Atkore Inc. - Quarter Report: 2020 March (Form 10-Q)
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 27, 2020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-37793
_________________________________________
Atkore International Group Inc.
(Exact name of registrant as specified in its charter)
_________________________________________
Delaware | 90-0631463 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
16100 South Lathrop Avenue, Harvey, Illinois 60426
(Address of principal executive offices) (Zip Code)
708-339-1610
(Registrant's telephone number, including area code)
_________________________________________
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, $.01 par value per share | ATKR | New York Stock Exchange |
_____________________
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 ☒ 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 ☒ 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.
Large accelerated filer | ☒ | 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 Securities Act. ☐ | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
_____________________
As of April 30, 2020, there were 47,187,527 shares of the registrant's common stock, $0.01 par value per share, outstanding.
Table of Contents
Page No. | |
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ATKORE INTERNATIONAL GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended | Six months ended | |||||||||||||||||
(in thousands, except per share data) | Note | March 27, 2020 | March 29, 2019 | March 27, 2020 | March 29, 2019 | |||||||||||||
Net sales | $ | 455,654 | $ | 469,309 | $ | 903,102 | $ | 921,337 | ||||||||||
Cost of sales | 324,051 | 352,221 | 654,655 | 693,993 | ||||||||||||||
Gross profit | 131,603 | 117,088 | 248,447 | 227,344 | ||||||||||||||
Selling, general and administrative | 62,360 | 56,350 | 118,575 | 112,729 | ||||||||||||||
Intangible asset amortization | 13 | 8,071 | 8,196 | 16,184 | 16,410 | |||||||||||||
Operating income | 61,172 | 52,542 | 113,688 | 98,205 | ||||||||||||||
Interest expense, net | 10,564 | 13,328 | 21,184 | 25,488 | ||||||||||||||
Other income, net | 7 | (1,685 | ) | (594 | ) | (1,919 | ) | (2,194 | ) | |||||||||
Income before income taxes | 52,293 | 39,808 | 94,423 | 74,911 | ||||||||||||||
Income tax expense | 8 | 13,100 | 10,253 | 20,440 | 18,407 | |||||||||||||
Net income | $ | 39,193 | $ | 29,555 | $ | 73,983 | $ | 56,504 | ||||||||||
Net income per share | ||||||||||||||||||
Basic | 9 | $ | 0.81 | $ | 0.62 | $ | 1.53 | $ | 1.18 | |||||||||
Diluted | 9 | $ | 0.80 | $ | 0.61 | $ | 1.50 | $ | 1.15 | |||||||||
See Notes to unaudited condensed consolidated financial statements.
2
ATKORE INTERNATIONAL GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended | Six months ended | |||||||||||||||||
(in thousands) | Note | March 27, 2020 | March 29, 2019 | March 27, 2020 | March 29, 2019 | |||||||||||||
Net income | $ | 39,193 | $ | 29,555 | $ | 73,983 | $ | 56,504 | ||||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||||
Change in foreign currency translation adjustment | (6,229 | ) | 952 | (1,120 | ) | (1,794 | ) | |||||||||||
Change in unrecognized loss related to pension benefit plans | 5 | 226 | 15 | 433 | 40 | |||||||||||||
Total other comprehensive income (loss) | 10 | (6,003 | ) | 967 | (687 | ) | (1,754 | ) | ||||||||||
Comprehensive income | $ | 33,190 | $ | 30,522 | $ | 73,296 | $ | 54,750 | ||||||||||
See Notes to unaudited condensed consolidated financial statements.
