Atkore International Group Inc. — Q1 FY2018 10-Q
Reporting period: Unaudited quarter ended December 29, 2017; comparisons are with the quarter ended December 30, 2016. Atkore manufactures Electrical Raceway and Mechanical Products & Solutions (MP&S), primarily for construction and industrial markets. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 FY2018 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $414.6 | $337.6 | +22.8% |
| Gross profit / margin | $96.9 / 23.4% | $91.7 / 27.2% | Profit +5.7%; margin down |
| Operating income / margin | $36.6 / 8.8% | $42.1 / 12.5% | −13.2% |
| Net income | $27.2 | $17.4 | +56.4% |
| Diluted EPS | $0.41 | $0.26 | +$0.15 |
| Adjusted EBITDA / margin | $58.5 / 14.1% | $49.9 / 14.8% | +17.2%; margin down |
| Operating cash flow | $48.9 | $32.2 | +$16.8 |
| Capital expenditures | $8.2 | $4.0 | +$4.3 |
Cash was $39.8 at quarter-end, down $6.0 from September 30, 2017. Debt was $532.0, compared with $576.1 at fiscal year-end; $527.8 was long-term. The ABL facility had $42.0 outstanding and $206.7 available. Management said cash from operations and ABL availability should fund operations, expected capital spending and obligations for at least 12 months. Credit-facility covenants were met.
Changes versus the prior-year quarter
- Sales growth reflected higher volume (9.1%), selling prices (5.6%), acquisitions (7.5%) and foreign exchange (0.5%). The 2017 acquisitions of Marco, Flexicon and Calpipe contributed $25.2 of sales.
- Cost of sales rose 29.2%, faster than sales, principally due to higher steel and copper costs ($25.6), volume ($21.7) and acquisitions ($16.6). Gross margin declined about 3.8 percentage points.
- Electrical Raceway sales increased 30.6% to $316.5 and Adjusted EBITDA rose 33.3% to $56.2; segment margin improved to 17.7% from 17.4%.
- MP&S sales increased 3.0% to $98.6, but Adjusted EBITDA fell 31.5% to $10.8 and margin declined to 11.0% from 16.5%, mainly on higher steel and freight costs and a mix shift toward lower-margin products.
- Net income benefited from the absence of the prior-year $9.8 debt-extinguishment loss, $3.2 lower net interest expense and a $3.0 reduction in tax expense; these gains were partly offset by lower operating income. The 8.5% effective tax rate included a provisional, one-time $4.8 benefit from revaluing deferred tax liabilities after U.S. tax reform; the prior-year rate was 24.1%.
- Operating cash flow increased, which management attributed mainly to lower working-capital investment and lower incentive-compensation payouts, partly offset by higher days sales outstanding. Financing used $47.7, chiefly for net ABL repayments of $43.0 and $6.7 of share repurchases.
Outlook, risks and notable items
- The filing provides no quantified earnings or revenue guidance. Management’s liquidity outlook was that available cash and borrowing capacity would cover anticipated needs for at least 12 months.
- On February 2, 2018, after quarter-end, Atkore repurchased approximately 17.2 million shares from CD&R for about $375 at $21.77 per share. It funded this in part with a new $425 incremental term loan at LIBOR + 2.75%; the rate on the existing term loan was also reduced to LIBOR + 2.75%. Proceeds also repaid all ABL borrowings and covered fees and expenses. CD&R’s ownership fell to approximately 29%.
- Atkore acquired Communications Integrators, Inc. on January 8, 2018. Purchase-price allocation for the 2017 Calpipe and Flexicon acquisitions remained preliminary.
- Product-liability reserves were $5.0; management estimated probable losses for the relevant product claims at $3.0–$10.0 and said additional reserves could be required, though it did not expect a material adverse effect. A separate antidumping-duty matter had a $7.5 accrual; the company was appealing the scope decision.
- Open purchase orders for production materials totaled $180.1 for the remainder of FY2018. Other key risks cited include construction demand, commodity and freight costs, competition, working-capital needs, acquisition integration, debt restrictions and changes or uncertainty related to tax reform.
Investor verification priorities
- Assess whether sales-price increases can keep pace with steel, copper and freight costs, and whether gross-margin pressure persists.
- Track MP&S profitability and the contribution and integration of recent acquisitions.
- Review the post-quarter share repurchase and incremental borrowing’s effect on leverage, interest expense, liquidity and share count.
- Monitor cash conversion, receivables and working-capital requirements, alongside capital spending and ABL availability.
- Verify final tax-reform accounting and any subsequent adjustments to the provisional tax benefit; follow product-claim reserves and the antidumping-duty appeal.