Gibraltar Industries, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Dollar amounts below are in millions unless otherwise stated. Gibraltar manufactures residential building products and industrial and infrastructure products, principally in North America and Europe. Results are seasonal, with lower activity typically in the first and fourth quarters.
Financial performance and liquidity
- Revenue: $191.0, down 2.9% from $196.8. Management attributed the decline to lower volume (2.1%) and pricing (1.0%).
- Profitability: Gross profit was $29.9, with gross margin of 15.6% versus 18.4%. Operating income fell to $0.3 from $5.2; operating margin was 0.2% versus 2.6%. Net loss was $2.1, or $0.07 per share, compared with a $3.6 net loss, or $0.12 per share.
- Segment results: Residential Products sales were $87.0, down 3.0%, and operating income was $2.1 versus $6.6. Industrial and Infrastructure Products sales were $104.3, down 2.9%, and operating income was $3.1 versus $6.3.
- Cash flow: Operating cash use was $14.6 versus $12.7 in Q1 2013; capital expenditures were $4.1 versus $2.0. Cash declined $18.9 during the quarter to $78.2. The company attributed the operating cash use mainly to a $20.6 working-capital investment for seasonal demand.
- Debt and liquidity: Total debt was $214.0, including $210.0 of 6.25% senior subordinated notes due February 2021. No revolving-credit borrowings were outstanding; $116.7 was available under the facility. Reported liquidity was approximately $195.0, including cash and revolver availability. The company was compliant with its 1.25-to-1.00 minimum fixed-charge coverage covenant.
- Balance sheet: Current assets were $328.8 and current liabilities $126.0 at March 31. Cash was down from $97.0 at December 31, 2013; receivables and inventories increased to $106.6 and $127.2, respectively.
Changes versus the prior-year quarter
- Both segments experienced lower sales and operating income. Management cited reduced volumes, unfavorable product mix, weaker alignment of material costs with selling prices, and competitive pricing. Harsh, prolonged winter weather particularly affected residential demand; transportation infrastructure shipments also declined.
- Gross margin contracted 2.8 percentage points. Residential results were additionally affected by higher resin costs; industrial results by steel-cost inflation not recovered through pricing.
- SG&A declined 4.7% to $29.5, largely reflecting $2.5 less equity-based compensation expense. Corporate expenses also fell $2.9.
- Interest expense was $3.6 versus $11.2. The 2013 quarter included a $7.2 charge related to redemption of the former 8% notes; the company refinanced with 6.25% notes in January 2013. The lower comparison therefore is not solely an indicator of operating improvement.
Outlook, risks, and unusual items
- Management maintained its 2014 outlook for sales growth of 4%–7% and earnings per share of $0.73–$0.87, versus a 2013 net loss per share of $0.18. It expected Q2 results to improve sequentially and year over year, citing seasonally stronger residential activity and improving order rates; industrial and infrastructure demand was expected to be weighted toward the second half.
- Management characterized Q1 challenges as temporary and cited higher recent incoming orders. It also noted that key end markets remained below long-term activity levels and that actual results could differ materially from forward-looking statements.
- The company expected approximately $0.7 of additional costs from facility closure and consolidation efforts; Q1 recorded $0.4 of exit costs and asset impairments.
- A 2013 acquisition carries uncapped contingent earn-out consideration through 2015. Its fair-value liability was $1.9 at March 31 and depends chiefly on the acquired business’s forecast EBITDA.
- A contingent environmental-remediation liability relates to a discontinued operation; the filing does not provide a clear amount. Management said it did not expect the claim or other claims to significantly affect financial condition or results.
- Foreign subsidiaries held $20.6 of cash; repatriating it for domestic use could have significant tax consequences. Other stated risks include economic and market conditions, raw-material pricing and availability, competition, and access to financing.
Important facts for investors to verify
- Whether improving orders translate into the forecast 4%–7% sales growth and $0.73–$0.87 EPS, particularly after Q1 margin compression.
- Whether the decline in segment operating income reverses as volume and product mix improve and material costs align with pricing.
- Working-capital trends, seasonal cash use, and the sustainability of reported liquidity and revolver availability.
- Compliance with debt covenants and the assumptions underlying the acquisition earn-out and environmental contingency.
- Management’s estimate that Q1 weakness was temporary, in light of persistently below-average end-market activity and the company’s seasonal exposure.