3
ATKORE INTERNATIONAL GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share data) | Note | March 27, 2020 | September 30, 2019 | |||||||
Assets | ||||||||||
Current Assets: | ||||||||||
Cash and cash equivalents | $ | 137,202 | $ | 123,415 | ||||||
Accounts receivable, less allowance for doubtful accounts of $3,410 and $2,608, respectively | 305,617 | 315,353 | ||||||||
Inventories, net | 11 | 246,235 | 226,090 | |||||||
Prepaid expenses and other current assets | 54,083 | 34,679 | ||||||||
Total current assets | 743,137 | 699,537 | ||||||||
Property, plant and equipment, net | 12 | 246,304 | 260,703 | |||||||
Intangible assets, net | 13 | 269,882 | 285,684 | |||||||
Goodwill | 13 | 186,779 | 186,231 | |||||||
Right-of-use assets, net | 2 | 41,629 | — | |||||||
Deferred tax assets | 8 | 1,016 | 577 | |||||||
Other long-term assets | 4,820 | 4,263 | ||||||||
Total Assets | $ | 1,493,567 | $ | 1,436,995 | ||||||
Liabilities and Equity | ||||||||||
Current Liabilities: | ||||||||||
Accounts payable | 128,173 | 150,681 | ||||||||
Income tax payable | 2,690 | 2,157 | ||||||||
Accrued compensation and employee benefits | 23,981 | 35,770 | ||||||||
Customer liabilities | 39,307 | 44,983 | ||||||||
Lease obligations | 2 | 12,048 | — | |||||||
Other current liabilities | 48,911 | 53,943 | ||||||||
Total current liabilities | 255,110 | 287,534 | ||||||||
Long-term debt | 14 | 845,694 | 845,317 | |||||||
Long-term lease obligations | 2 | 30,411 | — | |||||||
Deferred tax liabilities | 8 | 21,336 | 19,986 | |||||||
Other long-term tax liabilities | 740 | 3,669 | ||||||||
Pension liabilities | 32,520 | 34,509 | ||||||||
Other long-term liabilities | 12,322 | 13,044 | ||||||||
Total Liabilities | 1,198,133 | 1,204,059 | ||||||||
Equity: | ||||||||||
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 47,175,927 and 46,955,163 shares issued and outstanding, respectively | 473 | 471 | ||||||||
Treasury stock, held at cost, 260,900 and 260,900 shares, respectively | (2,580 | ) | (2,580 | ) | ||||||
Additional paid-in capital | 482,399 | 477,139 | ||||||||
Accumulated deficit | (142,473 | ) | (200,396 | ) | ||||||
Accumulated other comprehensive loss | 10 | (42,385 | ) | (41,698 | ) | |||||
Total Equity | 295,434 | 232,936 | ||||||||
Total Liabilities and Equity | $ | 1,493,567 | $ | 1,436,995 | ||||||
See Notes to unaudited condensed consolidated financial statements.
4
ATKORE INTERNATIONAL GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended | ||||||||||
(in thousands) | Note | March 27, 2020 | March 29, 2019 | |||||||
Operating activities: | ||||||||||
Net income | $ | 73,983 | $ | 56,504 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
Depreciation and amortization | 37,208 | 36,301 | ||||||||
Deferred income taxes | 8 | 1,036 | (1,101 | ) | ||||||
Stock-based compensation | 7,646 | 4,816 | ||||||||
Amortization of right-of-use assets | 7,384 | — | ||||||||
Loss on disposal of property, plant and equipment | 4,560 | — | ||||||||
Other adjustments to net income | 2,672 | 3,046 | ||||||||
Changes in operating assets and liabilities, net of effects from acquisitions | ||||||||||
Accounts receivable | 7,757 | (4,839 | ) | |||||||
Inventories | (22,719 | ) | 8,540 | |||||||
Accounts payable | (18,856 | ) | (19,135 | ) | ||||||
Other, net | (51,387 | ) | (41,343 | ) | ||||||
Net cash provided by operating activities | 49,284 | 42,789 | ||||||||
Investing activities: | ||||||||||
Capital expenditures | (17,139 | ) | (14,712 | ) | ||||||
Acquisition of businesses, net of cash acquired | 4 | — | (57,899 | ) | ||||||
Other, net | 30 | (194 | ) | |||||||
Net cash used in investing activities | (17,109 | ) | (72,805 | ) | ||||||
Financing activities: | ||||||||||
Borrowings under credit facility | — | 17,000 | ||||||||
Repayments under credit facility | — | (17,000 | ) | |||||||
Repayments of short-term debt | 14 | — | (20,980 | ) | ||||||
Issuance of common stock | (2,380 | ) | 1,291 | |||||||
Repurchase of common stock | (15,011 | ) | (24,419 | ) | ||||||
Other, net | (30 | ) | (677 | ) | ||||||
Net cash used for financing activities | (17,421 | ) | (44,785 | ) | ||||||
Effects of foreign exchange rate changes on cash and cash equivalents | (967 | ) | (363 | ) | ||||||
Increase (decrease) in cash and cash equivalents | 13,787 | (75,164 | ) | |||||||
Cash and cash equivalents at beginning of period | 123,415 | 126,662 | ||||||||
Cash and cash equivalents at end of period | $ | 137,202 | $ | 51,498 | ||||||
Supplementary Cash Flow information | ||||||||||
Capital expenditures, not yet paid | $ | 713 | $ | 626 | ||||||
See Notes to unaudited condensed consolidated financial statements.
