Gibraltar Industries, Inc. — Q3 2019 Form 10-Q
Business context and period. The company manufactures and distributes products for renewable energy and conservation, residential, industrial, and infrastructure markets. This unaudited report covers the three and nine months ended September 30, 2019; interim results may be affected by seasonality and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $299.2 million | $280.1 million | $789.3 million | $761.5 million |
| Gross profit / margin | $76.6 million / 25.6% | $70.3 million / 25.1% | $184.0 million / 23.3% | $189.1 million / 24.8% |
| Operating income / margin | $31.4 million / 10.5% | $29.4 million / 10.5% | $68.6 million / 8.7% | $75.5 million / 9.9% |
| Net income | $24.5 million | $19.5 million | $50.7 million | $50.7 million |
| Diluted EPS | $0.75 | $0.60 | $1.55 | $1.56 |
| Operating cash flow | Not provided separately | Not provided separately | $72.5 million | $38.2 million |
Revenue by segment, Q3: Renewable Energy and Conservation sales rose 18.6% to $116.8 million; Residential Products increased 0.3% to $126.3 million; Industrial and Infrastructure Products increased 0.7% to $56.2 million. For the nine months, Renewable Energy and Conservation grew 14.1% to $261.6 million, while Residential Products were essentially flat at $360.4 million and Industrial and Infrastructure Products declined 2.4% to $167.3 million.
Cash, debt, and liquidity at September 30: Cash and equivalents were $137.6 million, down from $297.0 million at year-end 2018. The company reported no long-term debt outstanding and had $394.0 million available on its $400 million revolving facility, net of $6.0 million in letters of credit. Total stated liquidity was $531.6 million. Operating cash flow was $72.5 million; investing used $16.3 million and financing used $216.3 million, primarily reflecting repayment of $210 million of notes. Operating lease liabilities totaled $28.8 million. The company reported compliance with all three credit-agreement financial covenants.
Material changes and management’s explanations
- Q3 sales increased 6.8%, reflecting $12.6 million of organic growth and $7.2 million of acquisition contribution. Management cited 4.5% volume growth, especially in Renewable Energy and Conservation, and a 72% year-over-year improvement in backlog in that segment’s conservation and renewable energy businesses.
- Q3 gross margin improved to 25.6%, which management attributed to operating execution, 80/20 simplification initiatives, material-cost alignment, and volume leverage. For the nine months, gross margin fell to 23.3%, primarily due to costs for field improvements to the solar tracker solution.
- Nine-month operating income declined $6.9 million despite higher sales. Residential Products operating income fell $7.7 million, and corporate expense increased $3.0 million. Renewable Energy and Conservation and Industrial and Infrastructure Products reported higher operating income.
- The company acquired Apeks, a botanical oil extraction systems maker, on August 30 for preliminary consideration of $12.6 million, funded with cash. The purchase price remains subject to adjustment. Its results are included in Renewable Energy and Conservation from the acquisition date.
- The company redeemed its $210 million 6.25% senior subordinated notes on February 1, 2019. Nine-month interest expense declined to $2.3 million from $9.3 million; a $1.1 million write-off of deferred financing fees was recorded.
Outlook, risks, and unusual items
- Guidance: 2019 revenue of $1.04–$1.05 billion and GAAP EPS of $2.02–$2.10. Q4 revenue guidance is $251–$261 million and GAAP EPS is $0.47–$0.55. Management expected profitable growth in Q4, citing backlog composition and end-market activity.
- Costs and execution: Nine-month exit activity and asset impairment charges were $6.3 million, versus $3.4 million a year earlier; one facility closed in the period. Q3 SG&A also reflected increased senior leadership transition and acquisition expenses, partly offset by lower performance-based compensation. Management cited additional solar tracker field-improvement costs.
- Business and liquidity risks: Results are exposed to general economic conditions, interest and foreign-exchange rates, commodity costs and availability, housing and repair activity, construction and infrastructure demand, government policies, tariffs, and renewable-energy demand. Management noted that weaker operating cash flow or unavailable or costly financing could adversely affect future liquidity. It also cautioned that larger acquisitions could require additional financing or equity issuance.
- Other disclosures: Adoption of lease accounting in Q1 2019 added operating lease assets and liabilities and increased opening retained earnings by approximately $1.6 million; management said it did not materially affect earnings or cash flows. The company reported no material changes to previously disclosed risk factors, no applicable legal proceedings, and no material changes to internal controls.
Important facts for investors to verify
- Whether the Q4 and full-year revenue and GAAP EPS guidance was achieved, and whether backlog translated into delivered sales.
- Progress and costs associated with solar tracker field improvements, and whether Renewable Energy and Conservation margins recover.
- Drivers of Residential Products’ lower operating profitability and Industrial and Infrastructure Products’ exposure to steel prices and demand.
- Final Apeks purchase consideration and the acquired business’s contribution to sales, earnings, and cash flow.
- Working-capital trends, including the substantial increase in accounts receivable and seasonal contract-liability movements, and the resulting effect on cash conversion.
- Ongoing restructuring and leadership-transition costs, alongside the company’s capacity to maintain liquidity while pursuing acquisitions.