of the new lease standard.
- Operating, investing and financing cash flows were respectively $52.2 million provided, $9.8 million used and $3.0 million used. Prior-period investing cash use included the Vergokan acquisition; prior-period financing use included $24.4 million of share repurchases.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and available ABL capacity are expected to meet operating, capital expenditure and debt-service needs for at least the next 12 months. No numerical earnings or revenue guidance was provided.
- Key stated risks include economic or non-residential construction weakness, raw-material price changes, competitive pricing pressure, freight and energy costs, customer credit and working-capital needs, supply or production interruptions, acquisition integration, litigation, and debt restrictions.
- Product-liability reserves were $2.6 million; the disclosed reasonably possible loss range for Special Products Claims and other product-liability matters was $1.0 million to $8.0 million. The company said it did not expect these proceedings to have a material adverse effect and noted Johnson Controls’ indemnification obligation for remaining and future Special Products Claims.
- Adoption of ASC Topic 842 on October 1, 2019 resulted in recognition of lease assets and liabilities and a $1.1 million after-tax reduction to accumulated deficit. The quarter also included $0.2 million of restructuring charges. Foreign-currency derivative and intercompany loan effects contributed to other income and can be volatile.
- Management reported no material changes to previously disclosed risk factors, contractual obligations or market-risk disclosures. Disclosure controls were assessed as effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether lower commodity-linked selling prices continue to offset or outweigh volume growth, and how input-cost movements affect margins.
- Whether segment EBITDA gains reflect sustainable operating improvements rather than temporary pricing, cost or acquisition effects.
- Cash conversion and working-capital trends, particularly the quarter’s inventory increase and availability of ABL capacity.
- Debt repayment, interest costs, covenant compliance and any restrictions on subsidiary distributions.
- Actual exposure and indemnification recovery for product-liability claims, as well as the assumptions behind reserves and the disclosed loss range.