5
ATKORE INTERNATIONAL GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Equity | ||||||||||||||||||||
(in thousands) | Shares | Amount | Amount | ||||||||||||||||||||||
Balance as of September 30, 2018 | 47,080 | $ | 472 | (2,580 | ) | $ | 457,978 | $ | (317,373 | ) | $ | (16,438 | ) | $ | 122,059 | ||||||||||
Net income | — | — | — | — | 26,949 | — | 26,949 | ||||||||||||||||||
Other comprehensive income | — | — | — | — | — | (2,721 | ) | (2,721 | ) | ||||||||||||||||
Stock-based compensation | — | — | — | 2,982 | — | — | 2,982 | ||||||||||||||||||
Issuance of common stock | 131 | 1 | — | (696 | ) | — | (695 | ) | |||||||||||||||||
Repurchase of common stock | (1,230 | ) | (12 | ) | — | — | (24,407 | ) | — | (24,419 | ) | ||||||||||||||
Balance as of December 28, 2018 | 45,981 | 461 | (2,580 | ) | 460,264 | (314,831 | ) | (19,159 | ) | 124,155 | |||||||||||||||
Net income | — | — | — | — | 29,555 | — | 29,555 | ||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 967 | 967 | ||||||||||||||||||
Reclassification of stranded tax benefits (1) | — | — | — | — | 2,333 | (2,333 | ) | — | |||||||||||||||||
Stock-based compensation | — | — | — | 1,834 | — | — | 1,834 | ||||||||||||||||||
Issuance of common stock | 235 | 2 | — | 1,984 | — | 1,986 | |||||||||||||||||||
Balance as of March 30, 2019 | 46,216 | 463 | (2,580 | ) | 464,082 | (282,943 | ) | (20,525 | ) | 158,497 | |||||||||||||||
Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Equity | |||||||||||||||||||||
(in thousands) | Shares | Amount | Amount | |||||||||||||||||||||||
Balance as of September 30, 2019 | 46,955 | $ | 471 | $ | (2,580 | ) | $ | 477,139 | $ | (200,396 | ) | $ | (41,698 | ) | $ | 232,936 | ||||||||||
Net income | — | — | — | — | 34,790 | — | 34,790 | |||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | 5,316 | 5,316 | |||||||||||||||||||
ASU 2016-02 modified retrospective adoption | — | — | — | — | (1,053 | ) | — | (1,053 | ) | |||||||||||||||||
Stock-based compensation | — | — | — | 3,123 | — | — | 3,123 | |||||||||||||||||||
Issuance of common stock | 524 | 5 | — | (2,986 | ) | — | — | (2,981 | ) | |||||||||||||||||
Balance as of December 27, 2019 | 47,479 | 476 | (2,580 | ) | 477,276 | (166,659 | ) | (36,382 | ) | 272,131 | ||||||||||||||||
Net income | — | — | — | — | 39,193 | — | 39,193 | |||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (6,003 | ) | (6,003 | ) | |||||||||||||||||
Stock-based compensation | — | — | — | 4,523 | — | — | 4,523 | |||||||||||||||||||
Issuance of common stock | 91 | 1 | — | 600 | — | — | 601 | |||||||||||||||||||
Repurchase of common stock | (394 | ) | (4 | ) | — | — | (15,007 | ) | — | (15,011 | ) | |||||||||||||||
Balance as of March 27, 2020 | 47,176 | 473 | (2,580 | ) | 482,399 | (142,473 | ) | (42,385 | ) | 295,434 | ||||||||||||||||
(1) Due to the adoption of ASU 2018-02. | ||||||||||||||||||||||||||
See Notes to unaudited condensed consolidated financial statements.
6
ATKORE INTERNATIONAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars and shares in thousands, except per share data)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Organization and Ownership Structure — Atkore International Group Inc. (the "Company", "Atkore" or "AIG") is a leading manufacturer of Electrical Raceway products primarily for the non-residential construction and renovation markets and Mechanical Products & Solutions ("MP&S") for the construction and industrial markets. Electrical Raceway products form the critical infrastructure that enables the deployment, isolation and protection of a structure's electrical circuitry from the original power source to the final outlet. MP&S frame, support and secure component parts in a broad range of structures, equipment and systems in electrical, industrial and construction applications.
Atkore was incorporated in the State of Delaware on November 4, 2010. Atkore is the sole stockholder of Atkore International Holdings Inc. ("AIH"), which in turn is the sole stockholder of Atkore International, Inc. ("AII").
Basis of Presentation — The accompanying unaudited condensed consolidated financial statements of the Company included herein have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These unaudited condensed consolidated financial statements have been prepared in accordance with the Company's accounting policies and on the same basis as those financial statements included in the Company's latest Annual Report on Form 10-K for the year ended September 30, 2019, filed with the U.S. Securities and Exchange Commission (the "SEC") on November 22, 2019, and should be read in conjunction with those consolidated financial statements and the notes thereto. Certain information and disclosures normally included in the Company's annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.
The unaudited condensed consolidated financial statements include the assets and liabilities used in operating the Company's business. All intercompany balances and transactions have been eliminated in consolidation. The results of companies acquired or disposed of are included in the unaudited condensed consolidated financial statements from the effective date of acquisition or up to the date of disposal.
These statements include all adjustments (consisting of normal recurring adjustments) that the Company considered necessary to present a fair statement of its results of operations, financial position and cash flows. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year.
