Gibraltar Industries Earnings 2019-03-31
ROCK 10Q Quarterly Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019
Commission File Number 0-22462
GIBRALTAR INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 16-1445150 | |
(State or incorporation ) | (I.R.S. Employer Identification No.) | |
3556 Lake Shore Road, P.O. Box 2028 Buffalo, New York | 14219-0228 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (716) 826-6500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | ROCK | NASDAQ Stock Market |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨ | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 30, 2019, the number of common shares outstanding was: 32,202,885.
GIBRALTAR INDUSTRIES, INC.
INDEX
PAGE NUMBER | |||
PART I. | |||
Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 5. | |||
Item 6. | |||
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Net Sales | $ | 227,417 | $ | 215,337 | |||
Cost of sales | 183,517 | 167,019 | |||||
Gross profit | 43,900 | 48,318 | |||||
Selling, general, and administrative expense | 33,334 | 34,475 | |||||
Income from operations | 10,566 | 13,843 | |||||
Interest expense | 2,061 | 3,269 | |||||
Other expense (income) | 589 | (585 | ) | ||||
Income before taxes | 7,916 | 11,159 | |||||
Provision for income taxes | 1,571 | 2,807 | |||||
Net income | $ | 6,345 | $ | 8,352 | |||
Net earnings per share: | |||||||
Basic | $ | 0.20 | $ | 0.26 | |||
Diluted | $ | 0.19 | $ | 0.26 | |||
Weighted average shares outstanding: | |||||||
Basic | 32,279 | 31,786 | |||||
Diluted | 32,617 | 32,444 | |||||
See accompanying notes to consolidated financial statements.
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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Net income | $ | 6,345 | $ | 8,352 | |||
Other comprehensive income (loss): | |||||||
Foreign currency translation adjustment | 842 | 110 | |||||
Cumulative effect of accounting change | — | (350 | ) | ||||
Minimum pension and post retirement benefit plan adjustments | 12 | 27 | |||||
Other comprehensive income (loss) | 854 | (213 | ) | ||||
Total comprehensive income | $ | 7,199 | $ | 8,139 | |||
See accompanying notes to consolidated financial statements.
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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 31, 2019 | December 31, 2018 | ||||||
(unaudited) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 43,509 | $ | 297,006 | |||
Accounts receivable, net | 167,201 | 140,283 | |||||
Inventories | 98,594 | 98,913 | |||||
Other current assets | 8,282 | 8,351 | |||||
Total current assets | 317,586 | 544,553 | |||||
Property, plant, and equipment, net | 95,856 | 95,830 | |||||
Operating lease assets | 31,823 | — | |||||
Goodwill | 323,573 | 323,671 | |||||
Acquired intangibles | 94,520 | 96,375 | |||||
Other assets | 2,900 | 1,216 | |||||
$ | 866,258 | $ | 1,061,645 | ||||
Liabilities and Shareholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 84,462 | $ | 79,136 | |||
Accrued expenses | 65,020 | 87,074 | |||||
Billings in excess of cost | 18,259 | 17,857 | |||||
Current maturities of long-term debt | 400 | 208,805 | |||||
Total current liabilities | 168,141 | 392,872 | |||||
Long-term debt | 1,600 | 1,600 | |||||
Deferred income taxes | 36,916 | 36,530 | |||||
Non-current operating lease liabilities | 22,751 | — | |||||
Other non-current liabilities | 31,017 | 33,950 | |||||
Shareholders’ equity: | |||||||
Preferred stock, $0.01 par value; authorized 10,000 shares; none outstanding | — | — | |||||
Common stock, $0.01 par value; authorized 50,000 shares; 33,026 shares and 32,887 shares issued and outstanding in 2019 and 2018 | 330 | 329 | |||||
Additional paid-in capital | 285,034 | 282,525 | |||||
Retained earnings | 346,922 | 338,995 | |||||
Accumulated other comprehensive loss | (6,380 | ) | (7,234 | ) | |||
Cost of 855 and 796 common shares held in treasury in 2019 and 2018 | (20,073 | ) | (17,922 | ) | |||
Total shareholders’ equity | 605,833 | 596,693 | |||||
$ | 866,258 | $ | 1,061,645 | ||||
See accompanying notes to consolidated financial statements.
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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)(unaudited)
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Cash Flows from Operating Activities | |||||||
Net income | $ | 6,345 | $ | 8,352 | |||
Adjustments to reconcile net income to net cash used in operating activities: | |||||||
Depreciation and amortization | 4,941 | 5,189 | |||||
Stock compensation expense | 2,371 | 2,097 | |||||
Exit activity recoveries, non-cash | — | (727 | ) | ||||
Provision for deferred income taxes | 393 | — | |||||
Other, net | 2,456 | 353 | |||||
Changes in operating assets and liabilities, excluding the effects of acquisitions: | |||||||
Accounts receivable | (27,623 | ) | 4,947 | ||||
Inventories | 35 | (8,907 | ) | ||||
Other current assets and other assets | 165 | 1,498 | |||||
Accounts payable | 5,332 | (1,694 | ) | ||||
Accrued expenses and other non-current liabilities | (31,903 | ) | (33,314 | ) | |||
Net cash used in operating activities | (37,488 | ) | (22,206 | ) | |||
Cash Flows from Investing Activities | |||||||
Acquisitions, net of cash acquired | (264 | ) | — | ||||
Net proceeds from sale of property and equipment | 22 | 2,823 | |||||
Purchases of property, plant, and equipment | (3,132 | ) | (1,033 | ) | |||
Net cash (used in) provided by investing activities | (3,374 | ) | 1,790 | ||||
Cash Flows from Financing Activities | |||||||
Long-term debt payments | (210,000 | ) | — | ||||
Payment of debt issuance costs | (1,235 | ) | — | ||||
Purchase of treasury stock at market prices | (2,151 | ) | (850 | ) | |||
Net proceeds from issuance of common stock | 139 | 226 | |||||
Net cash used in financing activities | (213,247 | ) | (624 | ) | |||
Effect of exchange rate changes on cash | 612 | (499 | ) | ||||
Net decrease in cash and cash equivalents | (253,497 | ) | (21,539 | ) | |||
Cash and cash equivalents at beginning of year | 297,006 | 222,280 | |||||
Cash and cash equivalents at end of period | $ | 43,509 | $ | 200,741 | |||
See accompanying notes to consolidated financial statements.
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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders’ Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at December 31, 2018 | 32,887 | $ | 329 | $ | 282,525 | $ | 338,995 | $ | (7,234 | ) | 796 | $ | (17,922 | ) | $ | 596,693 | |||||||||||||
Net income | — | — | — | 6,345 | — | — | — | 6,345 | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 842 | — | — | 842 | |||||||||||||||||||||
Minimum pension and post retirement benefit plan adjustments, net of taxes of $4 | — | — | — | — | 12 | — | — | 12 | |||||||||||||||||||||
Stock compensation expense | — | — | 2,371 | — | — | — | — | 2,371 | |||||||||||||||||||||
Cumulative effect of accounting change (see Note 2) | — | — | — | 1,582 | — | — | — | 1,582 | |||||||||||||||||||||
Stock options exercised | 12 | — | 139 | — | — | — | — | 139 | |||||||||||||||||||||
Net settlement of restricted stock units | 127 | 1 | (1 | ) | — | — | 59 | (2,151 | ) | (2,151 | ) | ||||||||||||||||||
Balance at March 31, 2019 | 33,026 | $ | 330 | $ | 285,034 | $ | 346,922 | $ | (6,380 | ) | 855 | $ | (20,073 | ) | $ | 605,833 | |||||||||||||
See accompanying notes to consolidated financial statements.
