Atkore Inc. (Atkore International Group Inc.) — Q2 FY2020 10-Q
Reporting period: Fiscal second quarter and six months ended March 27, 2020; comparisons are with the corresponding periods ended March 29, 2019. Atkore manufactures electrical raceway products and mechanical products and solutions for construction and industrial markets. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended March 27, 2020 | Year-over-year change | Six months ended March 27, 2020 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $455.7 million | Down 2.9% | $903.1 million | Down 2.0% |
| Gross profit | $131.6 million | Up 12.4% | $248.4 million | Up 9.3% |
| Gross margin | 28.9% | Up from 24.9% | 27.5% | Up from 24.7% |
| Operating income | $61.2 million | Up 16.4% | $113.7 million | Up 15.8% |
| Net income | $39.2 million | Up 32.6% | $74.0 million | Up 30.9% |
| Diluted earnings per share | $0.80 | Up from $0.61 | $1.50 | Up from $1.15 |
For the quarter, lower average selling prices—mainly reflecting lower steel and resin costs—and lower Electrical Raceway volume reduced sales. Lower input costs, operational efficiencies and contributions from 2019 acquisitions more than offset lower sales, lifting gross profit and margins. Net interest expense also declined, primarily following prior-period debt repayments.
Segments and material changes
- Electrical Raceway: Quarterly sales were $339.7 million, down 3.9%; Adjusted EBITDA was $79.0 million, up 17.2%, and margin increased to 23.2% from 19.1%. For six months, sales fell 2.3% to $681.1 million while Adjusted EBITDA rose 9.8% to $149.2 million.
- Mechanical Products & Solutions (MP&S): Quarterly sales were $116.6 million, up 0.4%; Adjusted EBITDA fell 7.3% to $16.1 million and margin declined to 13.8% from 15.0%, reflecting additional equipment-maintenance costs. For six months, sales declined 0.8% to $223.3 million while Adjusted EBITDA rose 15.9% to $32.8 million.
- Quarterly consolidated sales fell $13.7 million. Lower selling prices reduced sales by $18.6 million; acquisitions added $10.6 million. For the six-month period, lower prices reduced sales by $48.7 million, partly offset by $23.0 million from acquisitions and higher volume.
Cash flow, debt and liquidity
- Six-month operating cash flow was $49.3 million, versus $42.8 million a year earlier. Capital expenditures were $17.1 million; investing cash outflow was $17.1 million.
- Cash increased by $13.8 million during the six months to $137.2 million. Financing cash outflow was $17.4 million, including $15.0 million of share repurchases.
- Long-term debt was $845.7 million, primarily the First Lien Term Loan due December 2023; no current portion was reported. The ABL facility had no borrowings and approximately $298.2 million available, after letters of credit.
- Management stated that cash, operating cash flow and ABL availability were expected to fund operations, capital expenditures and liquidity needs for at least the next 12 months. The company reported compliance with debt covenants.
- Lease obligations totaled $42.5 million following adoption of the lease accounting standard in FY2020. Cash and cash equivalents included $43.4 million held at non-U.S. subsidiaries, potentially subject to taxes if repatriated.
Outlook, risks and unusual items
- Management reported some order softness amid COVID-19 but said it was too early to judge its significance. Atkore’s operations were considered essential and its supply chains were mostly localized; management cautioned that the pandemic could nevertheless materially harm demand, operations, results and cash flows. No quantified earnings or revenue guidance is provided in the filing.
- COVID-19 impacts triggered a goodwill impairment test for the EMEA reporting unit. Its estimated fair value exceeded carrying value by less than 10%; no impairment was recorded. The $35.0 million of allocated goodwill is sensitive to changes in forecasts and valuation assumptions, and future impairment could be material.
- A manufacturing-facility flood resulted in a recorded $4.6 million loss and a related $3.6 million insurance recovery. Estimated property and equipment losses ranged from $4.6 million to $13.0 million, excluding business-interruption losses; the company expected insurance to reimburse substantially all but the deductible.
- COVID-related workforce reductions contributed to restructuring charges. Total restructuring charges were $2.6 million for the quarter and $2.9 million for six months; a $1.6 million reduction-in-force charge was identified as COVID-related.
- Product-liability reserves for the specified sprinkler-pipe claims and other product matters totaled $0.7 million. Management estimated reasonably possible losses of $1.0 million to $8.0 million and said it did not expect the proceedings to have a material adverse effect; Johnson Controls has agreed to indemnify the company for remaining and future specified claims.
- The CARES Act was not expected to have a material financial-statement impact at the time of filing. The effective income tax rate was 25.1% for the quarter and 21.6% for six months, lower than in the comparative periods primarily due to excess tax benefits from stock compensation.
Key facts for investors to verify
- Whether COVID-related order softness developed into sustained demand weakness, and how essential-business status and localized supply chains affected operations.
- Whether lower commodity costs and operational efficiencies continue to support margins if selling prices, volumes or input costs change.
- Whether EMEA performance or valuation assumptions deteriorate enough to require a goodwill impairment.
- Whether the flood loss, insurance recovery and any business-interruption effects differ from management’s estimates.
- How working-capital needs, debt service, ABL availability and share repurchases affect liquidity and leverage.