Fiscal Periods — The Company has a fiscal year that ends on September 30. It is the Company's practice to establish quarterly closings using a 4-5-4 calendar. The Company's fiscal quarters end on the last Friday in December, March and June.
Use of Estimates — The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclose contingent assets and liabilities at the date of the condensed consolidated financial statements and report the associated amounts of revenues and expenses. Actual results could differ materially from these estimates.
Recent Accounting Pronouncements
A summary of recently adopted accounting guidance is as follows. Adoption dates are on the first day of the fiscal year indicated below, unless otherwise specified.
7
ASU | Description of ASU | Impact to Atkore | Note | Adoption Date | ||||
2016-02 Leases (Topic 842) | The Accounting Standards Update ("ASU") requires companies to use a "right of use" lease model that assumes that each lease creates an asset (the lessee's right to use the leased asset) and a liability (the future rent payment obligations), which should be reflected on a lessee's balance sheet to fairly represent the lease transaction and the lessee's related financial obligations with terms of more than 12 months. | The Company adopted the guidance in the first quarter of 2020 using the modified retrospective method. See Note 2, "Leases" for further detail. | 2 | 2020 | ||||
A summary of accounting guidance not yet adopted is as follows. Effective dates are on the first day of the fiscal year indicated below, unless otherwise specified.
ASU | Description of ASU | Impact to Atkore | Effective Date | |||
2016-13 Financial Instruments - Credit Losses (Topic 326) | The ASU adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. | Under evaluation. | 2021 | |||
2018-14 Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans | The ASU amends Accounting Standards Codification ("ASC") 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. | Under evaluation. | 2021 | |||
2019-12 Income Tax | The ASU amends ASC 740 to simplify the accounting for various topics related to income taxes. | Under evaluation. | 2021 | |||
2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (issued March 12, 2020) | The ASU addresses constituents’ concerns about certain accounting consequences that could result from the global markets’ anticipated transition away from the use of the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. | Under evaluation. | 2022 | |||
2. LEASES
On October 1, 2019, we adopted ASC Topic 842 using the modified retrospective transition method. Topic 842 requires the recognition of lease assets and liabilities for operating leases, in addition to the finance lease assets and liabilities previously recorded on our condensed consolidated balance sheets. Beginning on October 1, 2019, our condensed consolidated financial statements are presented in accordance with the revised policies, while prior period amounts are not adjusted and continue to be reported in accordance with our historical policies. The modified retrospective transition method required the cumulative effect, if any, of initially applying the guidance to be recognized as an adjustment to our accumulated deficit as of our adoption date. As a result of adopting Topic 842, we recognized additional operating lease assets and liabilities of $45,519 and $46,941 as of October 1, 2019. The discount rate primarily used to calculate that adjustment was the Company's incremental borrowing rate as of the adoption date, October 1, 2019, as a rate implicit in most contracts was not readily determinable. The Company recorded a cumulative effect adjustment of $1,053 to accumulated deficit, net of tax, as a result of the adoption.
The Company elected the package of practical expedients permitted under the transition guidance within Topic 842, which allowed us to carry forward prior conclusions about lease identification, classification and initial direct costs for leases
8
entered into prior to adoption of Topic 842. Additionally, for leases with a term of 12 months or less, the Company elected the short-term lease exemption, which allowed us to not recognize right-of-use assets ("ROU") or lease liabilities for qualifying leases existing at transition and new leases we may enter into in the future. Leases with an initial term of 12 months or less are classified as short-term leases and are not recorded on the condensed consolidated balance sheets. The lease expense for short-term leases is recognized on a straight-line basis over the lease term.
The Company engages in leasing transactions to meet the needs of the business. The Company leases certain warehouses and distribution centers, office space, forklifts, vehicles and other machinery and equipment. The determination to lease, rather than purchase, an asset is primarily contingent upon capital requirements, duration of the forecasted business investment, and asset availability.
The Company determines if an arrangement is a lease at inception and all arrangements deemed to be leases are subject to an assessment to determine the classification between finance and operating leases. The Company's significant assumptions and judgments in determining whether a contract is or contains a lease include establishing whether the supplier has the ability to use other assets to fulfill its service or whether the terms of the agreement enable the Company to control the use of a dedicated property, plant and equipment asset during the contract term. In the majority of the Company's contracts where it must identify whether a lease is present, it is readily determinable that the Company controls the use of the assets and obtains substantially all of the economic benefit during the term of the contract. In those contracts where identification is not readily determinable, the Company has determined that the supplier has either the ability to use another asset to provide the service or the terms of the contract give the supplier the rights to operate the asset at its discretion during the term of the contract, in which case the arrangement would not constitute a lease.