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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders’ Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at December 31, 2017 | 32,332 | $ | 323 | $ | 271,957 | $ | 274,562 | $ | (4,366 | ) | 615 | $ | (10,757 | ) | $ | 531,719 | |||||||||||||
Net income | — | — | — | 8,352 | — | — | — | 8,352 | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 110 | — | — | 110 | |||||||||||||||||||||
Minimum pension and post retirement benefit plan adjustments, net of taxes of $10 | — | — | — | — | 27 | — | — | 27 | |||||||||||||||||||||
Stock compensation expense | — | — | 2,097 | — | — | — | — | 2,097 | |||||||||||||||||||||
Cumulative effect of accounting change | — | — | — | 624 | (350 | ) | — | — | 274 | ||||||||||||||||||||
Stock options exercised | 13 | — | 226 | — | — | — | — | 226 | |||||||||||||||||||||
Net settlement of restricted stock units | 53 | 1 | (1 | ) | — | — | 24 | (850 | ) | (850 | ) | ||||||||||||||||||
Balance at March 31, 2018 | 32,398 | $ | 324 | $ | 274,279 | $ | 283,538 | $ | (4,579 | ) | 639 | $ | (11,607 | ) | $ | 541,955 | |||||||||||||
See accompanying notes to consolidated financial statements.
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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) | CONSOLIDATED FINANCIAL STATEMENTS |
The accompanying unaudited consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting of normal recurring adjustments considered necessary for the fair presentation of results for the interim period have been included. The Company's operations are seasonal; for this and other reasons, financial results for any interim period are not necessarily indicative of the results expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our annual Form 10-K for the year ended December 31, 2018.
The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
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(2) | RECENT ACCOUNTING PRONOUNCEMENTS |
Recent Accounting Pronouncements Adopted
Standard | Description | Financial Statement Effect or Other Significant Matters | ||
ASU No. 2016-02 Leases (Topic 842) | The standard requires lessees to recognize most leases as assets and liabilities on the balance sheet, but record expenses on the statement of operations in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and accounting for sales-type and direct financing leases. The standard also requires additional disclosures about leasing arrangements and requires a modified retrospective transition approach for existing leases, whereby the standard will be applied to the earliest year presented. The provisions of the standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. | The Company has adopted this standard using the modified retrospective approach and elected the transition method to initially apply the new leases standard to all leases that exist at January 1, 2019. Under this transition method, the Company initially applied Topic 842 as of January 1, 2019, and recognized a cumulative-effect adjustment which increased the Company's beginning retained earnings as of January 1, 2019 by approximately $1.6 million. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new leases standard, which among other things, permitted the Company to carry forward its historical lease classification for leases in place prior to January 1, 2019. The comparative period information has not been restated and continues to be reported and presented under the accounting standards in effect for that period. The standard did not materially impact the Company's consolidated net earnings and had no impact on cash flows. Date of adoption: Q1 2019 | ||
Recent Accounting Pronouncements Not Yet Adopted
Standard | Description | Financial Statement Effect or Other Significant Matters | ||
ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326) | The objective of this standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit, including trade receivables, held by an entity at each reporting date. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The provisions of this standard are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective, that is, a modified-retrospective approach. | The Company is currently evaluating the requirements of this standard. It does not expect it to have a material impact on the Company's financial statements. Date of adoption: Q1 2020 | ||
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(3) | ACCOUNTS RECEIVABLE, NET |
Accounts receivable consists of the following (in thousands):
March 31, 2019 | December 31, 2018 | ||||||
Trade accounts receivable | $ | 149,159 | $ | 124,609 | |||
Costs in excess of billings | 25,519 | 22,634 | |||||
Total accounts receivables | 174,678 | 147,243 | |||||
Less allowance for doubtful accounts | (7,477 | ) | (6,960 | ) | |||
Accounts receivable | $ | 167,201 | $ | 140,283 | |||
Refer to Note 4 of the Company's consolidated financial statements included in this quarterly report on Form 10-Q for additional information concerning the Company's costs in excess of billings.
(4) | REVENUE |
Sales includes revenue from contracts with customers from roof and foundation ventilation products; centralized mail systems and electronic package solutions; rain dispersion products and roofing accessories; expanded and perforated metal; perimeter security solutions; expansion joints and structural bearings; designing, engineering, manufacturing and installation of solar racking systems and greenhouse structures.
Revenue recognition
Revenue is recognized when, or as, the Company transfers control of promised products or service to a customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those products or service. Refer to Note 16 of this quarterly report on Form 10-Q for additional information related to revenue recognized by timing of transfer of control by reportable segment.
As of March 31, 2019, the Company's remaining performance obligations are part of contracts that have an original expected duration of one year or less.
Contract assets and contract liabilities
Contract assets consist of costs in excess of billings. Contract liabilities consist of billings in excess of cost and unearned revenue. Unearned revenue relates to payments received in advance of performance under the contract and is recognized when the Company performs under the contract. Unearned revenue is presented within accrued expenses in the Company's consolidated balance sheet.
The following table presents the beginning and ending balances and significant changes in the costs in excess of billings and billings in excess of cost balance during the three months ended March 31, 2019 and 2018, respectively (in thousands):
March 31, 2019 | December 31, 2018 | ||||||
Costs in excess of billings | $ | 25,519 | $ | 22,634 | |||
Billings in excess of cost | (18,259 | ) | (17,857 | ) | |||
Unearned revenue | (12,917 | ) | (12,028 | ) | |||
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Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | ||||||
Revenue recognized in the period from: | |||||||
Amounts included in billings in excess of cost at the beginning of the period | $ | 9,697 | $ | 8,340 | |||
Amounts included in unearned revenue at the beginning of the period | $ | 4,661 | $ | 1,836 | |||
(5) | INVENTORIES |
Inventories consist of the following (in thousands):
March 31, 2019 | December 31, 2018 | ||||||
Raw material | $ | 58,376 | $ | 57,845 | |||
Work-in-process | 7,626 | 6,930 | |||||
Finished goods | 32,592 | 34,138 | |||||
Total inventories | $ | 98,594 | $ | 98,913 | |||
(6) ACQUISITIONS
On August 21, 2018, the Company acquired all of the outstanding stock of SolarBOS. SolarBOS is a provider of electrical balance of systems products, which consists of electrical components such as wiring, switches, and combiner boxes that support photovoltaic systems, for the U.S. solar renewable energy market. The Company expects the acquisition of SolarBOS to enable the Company to provide complementary product offerings to its existing customers and strengthen its position in the solar renewable energy market. The results of SolarBOS have been included in the Company's consolidated financial results since the date of acquisition (within the Company's Renewable Energy and Conservation segment). The aggregate purchase consideration for the acquisition of SolarBOS was $6.4 million, which includes a working capital adjustment and certain other adjustments provided for in the stock purchase agreement. The acquisition was financed through cash on hand.
The purchase price for the acquisition was allocated to the assets acquired and liabilities assumed based upon their respective fair values. The excess consideration was recorded as goodwill and approximated $2.9 million, all of which is deductible for tax purposes. Goodwill represents future economic benefits arising from other assets acquired that could not be individually identified including workforce additions, growth opportunities, and increased presence in the solar renewable energy markets.
The allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed is as follows as of the date of the acquisition (in thousands):
Cash | $ | 915 | |
Working capital | 680 | ||
Property, plant and equipment | 483 | ||
Acquired intangible assets | 1,450 | ||
Other assets | 13 | ||
Other liabilities | (51 | ) | |
Goodwill | 2,879 | ||
Fair value of purchase consideration | $ | 6,369 | |
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The intangible assets acquired in this acquisition consisted of the following (in thousands):
Fair Value | Estimated Useful Life | ||||
Trademarks | $ | 300 | 3 years | ||
Technology | 450 | 9 years | |||
Customer relationships | 700 | 9 years | |||
Total | $ | 1,450 | |||
During the three month periods ended March 31, 2019 and 2018, the Company did not incur any acquisition-related costs.