Right-of-use assets and lease obligations are recognized based on the present value of the future minimum lease payments over the lease term as of the commencement date. The Company’s lease agreements have terms that include both lease and non-lease components. Lease component fees are included in the present value of future minimum lease payments. Conversely, non-lease components are not subject to capitalization and are expensed as incurred. Per Topic 842, the contractual interest rate is used to calculate the present value of the future minimum lease payments. However, the majority of the Company’s leases do not provide an implicit rate. Therefore, the Company's significant assumption and judgments in determining the discount rate include determining the incremental borrowing rate. The Company’s incremental borrowing rates are based on the term of the lease, the economic environment of the lease and the effect of collateralization. The valuation of the ROU asset also includes lease payments made in advance of the lease commencement date and initial direct costs incurred to secure the lease and is reduced for lease incentives. The lease terms include options to extend or terminate the lease when it is reasonably certain the Company will exercise the options.
The Company has certain leasing agreements, related to leased vehicles available to our sales personnel, that contain guaranteed residual value terms, which are not expected to be triggered. The Company’s leasing portfolio does not contain any material restrictive covenants.
9
Leases
(in thousands) | March 27, 2020 | |||
Assets | ||||
Operating lease assets | $ | 39,900 | ||
Finance lease assets | 3,564 | |||
Total right-of-use assets, gross | $ | 43,464 | ||
Less: accumulated depreciation | (1,835 | ) | ||
Right-of-use assets, net | $ | 41,629 | ||
Liabilities | ||||
Current liabilities: | ||||
Current portion of operating lease liabilities | $ | 11,556 | ||
Current portion of finance lease liabilities | 492 | |||
Lease obligations | $ | 12,048 | ||
Noncurrent liabilities: | ||||
Operating lease liabilities | $ | 29,476 | ||
Finance lease liabilities | 935 | |||
Long-term lease obligations | $ | 30,411 | ||
Total lease obligations | $ | 42,459 | ||
Lease Cost
The following table summarizes lease costs by type of cost for the three months ended March 27, 2020. In the condensed consolidated statements of operations, cost of sales and selling, general and administrative expenses included lease costs of $3,194 and $967, respectively.
(in thousands) | Three months ended March 27, 2020 | |||
Condensed Consolidated Statement of Operations Classification | Total | |||
Amortization of right-of-use assets | $ | 3,757 | ||
Interest on lease liabilities | 14 | |||
Variable lease costs | 43 | |||
Short term lease costs | 347 | |||
Total lease costs | $ | 4,161 | ||
The following table summarizes lease costs by type of cost for the six months ended March 27, 2020. In the condensed consolidated statements of operations, cost of sales and selling, general and administrative expenses included lease costs of $5,950 and $2,125, respectively.
10
(in thousands) | Six months ended March 27, 2020 | |||
Condensed Consolidated Statement of Operations Classification | Total | |||
Amortization of right-of-use assets | $ | 7,384 | ||
Interest on lease liabilities | 22 | |||
Variable lease costs | 82 | |||
Short term lease costs | 587 | |||
Total lease costs | $ | 8,075 | ||
Maturity of Lease Liabilities
The Company's maturity analysis of its lease liabilities as of March 27, 2020 is as follows:
(in thousands) | Financing Leases | Operating Leases | ||||||
2020 | $ | 462 | $ | 13,274 | ||||
2021 | 388 | 10,366 | ||||||
2022 | 382 | 8,202 | ||||||
2023 | 237 | 6,010 | ||||||
2024 | 16 | 4,826 | ||||||
2025 and after | — | 4,919 | ||||||
Total lease payments | $ | 1,485 | $ | 47,597 | ||||
Less: Interest | (59 | ) | (6,565 | ) | ||||
Present value of lease liabilities | $ | 1,426 | $ | 41,032 | ||||
The following represents the Company's future minimum rental payments at September 30, 2019 for agreements classified as operating leases under ASC 840 with non-cancelable terms in excess of one year:
2020 | $ | 13,526 | ||
2021 | 11,592 | |||
2022 | 8,666 | |||
2023 | 6,362 | |||
2024 | 5,097 | |||
2025 and thereafter | 6,938 | |||
Total | $ | 52,181 | ||
Lease Term and Discount Rate
March 27, 2020 | |||
Weighted-average remaining lease term (years) | |||
Operating leases | 4.74 | ||
Finance leases | 3.52 | ||
Weighted-average discount rate | |||
Operating leases | 4.34 | % | |
Finance leases | 3.16 | % | |
Other Information
11
(in thousands) | Six months ended March 27, 2020 | ||
Cash paid for amounts included in the measurement of lease liabilities | |||
Operating cash flows from operating leases | 6,517 | ||
Operating cash flows from finance leases | 14 | ||
Financing cash flows from finance leases | 267 | ||
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company’s revenue arrangements primarily consist of a single performance obligation to transfer promised goods which is satisfied at a point in time when title, risks and rewards of ownership, and subsequently control have transferred to the customer. This generally occurs when the product is shipped to the customer, with an immaterial amount of transactions in which control transfers upon delivery. The Company primarily offers assurance-type standard warranties that do not represent separate performance obligations.
The Company has certain arrangements that require it to estimate at the time of sale the amounts of variable consideration that should not be recorded as revenue as certain amounts are not expected to be collected from customers, as well as an estimate of the value of products to be returned. The Company principally relies on historical experience, specific customer agreements, and anticipated future trends to estimate these amounts at the time of sale and to reduce the transaction price. These arrangements include sales discounts and allowances, volume rebates, and returned goods.
The Company records amounts billed to customers for reimbursement of shipping and handling costs within revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of goods sold. Sales taxes and other usage-based taxes are excluded from revenue. The Company does not evaluate whether the selling price includes a financing interest component for contracts that are less than a year. The Company also expenses costs incurred to obtain a contract, primarily sales commissions, as all obligations will be settled in less than one year.
The Company typically receives payment 30 to 60 days from the point it has satisfied the related performance obligation. See Note 18, ''Segment Information'' for revenue disaggregated by geography and product categories.
4. ACQUISITIONS
From time to time, the Company enters into strategic acquisitions in an effort to better service existing customers and to attain new customers.
On August 21, 2019, Atkore Plastic Pipe Corporation, a wholly-owned subsidiary of the Company acquired the assets of Rocky Mountain Pipe ("Cor-Tek"), a manufacturer of PVC conduit for electrical applications, and considered a leading innovator in cellular core extrusion technology for a purchase price of $14,835. In connection with this acquisition, the Company recorded a bargain purchase gain of $7,384 within other income, net during the fourth quarter of fiscal 2019 in the Statement of Operations. The Company believes that it was able to acquire the net assets of Cor-Tek for less than fair value as a result of Cor-Tek’s financial difficulties.
On August 12, 2019, Unistrut Limited, a wholly-owned subsidiary of the Company, acquired Flytec Systems Ltd. and its parent holding company, Modern Associates Ltd., (collectively "Flytec"), a manufacturer of metal surface trunking, including IP4X, perimeter systems, pedestal boxes, as well as underfloor installations and industrial floor trunking. The purchase price was immaterial to the Company.
On June 3, 2019, AFC Cable Systems, Inc., a wholly-owned subsidiary of the Company acquired the assets of United Structural Products, LLC. ("U.S. Tray"), a manufacturer of welded aluminum and engineered-to-order cable trays for a purchase price of $25,507, net of cash received. As a result of the acquisition, the Company recognized $7,295 of goodwill, $14,800 of identifiable intangible assets and $3,412 of working capital and other net other tangible assets.
12
On October 1, 2018, Allied Luxembourg S.a.r.l, a wholly-owned subsidiary of the Company acquired all of the outstanding stock of Vergokan International NV ("Vergokan") for a purchase price of $57,899, net of cash received. Vergokan is a leading manufacturer of cable tray and cable ladder systems, underfloor installations and industrial floor trunking that serves industrial, power and energy, commercial and infrastructure sectors in more than 45 countries. This transaction provides Atkore with an expanded presence in Western Europe and strengthens the Company's electrical portfolio of cable management products within the Electrical Raceway segment.
All the above acquisitions were funded with cash on hand. The condensed consolidated financial statements include the results of the acquired companies from the acquisition date. Due to the immaterial nature of these acquisitions, both individually, and in the aggregate, the Company did not include the full year pro forma results of operations for the acquisition year or previous years.
The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed, based on their fair values. The following table summarizes the Level 3 fair values assigned to the net assets acquired and liabilities assumed as of the acquisition date for fiscal 2019:
(in thousands) | Vergokan | Other | Total | |||||||||
Fair value of consideration transferred: | ||||||||||||
Cash consideration | $ | 58,728 | $ | 41,641 | $ | 100,369 | ||||||
Other liability consideration | — | 1,400 | $ | 1,400 | ||||||||
Total consideration transferred | 58,728 | 43,041 | 101,769 | |||||||||
Fair value of assets acquired and liabilities assumed: | ||||||||||||
Cash | 829 | 1,541 | 2,370 | |||||||||
Accounts receivable | 8,761 | 8,217 | 16,978 | |||||||||
Inventories | 11,434 | 7,494 | 18,928 | |||||||||
Intangible assets | 12,621 | 16,400 | 29,021 | |||||||||
Fixed assets | 32,490 | 19,298 | 51,788 | |||||||||
Accounts payable | (18,716 | ) | (7,608 | ) | (26,324 | ) | ||||||
Gain on purchase of business | — | (7,384 | ) | (7,384 | ) | |||||||
Other | 1,680 | (3,412 | ) | (1,732 | ) | |||||||
Net assets acquired | 49,099 | 34,546 | 83,645 | |||||||||
Excess purchase price attributed to goodwill acquired | $ | 9,629 | $ | 8,495 | $ | 18,124 | ||||||
The following table summarizes the fair value of intangible assets as of the acquisition date:
Vergokan | Other | |||||||||||
($ in thousands) | Fair Value | Weighted Average Useful Life (Years) | Fair Value | Weighted Average Useful Life (Years) | ||||||||
Customer relationships | $ | 10,535 | 12.0 | $ | 15,400 | 10.0 | ||||||
Other | 2,086 | 9.0 | 1,000 | 9.0 | ||||||||
Total intangible assets | $ | 12,621 | $ | 16,400 | ||||||||
The purchase price allocation, intangible asset values and related estimates of useful lives for all 2019 acquisitions have been finalized as of December 27, 2019.