(7) | GOODWILL AND RELATED INTANGIBLE ASSETS |
Goodwill
The changes in the carrying amount of goodwill for the three months ended March 31, 2019 are as follows (in thousands):
Residential Products | Industrial and Infrastructure Products | Renewable Energy & Conservation | Total | ||||||||||||
Balance at December 31, 2018 | $ | 198,075 | $ | 53,769 | $ | 71,827 | $ | 323,671 | |||||||
Adjustments to prior year acquisitions | — | — | (172 | ) | (172 | ) | |||||||||
Foreign currency translation | — | 116 | (42 | ) | 74 | ||||||||||
Balance at March 31, 2019 | $ | 198,075 | $ | 53,885 | $ | 71,613 | $ | 323,573 | |||||||
Acquired Intangible Assets
Acquired intangible assets consist of the following (in thousands):
March 31, 2019 | December 31, 2018 | ||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | Estimated Life | |||||||||||||
Indefinite-lived intangible assets: | |||||||||||||||||
Trademarks | $ | 43,870 | $ | — | $ | 43,870 | $ | — | Indefinite | ||||||||
Finite-lived intangible assets: | |||||||||||||||||
Trademarks | 6,114 | 3,669 | 6,094 | 3,518 | 3 to 15 Years | ||||||||||||
Unpatented technology | 28,644 | 14,352 | 28,644 | 13,881 | 5 to 20 Years | ||||||||||||
Customer relationships | 70,348 | 36,791 | 70,419 | 35,678 | 5 to 17 Years | ||||||||||||
Non-compete agreements | 1,649 | 1,293 | 1,649 | 1,224 | 4 to 10 Years | ||||||||||||
106,755 | 56,105 | 106,806 | 54,301 | ||||||||||||||
Total acquired intangible assets | $ | 150,625 | $ | 56,105 | $ | 150,676 | $ | 54,301 | |||||||||
The following table summarizes the acquired intangible asset amortization expense for the three months ended March 31 (in thousands):
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Amortization expense | $ | 1,797 | $ | 2,139 | |||
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Amortization expense related to acquired intangible assets for the remainder of fiscal 2019 and the next five years thereafter is estimated as follows (in thousands):
2019 | 2020 | 2021 | 2022 | 2023 | 2024 | ||||||||||||||||||
Amortization expense | $ | 5,390 | $ | 6,895 | $ | 6,700 | $ | 6,222 | $ | 5,684 | $ | 5,428 | |||||||||||
(8) | LONG-TERM DEBT |
Long-term debt consists of the following (in thousands):
March 31, 2019 | December 31, 2018 | ||||||
Senior Subordinated 6.25% Notes | $ | — | $ | 210,000 | |||
Other debt | 2,000 | 2,000 | |||||
Less unamortized debt issuance costs | — | (1,595 | ) | ||||
Total debt | 2,000 | 210,405 | |||||
Less current maturities | 400 | 208,805 | |||||
Total long-term debt | $ | 1,600 | $ | 1,600 | |||
Senior Credit Agreement
On January 24, 2019, the Company entered into a Sixth Amended and Restated Credit Agreement ("2019 Senior Credit Agreement"), which amends and restates the Company’s Fifth Amended and Restated Credit Agreement dated December 9, 2015.
The 2019 Senior Credit Agreement provides for a revolving credit facility and letters of credit in an aggregate amount equal to $400 million. The Company can request additional financing from the lenders to increase the revolving credit facility to $700 million or enter into a term loan of up to $300 million subject to conditions set forth in the Senior Credit Agreement. The 2019 Senior Credit Agreement contains three financial covenants. As of March 31, 2019, the Company is in compliance with all three covenants.
Borrowings under the 2019 Senior Credit Agreement are secured by the trade receivables, inventory, personal property, equipment, and general intangibles of the Company’s significant domestic subsidiaries.
Interest rates on the 2019 revolving credit facility are based on the LIBOR plus an additional margin that ranges from 1.125% to 2.00%. In addition, the revolving credit facility is subject to an undrawn commitment fee ranging between 0.15% and 0.25% based on the Total Leverage Ratio and the daily average undrawn balance. The 2019 Senior Credit Agreement terminates on January 23, 2024.
Standby letters of credit of $8.1 million have been issued under the 2019 Senior Credit Agreement on behalf of the Company as of March 31, 2019. These letters of credit reduce the amount otherwise available under the revolving credit facility. As of March 31, 2019, the Company had $391.9 million of availability under the revolving credit facility. No borrowings were outstanding under the Company's revolving credit facility at March 31, 2019 and December 31, 2018.
Senior Subordinated Notes
On January 31, 2013, the Company issued $210 million of 6.25% Senior Subordinated Notes ("6.25% Notes") due February 1, 2021.The provisions of the 6.25% Notes include, without limitation, restrictions on indebtedness, liens, and distributions from restricted subsidiaries, asset sales, affiliate transactions, dividends, and other restricted payments. Dividend payments are subject to annual limits and interest is paid semiannually on February 1 and August 1 of each year.
On December 20, 2018, the Company announced its redemption of its $210 million outstanding Senior Subordinated 6.25% Notes, effective February 1, 2019. The 6.25% Notes were redeemed in accordance with the provisions of the
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indenture governing the Notes on February 1, 2019. The Company recorded a charge of $1.1 million for the write-off of deferred financing fees relating to the 6.25% Notes during the quarter ending March 31, 2019.
(9) | ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME |
The following tables summarize the cumulative balance of each component of accumulated other comprehensive loss, net of tax, for the three months ended March 31, (in thousands):
Foreign Currency Translation Adjustment | Minimum pension and post retirement benefit plan adjustments | Total Pre-Tax Amount | Tax (Benefit) Expense | Accumulated Other Comprehensive (Loss) Income | |||||||||||||||
Balance at December 31, 2018 | $ | (5,939 | ) | $ | (2,040 | ) | $ | (7,979 | ) | $ | (745 | ) | $ | (7,234 | ) | ||||
Minimum pension and post retirement health care plan adjustments | — | 16 | 16 | 4 | 12 | ||||||||||||||
Foreign currency translation adjustment | 842 | — | 842 | — | 842 | ||||||||||||||
Balance at March 31, 2019 | $ | (5,097 | ) | $ | (2,024 | ) | $ | (7,121 | ) | $ | (741 | ) | $ | (6,380 | ) | ||||
Foreign Currency Translation Adjustment | Minimum pension and post retirement benefit plan adjustments | Total Pre-Tax Amount | Tax (Benefit) Expense | Accumulated Other Comprehensive (Loss) Income | |||||||||||||||
Balance at December 31, 2017 | $ | (2,698 | ) | $ | (2,638 | ) | $ | (5,336 | ) | $ | (970 | ) | $ | (4,366 | ) | ||||
Cumulative effect of accounting change | (350 | ) | (350 | ) | — | (350 | ) | ||||||||||||
Minimum pension and post retirement health care plan adjustments | — | 37 | 37 | 10 | 27 | ||||||||||||||
Foreign currency translation adjustment | 110 | — | 110 | — | 110 | ||||||||||||||
Balance at March 31, 2018 | $ | (2,588 | ) | $ | (2,951 | ) | $ | (5,539 | ) | $ | (960 | ) | $ | (4,579 | ) | ||||
The realized adjustments relating to the Company’s minimum pension liability and post retirement health care costs were reclassified from accumulated other comprehensive loss and included in other expense in the consolidated statements of income.