13
5. POSTRETIREMENT BENEFITS
The Company provides pension benefits through a number of noncontributory and contributory defined benefit retirement plans covering eligible U.S. employees. As of September 30, 2017, all defined pension benefit plans were frozen, whereby participants no longer accrue credited service. The net periodic benefit credit was as follows:
Three months ended | Six months ended | |||||||||||||||||
(in thousands) | Note | March 27, 2020 | March 29, 2019 | March 27, 2020 | March 29, 2019 | |||||||||||||
Interest cost | $ | 935 | $ | 1,166 | $ | 1,870 | $ | 2,332 | ||||||||||
Expected return on plan assets | (1,583 | ) | (1,593 | ) | (3,166 | ) | (3,186 | ) | ||||||||||
Amortization of actuarial loss | 222 | 25 | 444 | 50 | ||||||||||||||
Net periodic benefit credit | 7 | $ | (426 | ) | $ | (402 | ) | $ | (852 | ) | $ | (804 | ) | |||||
6. RESTRUCTURING CHARGES
The liability for restructuring reserves is included within other current liabilities in the Company's condensed consolidated balance sheets as follows:
Electrical Raceway | MP&S | Other/Corporate | |||||||||||||||||||||
(in thousands) | Severance (a) | Other (b) | Severance (a) | Other | Severance (a) | Total | |||||||||||||||||
Balance as of September 30, 2018 | $ | 212 | $ | 310 | $ | — | $ | 29 | $ | — | $ | 551 | |||||||||||
Charges | 1,047 | 2,544 | 213 | — | — | 3,804 | |||||||||||||||||
Utilization | (867 | ) | (2,854 | ) | (68 | ) | (29 | ) | — | (3,818 | ) | ||||||||||||
Balance as of September 30, 2019 | 392 | — | 145 | — | — | 537 | |||||||||||||||||
Charges | 1,116 | 1,283 | 398 | — | 68 | 2,865 | |||||||||||||||||
Utilization | (228 | ) | (1,283 | ) | (131 | ) | — | — | (1,642 | ) | |||||||||||||
Exchange rate effects | 5 | — | — | — | — | 5 | |||||||||||||||||
Balance as of March 27, 2020 | $ | 1,285 | $ | — | $ | 412 | $ | — | $ | 68 | $ | 1,765 | |||||||||||
(a) Charges for the three and six months ended March 27, 2020 include a $1,570 charge for a reduction in force implemented as part of adjusting to the macroeconomic impacts related to the outbreak of the novel coronavirus (COVID-19).
(b) Primarily related to Atkore's commitment to close certain facilities as part of its continuing effort to realign its strategic focus. The Company recorded other restructuring charges to close facilities of $1,283 and $1,834 for the six months ended March 27, 2020 and March 29, 2019, respectively, and for the three months ended March 27, 2020 and March 29, 2019 the company recorded $1,075 and $759 respectively.
The Company expects to utilize all restructuring accruals as of March 27, 2020 within the next twelve months. The net restructuring charges included as a component of selling, general and administrative expenses in the Company's condensed consolidated statements of operations were as follows:
Three months ended | Six months ended | ||||||||||||||
(in thousands) | March 27, 2020 | March 29, 2019 | March 27, 2020 | March 29, 2019 | |||||||||||
Total restructuring charges, net | $ | 2,645 | $ | 1,085 | $ | 2,865 | $ | 2,472 | |||||||
14
7. OTHER INCOME, NET
Other income, net consisted of the following:
Three months ended | Six months ended | |||||||||||||||
(in thousands) | March 27, 2020 | March 29, 2019 | March 27, 2020 | March 29, 2019 | ||||||||||||
Undesignated foreign currency derivative instruments | $ | (3,666 | ) | $ | 1,112 | $ | (543 | ) | $ | (1,467 | ) | |||||
Foreign exchange (gain) loss on intercompany loans | 2,407 | (1,318 | ) | (524 | ) | 63 | ||||||||||
Pension-related benefits | (426 | ) | (402 | ) | (852 | ) | (804 | ) | ||||||||
Other | — | 14 | — | 14 | ||||||||||||
Other income, net | $ | (1,685 | ) | $ | (594 | ) | $ | (1,919 | ) | $ | (2,194 | ) | ||||
8. INCOME TAXES
On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions related to refundable payroll tax credits, deferment of the employer portion of social security payments, net operating loss carryback periods, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. While we are still assessing the impact of the legislation, we do not expect there to be a material impact to our consolidated financial statements at this time.