(10) | EQUITY-BASED COMPENSATION |
On May 4, 2018, the shareholders of the Company approved the adoption of the Gibraltar Industries, Inc. 2018 Equity Incentive Plan (the "2018 Plan"). The 2018 Plan provides for the issuance of up to 1,000,000 shares of common stock and supplements the remaining shares available for issuance under the existing Gibraltar Industries, Inc. 2015 Equity Incentive Plan (the "2015 Plan"). Both the 2018 Plan and the 2015 Plan allow the Company to grant equity-based incentive compensation awards, in the form of non-qualified options, restricted shares, restricted stock units, performance shares, performance stock units, and stock rights to eligible participants.
In 2016, the shareholders of the Company approved the adoption of the Gibraltar Industries, Inc. 2016 Stock Plan for Non-Employee Directors ("Non-Employee Directors Plan") which allows the Company to grant awards of shares of the Company's common stock to non-employee Directors of the Company and permits the Directors to defer receipt of such shares pursuant to the terms of the Non-Employee Directors Plan.
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Equity Based Awards - Settled in Stock
The following table sets forth the number of equity-based awards granted during the three months ended March 31, which will convert to shares upon vesting, along with the weighted average grant date fair values:
2019 | 2018 | ||||||||||||
Awards | Number of Awards (1) | Weighted Average Grant Date Fair Value | Number of Awards (2) | Weighted Average Grant Date Fair Value | |||||||||
Performance stock units | 145,420 | $ | 40.55 | 132,288 | $ | 33.35 | |||||||
Restricted stock units | 117,821 | $ | 39.37 | 67,055 | $ | 33.35 | |||||||
(1) Performance stock units granted will convert to shares based on the Company's actual return on invested capital ("ROIC") relative to the ROIC targeted for the performance period ended December 31, 2019.
(2) Performance stock units granted in 2018 which will convert to 126,337 shares to be issued on December 31, 2020, representing 95.5% of the targeted 2018 award, based on the Company’s actual ROIC compared to ROIC target for the performance period ended December 31, 2018.
Equity Based Awards - Settled in Cash
The Company's equity-based liability includes awards under a management stock purchase plan and cash-settled performance awards issued in 2016. As of March 31, 2019, the Company's total share-based liabilities recorded on the consolidated balance sheet were $26.6 million, of which $22.0 million was included in non-current liabilities. The share-based liabilities as of December 31, 2018 were $38.4 million, of which $23.6 million was included in non-current liabilities.
During the quarter ended March 31, 2019, the Company paid $8.9 million to participants of cash-settled performance stock units awarded in 2016. The participants earned 200% of the target, or 256,000 units, which were converted to cash and valued at the trailing 90-day closing price of the Company's common stock as of December 31, 2018.
Management Stock Purchase Plan
The Management Stock Purchase Plan ("MSPP") provides participants the ability to defer a portion of their compensation or Directors’ fees, which deferral is converted to restricted stock units, and credited to an account. Employees eligible to defer a portion of their compensation may elect to convert their deferral to unrestricted investments, restricted stock units, or a combination of both, and also receive a company-matching award in restricted stock units equal to a percentage of their compensation. The account represents a share-based liability that will be converted to and settled in cash payable to participants upon retirement or a termination of their service to the Company.
The following table provides the number of restricted stock units credited to active participant accounts and the payments made with respect to restricted stock units issued under the MSPP during the three months ended March 31,:
2019 | 2018 | ||||||
Restricted stock units credited | 51,608 | 63,937 | |||||
Share-based liabilities paid (in thousands) | $ | 4,933 | $ | 4,717 | |||
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(11) | FAIR VALUE MEASUREMENTS |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement as follows:
• | Level 1 - Quoted prices in active markets for identical assets or liabilities. |
• | Level 2 - Observable inputs other than quoted prices in active markets for similar assets and liabilities. |
• | Level 3 - Inputs that are unobservable inputs for the asset or liability. |
The Company had no financial assets or liabilities measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018. As of March 31, 2019, the Company does not have any financial instrument for which the carrying value differs from its fair value. At December 31, 2018, the Company's only financial instrument for which the carrying value differs from its fair value was the Company's Senior Subordinated 6.25% Notes, which were redeemed on February 1, 2019. At December 31, 2018, the fair value of the outstanding debt, net of unamortized debt issuance costs, was $210.8 million compared to its carrying value of $210.4 million.
(12) | LEASES |
The Company leases are classified as operating leases and consist of manufacturing facilities, distribution centers, office space, vehicles and equipment. For leases with terms greater than twelve months, at lease commencement the Company recognizes a right-of-use asset and a lease liability. The initial lease liability is recognized at the present value of remaining lease payments over the lease term. Leases with an initial term of twelve months or less are not recorded on the Company's consolidated balance sheet. The Company recognizes lease expense for operating leases on a straight-line basis over the lease term. The Company combines lease and non-lease components, such as common area maintenance costs, in calculating the related asset and lease liabilities for all underlying asset groups. Operating lease cost is included in income from operations and includes short-term leases and variable lease costs which are immaterial.
Most of the Company's leases include one or more options to renew, with renewal terms that can extend the respective lease term from one month to fifteen years. The exercise of lease renewal options is at the Company's sole discretion. As of March 31, 2019, the Company's renewal options are not part of the Company's operating lease assets and operating lease liabilities. Certain leases also include options to purchase at fair value the underlying leased asset at the Company's sole discretion.
Classification | March 31, 2019 | |||||
Assets | Operating lease assets | $ | 31,823 | |||
Liabilities | ||||||
Current | Accrued expenses | $ | 9,342 | |||
Non-current | Non-current operating lease liabilities | 22,751 | ||||
$ | 32,093 | |||||
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Three Months Ended March 31, 2019 | |||||
Lease cost: | |||||
Operating lease cost | $ | 3,357 | |||
Other information: | |||||
Cash paid for amounts included in the measurement of operating liabilities | $ | 2,640 | |||
Right-of-use assets obtained in exchange for new lease liabilties | $ | 3,470 | |||
Weighted-average remaining lease term - operating leases | 4.33 | years | |||
Weighted-average discount rate - operating leases | 5.70 | % | |||
Maturity of lease liabilities | Three Months Ended March 31, 2019 | |||
2019 (April 1, 2019 through December 31, 2019) | $ | 8,276 | ||
2020 | 8,981 | |||
2021 | 6,929 | |||
2022 | 5,175 | |||
2023 | 4,603 | |||
After 2023 | 2,328 | |||
Total lease payments | 36,292 | |||
Less: present value discount | (4,199 | ) | ||
Present value of lease liabilities | $ | 32,093 | ||
The Company uses the Company's incremental borrowing rate based on information available at the commencement date of a lease in determining the present value of lease payments as the rates implicit in most of the Company's leases are not readily determinable.
Upon adoption of ASU 2016-02 on January 1, 2019, the unrecognized deferred gain related to sale-leaseback transactions was recorded as a cumulative-effect adjustment to increase retained earnings, net of related income tax effects.
(13) | EXIT ACTIVITY COSTS AND ASSET IMPAIRMENTS |
The Company has incurred exit activity costs and asset impairment charges as a result of its 80/20 simplification and portfolio management initiatives. These initiatives have resulted in the identification of low-volume, low margin, internally-produced products which have been or will be outsourced or discontinued, the simplification of processes, and in the sale and exiting of less profitable businesses or products lines.
Exit activity costs were incurred during the three months ended March 31, 2019 which related to contract terminations, severance, and other moving and closing costs.
During the three months ended March 31, 2018, the Company incurred exit activity costs resulting from the above initiatives. In conjunction with these initiatives, the Company closed one facility during the first three months of 2018 and sold and leased back another facility which resulted in a gain, which was partially offset by inventory impairment charges incurred for discontinued products.
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The following tables set forth the asset impairment charges and exit activity costs incurred by segment during the three months ended March 31, related to the restructuring activities described above (in thousands):
Three months ended March 31, | |||||||||||||||||||||||
2019 | 2018 | ||||||||||||||||||||||
Inventory write-downs &/or asset impairment charges | Exit activity costs (recoveries), net | Total | Inventory write-downs &/or asset impairment (recoveries) charges, net | Exit activity (recoveries) costs, net | Total | ||||||||||||||||||
Residential Products | $ | — | $ | 151 | $ | 151 | $ | (43 | ) | $ | (123 | ) | $ | (166 | ) | ||||||||
Industrial & Infrastructure Products | — | (33 | ) | (33 | ) | (703 | ) | 218 | (485 | ) | |||||||||||||
Renewable Energy & Conservation | — | 94 | 94 | 19 | 117 | 136 | |||||||||||||||||
Corporate | — | 7 | 7 | — | 44 | 44 | |||||||||||||||||
Total exit activity costs & asset impairments | $ | — | $ | 219 | $ | 219 | $ | (727 | ) | $ | 256 | $ | (471 | ) | |||||||||
The following table provides a summary of where the asset impairments and exit activity costs were recorded in the consolidated statements of income for the three months ended March 31, (in thousands):
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Cost of sales | $ | (34 | ) | $ | 37 | ||
Selling, general, and administrative expense (recoveries) | 253 | (508 | ) | ||||
Net asset impairment and exit activity charges (recoveries) | $ | 219 | $ | (471 | ) | ||
The following table reconciles the beginning and ending liability for exit activity costs relating to the Company’s facility consolidation efforts (in thousands):
2019 | 2018 | ||||||
Balance at January 1 | $ | 1,923 | $ | 961 | |||
Exit activity costs recognized | 219 | 256 | |||||
Cash payments | (550 | ) | (739 | ) | |||
Balance at March 31 | $ | 1,592 | $ | 478 | |||
(14) | INCOME TAXES |
The following table summarizes the provision for income taxes for continuing operations (in thousands) for the three months ended March 31, and the applicable effective tax rates:
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Provision for income taxes | $ | 1,571 | $ | 2,807 | |||
Effective tax rate | 19.8 | % | 25.2 | % | |||
The effective tax rate for the three months ended March 31, 2019 was less than the U.S. federal statutory rate of 21% due to favorable discrete items partially offset by state taxes and nondeductible permanent differences. The effective tax rate for the three months ended March 31, 2018 was greater than the U.S. federal statutory rate of 21% due to state taxes and nondeductible permanent differences partially offset by favorable discrete items.
On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform Act") was signed into law. On this day, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a
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registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company recognized the provisional tax impacts related to the one-time transition tax, withholding tax and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. Our preliminary estimate of the one-time transition tax and the re-measurement of our deferred tax assets and liabilities was finalized in the fourth quarter of 2018.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it included two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return any foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the three months ended March 31, 2019 and March 31, 2018.
The BEAT provisions in the Tax Reform Act eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The BEAT tax had no impact on the Company's consolidated financial statements for the three months ended March 31, 2019 and March 31, 2018.
In January 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated other Comprehensive Income, which gives entities the option to reclassify retained earning tax effects resulting from Tax Reform related to items in AOCI that the FASB refers to as having been stranded in AOCI. The Company must adopt this guidance for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period Tax Reform was enacted. We elected to early adopt ASU 2018-02. As a result of adopting this standard, we reclassified $350,000 from AOCI to retained earnings on January 1, 2018.
(15) EARNINGS PER SHARE
Basic earnings and diluted weighted-average shares outstanding are as follows for the three months ended March 31, (in thousands):
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Numerator: | |||||||
Income from continuing operations | $ | 6,345 | $ | 8,352 | |||
Net income available to common shareholders | $ | 6,345 | $ | 8,352 | |||
Denominator for basic earnings per share: | |||||||
Weighted average shares outstanding | 32,279 | 31,786 | |||||
Denominator for diluted earnings per share: | |||||||
Weighted average shares outstanding | 32,279 | 31,786 | |||||
Common stock options and stock units | 338 | 658 | |||||
Weighted average shares and conversions | 32,617 | 32,444 | |||||
The weighted average number of diluted shares does not include potential anti-dilutive common shares issuable pursuant to equity based incentive compensation awards, aggregating to 258,000 and 359,000 for the three months ended March 31, 2019 and 2018, respectively.
(16) | SEGMENT INFORMATION |
The Company is organized into three reportable segments on the basis of the production process and products and services provided by each segment, identified as follows:
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(i) | Residential Products, which primarily includes roof and foundation ventilation products, rain dispersion products and roofing accessories, centralized mail systems and electronic package solutions; |
(ii) | Industrial and Infrastructure Products, which primarily includes expanded and perforated metal, perimeter security systems, expansion joints, and structural bearings; and |
(iii) | Renewable Energy and Conservation, which primarily includes designing, engineering, manufacturing and installation of solar racking and electrical balance of systems and greenhouse structures. |
When determining the reportable segments, the Company aggregated operating segments based on their similar economic and operating characteristics.
The following table illustrates certain measurements used by management to assess performance of the segments described above for the three months ended March 31, (in thousands):
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Net sales: | |||||||
Residential Products | $ | 103,709 | $ | 103,948 | |||
Industrial and Infrastructure Products | 55,188 | 54,624 | |||||
Less: Intersegment sales | (317 | ) | (221 | ) | |||
Net Industrial and Infrastructure Products | 54,871 | 54,403 | |||||
Renewable Energy and Conservation | 68,837 | 56,986 | |||||
Total consolidated net sales | $ | 227,417 | $ | 215,337 | |||
Income from operations: | |||||||
Residential Products | $ | 12,090 | $ | 13,238 | |||
Industrial and Infrastructure Products | 4,129 | 2,602 | |||||
Renewable Energy and Conservation | 1,632 | 4,062 | |||||
Unallocated Corporate Expenses | (7,285 | ) | (6,059 | ) | |||
Total income from operations | $ | 10,566 | $ | 13,843 | |||
The following tables illustrate revenue disaggregated by timing of transfer of control to the customer for the three months ended March 31 (in thousands):
Three Months Ended March 31, 2019 | |||||||||||||||
Residential Products | Industrial and Infrastructure Products | Renewable Energy and Conservation | Total | ||||||||||||
Net sales: | |||||||||||||||
Point in Time | $ | 102,892 | $ | 45,287 | $ | 7,290 | $ | 155,469 | |||||||
Over Time | 817 | 9,584 | 61,547 | 71,948 | |||||||||||
Total | $ | 103,709 | $ | 54,871 | $ | 68,837 | $ | 227,417 | |||||||
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Three Months Ended March 31, 2018 | |||||||||||||||
Residential Products | Industrial and Infrastructure Products | Renewable Energy and Conservation | Total | ||||||||||||
Net sales: | |||||||||||||||
Point in Time | $ | 102,884 | $ | 46,543 | $ | 5,620 | $ | 155,047 | |||||||
Over Time | 1,064 | 7,860 | 51,366 | 60,290 | |||||||||||
Total | $ | 103,948 | $ | 54,403 | $ | 56,986 | $ | 215,337 | |||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain information set forth herein includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and, therefore, are or may be deemed to be, “forward-looking statements.” These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “anticipates,” “expects,” “estimates,” “seeks,” “projects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, competition, strategies and the industries in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk Factors” disclosed in our Annual Report on Form 10-K. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this quarterly report, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements that we make herein speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Overview
Gibraltar Industries, Inc. (the "Company") is a leading manufacturer and distributor of building products for residential, industrial, infrastructure, and renewable energy and conservation markets.
The Company operates and reports its results in the following three reporting segments, entitled:
• | Residential Products; |
• | Industrial and Infrastructure Products; and |
• | Renewable Energy and Conservation. |
Our Residential Products segment services residential repair and remodeling activity and new residential housing construction with products including roof and foundation ventilation products, centralized mail systems and electronic package solutions, rain dispersion products and accessories. This segment's products are sold through major retail home centers, building material wholesalers, distributor groups, residential contractors and directly to multi-family property management companies.
Our Industrial and Infrastructure Products segment focuses on a variety of markets including industrial and commercial construction, highway and bridge construction, automotive, airports and energy and power generation markets with products including perimeter security, expanded and perforated metal, plank grating, architectural facades, as well as,
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expansion joints and structural bearings for roadways and bridges. This segment sells its products through steel fabricators and distributors, commercial and transportation contractors, and original equipment manufacturers.
Our Renewable Energy and Conservation segment focuses on the design, engineering, manufacturing and installation of solar racking systems and commercial, institutional, and retail greenhouse structures. This segment's services and products are provided directly to developers, power companies, solar energy contractors, and institutional and commercial growers of plants.
As of March 31, 2019, we operated 40 facilities, comprised of 30 manufacturing facilities, five distribution centers, and five offices, which are located in 18 states, Canada, China, and Japan. These facilities give us a base of operations to provide customer support, delivery, service and quality to a number of regional and national customers and provide us with manufacturing and distribution primarily throughout North America and, to a lesser extent, Asia.
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Business Strategy
Our business strategy focuses on accelerating the growth and financial returns of the Company. We strive to deliver best-in-class, sustainable value creation for our shareholders, customers and team members, and we believe this can be achieved from a transformational change in the Company’s portfolio and strong operating performance. Our business strategy has four key elements, or "pillars," which are: operational excellence, innovation, portfolio management, and acquisitions as a strategic accelerator.
Operational excellence is our first pillar in this strategy. We focus on reducing complexity, adjusting costs and simplifying our product offering through 80/20 initiatives (“80/20”). 80/20 is the practice of focusing on our largest and best opportunities (the “80”) and eliminating complexity associated with less profitable opportunities (the “20”). The execution of 80/20 across our businesses, along with in-lining and market rate of demand replenishment initiatives, has and will continue to improve our service levels, overall profitability, and efficiency in the deployment of capital.
Innovation is our second strategic pillar. Our focus is on making innovation a strong competency across our organization to ensure we consistently bring new products, better processes, and value added services for our markets and customers. We are focused on delivering solutions that create more relevance for our end customers, and position our team as a trusted and reliable partner. Our trade focus initiatives are focused on connecting with our end user groups to better understand their needs and the market challenges we need to solve. This effort is expected to produce ideas and opportunities that generate profitable and sustainable growth for us and our customers. Our focus on innovation is centered on our current end markets, including, postal and parcel products, residential air management, infrastructure, renewable energy and conservation. These respective markets are expected to grow based on demand for: centralized mail and parcel delivery systems, including solutions for the last mile of delivery; zero carbon footprint homes; energy sources not dependent on fossil fuels, and the growing demand for locally grown produce.
The third pillar of our strategy is portfolio management, which is a natural adjunct to the 80/20 initiative. Using the 80/20 process, we conduct strategic reviews of our customers and end markets, and allocate leadership time, capital and resources to the highest-potential platforms and businesses. As a result, we have sold and divested businesses and product lines which have helped contribute to the Company's realization of a higher rate of return on invested capital. We view portfolio management as a continuous process that will remain an important part of our strategy as we look to improve Gibraltar's long-term financial performance.
The fourth pillar of our strategy is acquisitions. We have targeted four key markets in which to make strategic acquisitions which are served by existing platforms within the Company. The target markets include: postal, parcel and storage solutions; infrastructure; residential air management; and renewable energy and conservation. These platforms are all in large markets in which the underlying trends for customer convenience and safety, energy-savings and resource conservation are of increasing importance and are expected to drive long-term demand. We believe these markets also offer the opportunity for higher returns on our investments than those we have generated in the past. The acquisitions of Rough Brothers Manufacturing, Inc., RBI Solar, Inc., and affiliates, collectively known as "RBI" in June 2015, Nexus Corporation ("Nexus") in October 2016, Package Concierge in February 2017, and most recently, SolarBOS in August 2018, were the direct result of this fourth pillar strategy. We also consider businesses outside of these four markets, as we continually search out opportunities to grow our business in large markets with expected growth in demand for the foreseeable future, where we can add value through our manufacturing expertise, 80/20 process and purchasing synergies.
Overall, we believe our business strategy has enabled us to achieve stronger financial results, make more efficient use of capital, and deliver higher shareholder returns. Going forward, we will continue to improve upon our operational excellence, optimize our assets and working capital efficiency, and invest in innovation and new product development to drive profitable and sustainable growth.
Recent Developments
On January 2, 2019, the Company appointed William T. Bosway as President and Chief Executive Officer of the Company and a member of the Board of Directors. Over the past 29 years, Mr. Bosway has worked for two Fortune 500 industrial companies and brings to the Company strong leadership skills and significant experience in acquisitions, driving organic growth, lean manufacturing and continuous improvement techniques.
On March 18, 2019, the Company appointed Patrick M. Burns as Chief Operating Officer. In his position as Chief Operating Officer, Mr. Burns will be responsible for all aspects of Gibraltar’s day to day operations across its businesses
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and such other executive duties as he is assigned from time to time by the Board of Directors and the Chief Executive Officer.
On January 24, 2019, we entered into the Company's Sixth Amended and Restated Credit Agreement (the "Senior Credit Agreement") which includes a 5-year, $400 million revolving credit facility. The Senior Credit Agreement also provides the Company the opportunity, upon request, to increase the amount of the revolving credit facility to $700 million.
In conjunction with entering into the Senior Credit Agreement on February 1, 2019, the Company redeemed all $210 million of its outstanding 6.25% Senior Subordinated Bonds. The amended Senior Credit Agreement provides the Company with access to capital and improves our financial flexibility.
On August 21, 2018, the Company acquired all of the outstanding stock of SolarBOS for an aggregate purchase price of $6.4 million which includes a working capital adjustment and certain other adjustments provided for in the stock purchase agreement. The acquisition was financed through cash on hand. SolarBOS is a provider of electrical balance of systems products, which consists of electrical components such as wiring, switches, and combiner boxes that support photovoltaic systems, for the U.S. solar renewable energy market. The results of operations of SolarBOS have been included in the Renewable Energy and Conservation segment of the Company's consolidated financial statements from the date of acquisition.
Economic Conditions
The end markets our businesses serve are subject to economic conditions that are influenced by various factors. These factors include but are not limited to changes in general economic conditions, interest rates, exchange rates, commodity costs, demand for residential construction, demand for repair and remodeling, governmental policies and funding, tax policies and incentives, tariffs, trade policies, the level of non-residential construction and infrastructure projects, need for protection of high value assets, demand for renewable energy sources, and climate change. We believe the key elements of our strategy will allow us to respond timely to changes in these factors.
Results of Operations
Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018
The following table sets forth selected results of operations data (in thousands) and its percentage of net sales for the three months ended March 31:
2019 | 2018 | ||||||||||||
Net sales | $ | 227,417 | 100.0 | % | $ | 215,337 | 100.0 | % | |||||
Cost of sales | 183,517 | 80.7 | % | 167,019 | 77.6 | % | |||||||
Gross profit | 43,900 | 19.3 | % | 48,318 | 22.4 | % | |||||||
Selling, general, and administrative expense | 33,334 | 14.7 | % | 34,475 | 16.0 | % | |||||||
Income from operations | 10,566 | 4.6 | % | 13,843 | 6.4 | % | |||||||
Interest expense | 2,061 | 0.9 | % | 3,269 | 1.5 | % | |||||||
Other expense (income) | 589 | 0.2 | % | (585 | ) | (0.3 | )% | ||||||
Income before taxes | 7,916 | 3.5 | % | 11,159 | 5.2 | % | |||||||
Provision for income taxes | 1,571 | 0.7 | % | 2,807 | 1.3 | % | |||||||
Net income | $ | 6,345 | 2.8 | % | $ | 8,352 | 3.9 | % | |||||
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The following table sets forth the Company’s net sales by reportable segment for the three months ended March 31, (in thousands):
2019 | 2018 | Total Change | |||||||||
Net sales: | |||||||||||
Residential Products | $ | 103,709 | $ | 103,948 | $ | (239 | ) | ||||
Industrial and Infrastructure Products | 55,188 | 54,624 | 564 | ||||||||
Less: Intersegment sales | (317 | ) | (221 | ) | (96 | ) | |||||
Net Industrial and Infrastructure Products | 54,871 | 54,403 | 468 | ||||||||
Renewable Energy and Conservation | 68,837 | 56,986 | 11,851 | ||||||||
Consolidated | $ | 227,417 | $ | 215,337 | $ | 12,080 | |||||
Consolidated net sales increased by $12.1 million, or 5.6%, to $227.4 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The 5.6% increase was the net result of a 5.9% increase in pricing to customers and a 1.5% decrease in volume. Volume decline in our Residential Products segment was largely offset by strong growth in our Renewable Energy and Conservation segment which included a $2.6 million contribution from the prior year acquisition of SolarBOS.
Net sales in our Residential Products segment decreased 0.2%, or $0.2 million, to $103.7 million for the three months ended March 31, 2019 compared to $103.9 million for the three months ended March 31, 2018. The slight decrease from the prior year quarter was the result of unfavorable weather impacting demand for our building products largely offset by customer selling price increases.
Net sales in our Industrial and Infrastructure Products segment increased 0.9%, or $0.5 million, to $54.9 million for the three months ended March 31, 2019 compared to $54.4 million for the three months ended March 31, 2018. Strong performance from the Infrastructure business and continued demand for innovative products was partially offset by lower volume in the Industrial business for more commoditized products.
Net sales in our Renewable Energy and Conservation segment increased 20.9%, or $11.9 million, to $68.8 million for the three months ended March 31, 2019 compared to $57.0 million for the three months ended March 31, 2018. The increase was the result of strong demand for our innovative tracker solutions along with a $2.6 million contribution from the prior year acquisition of SolarBOS.
Our consolidated gross margin decreased to 19.3% for the three months ended March 31, 2019 compared to 22.4% for the three months ended March 31, 2018. This decrease was largely the result of incremental costs incurred for design refinements and field enhancements of our recently launched tracker solution which more than offset the benefit from 80/20 simplification initiatives.
Selling, general, and administrative (SG&A) expenses decreased by $1.1 million, or 3.3%, to $33.3 million for the three months ended March 31, 2019 from $34.5 million for the three months ended March 31, 2018. The $1.1 million decrease was the result of $2.3 million of lower performance-based compensation expenses along with benefits from 80/20 simplification initiatives, partially offset by a $2.0 million increase in senior leadership transition costs as compared to the prior year quarter. SG&A expenses as a percentage of net sales decreased to 14.7% for the three months ended March 31, 2019 compared to 16.0% for the three months ended March 31, 2018.
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The following table sets forth the Company’s income from operations and income from operations as a percentage of net sales by reportable segment for the three months ended March 31, (in thousands):
2019 | 2018 | Total Change | |||||||||||||||
Income from operations: | |||||||||||||||||
Residential Products | $ | 12,090 | 11.7 | % | $ | 13,238 | 12.7 | % | $ | (1,148 | ) | ||||||
Industrial and Infrastructure Products | 4,129 | 7.5 | % | 2,602 | 4.8 | % | 1,527 | ||||||||||
Renewable Energy and Conservation | 1,632 | 2.4 | % | 4,062 | 7.1 | % | (2,430 | ) | |||||||||
Unallocated Corporate Expenses | (7,285 | ) | (3.2 | )% | (6,059 | ) | (2.8 | )% | (1,226 | ) | |||||||
Consolidated income from operations | $ | 10,566 | 4.6 | % | $ | 13,843 | 6.4 | % | $ | (3,277 | ) | ||||||
Our Residential Products segment generated an operating margin of 11.7% during the three months ended March 31, 2019 compared to 12.7% during the three months ended March 31, 2018. The decrease primarily resulted from unfavorable product mix and volume leverage, partially offset by benefits from 80/20 simplification initiatives.
Our Industrial and Infrastructure Products segment generated an operating margin of 7.5% during the three months ended March 31, 2019 compared to 4.8% during the three months ended March 31, 2018. The improvement was the result of favorable product mix, higher volume leverage in the Infrastructure business, and the continued benefit from the Company's 80/20 initiatives.
The Renewable Energy and Conservation segment generated an operating margin of 2.4% in the current year quarter compared to 7.1% in the prior year quarter. The decrease in operating margin was largely the result of incremental costs in the field to improve durability and ensure performance of the recently launched tracker solution which more than offset the benefits of improved volumes.
Unallocated corporate expenses increased $1.2 million from $6.1 million during the three months ended March 31, 2018 to $7.3 million during the three months ended March 31, 2019. This increase from the prior year quarter was largely due to a $2.2 million increase in senior leadership transition costs, partially offset by a $1.3 million decrease in performance-based compensation expenses as compared to the prior year quarter.
The Company recorded other expense of $0.6 million for the three months ended March 31, 2019 compared to other income of $0.6 million recorded for the three months ended March 31, 2018. The $1.2 million unfavorable change from the prior year quarter was primarily the result of foreign currency fluctuations.
Interest expense decreased by $1.2 million to $2.1 million for the three months ended March 31, 2019 compared to $3.3 million for the three months ended March 31, 2018. The decrease in expense resulted from the redemption of the Company's outstanding 6.25% Senior Subordinated Notes during the first quarter of 2019. During the three months ended March 31, 2019 and 2018, no amounts were outstanding under our revolving credit facility.
We recognized a provision for income taxes of $1.6 million and $2.8 million, with effective tax rates of 19.8% and 25.2% for the three months ended March 31, 2019, and 2018, respectively. The effective tax rate for the first quarter of 2019 was less than the U.S. federal statutory rate of 21% due to favorable discrete items partially offset by state taxes and nondeductible permanent differences. The effective tax rate for the first quarter of 2018 exceeded the U.S. federal statutory rate of 21% due to state taxes and nondeductible permanent differences partially offset by favorable discrete items.
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Outlook
For the remainder of 2019, we are confident in our ability to execute our operating plans. Through key resource investments across our businesses, we are accelerating our ability to innovate and become more relevant to our customers. With solid end-market activity across our portfolio, we look forward to another year of driving profitable growth and making more money at a higher rate of return with a more efficient use of capital.
The Company is maintaining its guidance for revenues and earnings for the full year 2019. We expect 2019 consolidated revenues to be in excess of $1 billion. GAAP EPS for full year 2019 is expected to be between $1.95 and $2.10, compared with $1.96 in 2018.
For the second quarter of 2019, the Company is expecting revenue in the range of $268 million to $274 million. GAAP EPS for the second quarter 2019 is expected to be between $0.60 and $0.65, compared to $0.70 in 2018.
Liquidity and Capital Resources
General
Our principal capital requirements are to fund our operations' working capital and capital improvements and to fund acquisitions. We will continue to invest in growth opportunities as appropriate while focusing on working capital efficiency and profit improvement opportunities to minimize the cash invested to operate our business.
As of March 31, 2019, our liquidity of $435.4 million consisted of $43.5 million of cash and $391.9 million of availability under our revolving credit facility as compared to liquidity of $491.0 million as of March 31, 2018.
On January 24, 2019, we entered into the Company's Sixth Amended and Restated Credit Agreement (the "Senior Credit Agreement") which includes a 5-year, $400 million revolving credit facility. The Senior Credit Agreement also provides the Company the opportunity, upon request, to increase the amount under the revolving credit facility to $700 million.
Utilizing existing cash on hand, the Company repaid $210 million of 6.25% Senior Subordinated Notes on February 1, 2019. We believe that our resulting low leverage and increased borrowing capacity along with enhanced flexibility in our new Senior Credit Agreement, provide us with ample liquidity. We believe our liquidity, together with the cash expected to be generated from operations, should be sufficient to fund working capital needs and simplification initiatives that likely will need cash to fund transitions and future growth. We continue to search for strategic acquisitions and larger acquisitions may require additional borrowings and/or the issuance of our common stock.
Our Senior Credit Agreement provides the Company with liquidity and capital resources for use by our U.S. operations. Historically, our foreign operations have generated cash flow from operations sufficient to invest in working capital and fund their capital improvements. As of March 31, 2019, our foreign subsidiaries held $24.6 million of cash in U.S. dollars, of which $13.0 million is available to be repatriated to the U.S. tax-free. Subsequent cash generated by our foreign subsidiaries will be reinvested into their operations.
Over the long-term, we expect that future investments, including strategic business opportunities such as acquisitions, may be financed through a number of sources, including internally available cash, availability under our revolving credit facility, new debt financing, the issuance of equity securities, or any combination of the above. Any potential acquisitions are evaluated based on our acquisition strategy, which includes the enhancement of our existing products, operations, or capabilities, expanding our access to new products, markets, and customers, and the improvement of shareholder value. Our 2018 acquisition of SolarBOS was funded by cash on hand.
These expectations are forward-looking statements based upon currently available information and may change if conditions in the credit and equity markets deteriorate or other circumstances change. To the extent that operating cash flows are lower than current levels, or sources of financing are not available or not available at acceptable terms, our future liquidity may be adversely affected.
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Cash Flows
The following table sets forth selected cash flow data for the three months ended March 31, (in thousands):
2019 | 2018 | ||||||
Cash (used in) provided by: | |||||||
Operating activities of continuing operations | $ | (37,488 | ) | $ | (22,206 | ) | |
Investing activities of continuing operations | (3,374 | ) | 1,790 | ||||
Financing activities of continuing operations | (213,247 | ) | (624 | ) | |||
Effect of exchange rate changes | 612 | (499 | ) | ||||
Net increase in cash and cash equivalents | $ | (253,497 | ) | $ | (21,539 | ) | |
During the three months ended March 31, 2019, net cash used in operating activities totaling $37.5 million was primarily driven by an investment in working capital and other net assets of $54.0 million offset by $10.2 million from non-cash charges including depreciation, amortization, stock compensation and other net charges as well as net income of $6.3 million. Net cash used in operating activities for the three months ended March 31, 2018 totaled $22.2 million, and was primarily driven by an investment in working capital and other net assets of $37.5 million, partially offset by net income of $8.4 million and $6.9 million from non-cash charges including depreciation, amortization, stock compensation, and exit activities.
During the three months ended March 31, 2019, the cash invested in working capital and other net assets of $54.0 million included a $31.9 million decrease in accrued expenses and other non-current liabilities and a $27.6 million increase in accounts receivable, partially offset by a $5.3 million increase in accounts payable. The decrease in accrued expenses and other non-current liabilities was due to payments made in the first quarter for the Company's performance based incentive plans, interest on the redemption of the Company's 6.25% Senior Subordinated Notes on February 1, 2019, and accrued customer rebates. The increase in accounts receivable primarily relates to timing, in which sales volumes increased during the latter part of the quarter. Accounts payable increased due to the timing of quarter end vendor payments.
Net cash used in investing activities for the three months ended March 31, 2019 of $3.4 million consisted of capital expenditures of $3.1 million and a payment of $0.3 million related to the final purchase adjustment for the acquisition of SolarBOS. Net cash provided by investing activities for the three months ended March 31, 2018 of $1.8 million primarily consisted of net proceeds of $2.8 million from the sale of property and equipment offset by capital expenditures of $1.0 million.
Net cash used in financing activities for the three months ended March 31, 2019 of $213.2 million consisted of the repayment of $210.0 million of 6.25% Senior Subordinated Notes on February 1, 2019, purchases of treasury stock of $2.1 million and the payment of debt issuance costs of $1.2 million. Net cash used in financing activities for the three months ended March 31, 2018 of $0.6 million consisted of the purchase of treasury stock of $0.8 million offset by the proceeds received from the issuance of common stock of $0.2 million.
Senior Credit Agreement
Our new 2019 Senior Credit Agreement provides for a revolving credit facility and letters of credit in an aggregate amount equal to $400 million. The Company can request additional financing from the banks to increase the revolving credit facility to $700 million or enter into a term loan of up to $300 million subject to conditions set forth in the Senior Credit Agreement. The Senior Credit Agreement is committed through January 23, 2024. Borrowings under the Senior Credit Agreement are secured by the trade receivables, inventory, personal property, equipment, and general intangibles of the Company’s significant domestic subsidiaries. The Senior Credit Agreement contains three financial covenants. As of March 31, 2019, the Company is in compliance with all three covenants.
Interest rates on the revolving credit facility are based on the LIBOR plus 1.125%. In addition, the revolving credit facility is subject to an undrawn commitment fee ranging between 0.15% and 0.25% based on the Total Leverage Ratio and the daily average undrawn balance.
As of March 31, 2019, we have $391.9 million of availability under our revolving credit agreement, net of outstanding letters of credit of $8.1 million. No amounts were outstanding under our revolving credit facility as of March 31, 2019 and December 31, 2018.
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Off Balance Sheet Financing Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Contractual Obligations
Our contractual obligations have not changed materially from the disclosures included in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Critical Accounting Estimates
In the current year, there have been no changes to our critical accounting estimates from those disclosed in the consolidated financial statements and accompanying notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Recent Accounting Pronouncements
See Note 2 to the Company's consolidated financial statements in Part I, Item 1 of this Form 10-Q for further information on recent accounting pronouncements.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
In the ordinary course of business, the Company is exposed to various market risk factors, including changes in general economic conditions, competition, foreign exchange rates, and raw materials pricing and availability. In addition, the Company is exposed to other financial market risks, primarily related to its long-term debt and foreign operations. Refer to Item 7A in the Company's Form 10-K for the year ended December 31, 2018 for more information about the Company's exposure to market risk.
Item 4. Controls and Procedures
(a) | Evaluation of Disclosure Controls and Procedures |
The Company maintains a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). The Company’s Chief Executive Officer and the Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls as of the end of the period covered in this report. Based upon that evaluation and the definition of disclosure controls and procedures contained in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of the end of such period the Company’s disclosure controls and procedures were effective.
(b) | Changes in Internal Control over Financial Reporting |
There have been no changes in the Company’s internal control over financial reporting (as defined by Rule 13a-15(f) or 15d-15(f)) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
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Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risks discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operation, cash flows, and future prospects. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may materially adversely impact our business, financial condition, or operating results. We believe there have been no material changes from the risk factors previously disclosed in our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
(a) Exhibits
Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes–Oxley Act of 2002. | ||
Certification of Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes–Oxley Act of 2002. | ||
Certification of the President and Chief Executive Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002. | ||
Certification of the Senior Vice President and Chief Financial Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002. | ||
101.INS | XBRL Instance Document * | |
101.SCH | XBRL Taxonomy Extension Schema Document * | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document * | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document * | |
101.PRA | XBRL Taxonomy Extension Presentation Linkbase Document * | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document * | |
* | Submitted electronically with this Quarterly Report on Form 10-Q. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GIBRALTAR INDUSTRIES, INC.
(Registrant)
/s/ William T. Bosway |
William T. Bosway |
President and Chief Executive Officer |
/s/ Timothy F. Murphy |
Timothy F. Murphy |
Senior Vice President and Chief Financial Officer |
Date: May 3, 2019
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