For the three months ended March 27, 2020 and March 29, 2019, the Company's effective tax rate attributable to income before income taxes was 25.1% and 25.8%, respectively. For the three months ended March 27, 2020 and March 29, 2019, the Company's income tax expense was $13,100 and $10,253 respectively. The decrease in the current period effective tax rate was primarily due to an increase in the excess tax benefit associated with stock compensation.
For the six months ended March 27, 2020 and March 29, 2019, the Company's effective tax rate attributable to income before income taxes was 21.6% and 24.6%, respectively. For the six months ended March 27, 2020 and March 29, 2019, the Company's income tax expense was $20,440 and $18,407 respectively. The decrease in the current period effective tax rate was primarily due to an increase in the excess tax benefit associated with stock compensation.
A valuation allowance has been recorded against certain net operating losses in certain foreign jurisdictions. A valuation allowance is recorded when it is determined to be more likely than not that these assets will not be fully realized in the foreseeable future. The realization of deferred tax assets is dependent upon whether the Company can generate future taxable income in the appropriate character and jurisdiction to utilize the assets. The amount of the deferred tax assets considered realizable is subject to adjustment in future periods.
The Company recognizes the benefits of uncertain tax positions taken or expected to be taken in tax returns in the provision for income taxes only for those positions that we have determined are more likely than not to be realized upon examination. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the six months ended March 27, 2020, the balance of unrecognized tax benefits decreased by $108 upon the resolution of a state audit item.
For the six months ended March 27, 2020, the Company made no additional provision for U.S. or non-U.S. income taxes for unrecognized deferred tax liabilities for temporary differences related to basis differences in investments in subsidiaries, as the investments are essentially permanent in duration.
15
9. EARNINGS PER SHARE
The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating securities as if all of the net earnings for the period had been distributed. The Company's participating securities consist of share-based payment awards that contain a non-forfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common stockholders.
Basic earnings per common share excludes dilution and is calculated by dividing the net earnings allocable to common stock by the weighted-average number of common stock outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocated to common stock by the weighted-average number of shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended | Six months ended | |||||||||||||||
(in thousands, except per share data) | March 27, 2020 | March 29, 2019 | March 27, 2020 | March 29, 2019 | ||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 39,193 | $ | 29,555 | $ | 73,983 | $ | 56,504 | ||||||||
Less: Undistributed earnings allocated to participating securities | 853 | 857 | 1,719 | 1,507 | ||||||||||||
Net income available to common shareholders | $ | 38,340 | $ | 28,698 | $ | 72,264 | $ | 54,997 | ||||||||
Denominator: | ||||||||||||||||
Basic weighted average common shares outstanding | 47,404 | 46,079 | 47,268 | 46,529 | ||||||||||||
Effect of dilutive securities: Non-participating employee stock options (1) | 691 | 1,290 | 961 | 1,288 | ||||||||||||
Diluted weighted average common shares outstanding | 48,095 | 47,369 | 48,229 | 47,817 | ||||||||||||
Basic earnings per share | $ | 0.81 | $ | 0.62 | $ | 1.53 | $ | 1.18 | ||||||||
Diluted earnings per share | $ | 0.80 | $ | 0.61 | $ | 1.50 | $ | 1.15 | ||||||||
(1) Stock options to purchase approximately 0.3 million and 0.4 million shares of common stock were outstanding during the three months ended March 27, 2020 and March 29, 2019, respectively, but were not included in the calculation of diluted earnings per share as the impact of these options would have been anti-dilutive. Stock options to purchase approximately 0.1 million and 0.5 million shares of common stock were outstanding during the six months ended March 27, 2020 and March 29, 2019, respectively, but were not included in the calculation of diluted earnings per share as the impact of these options would have been anti-dilutive. | ||||||||||||||||
16
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive loss by component for the three months ended March 27, 2020 and March 29, 2019.
(in thousands) | Defined benefit pension items | Currency translation adjustments | Total | |||||||||
Balance as of September 30, 2019 | $ | (23,818 | ) | $ | (17,880 | ) | $ | (41,698 | ) | |||
Other comprehensive loss before reclassifications | — | (1,120 | ) | (1,120 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | 433 | — | 433 | |||||||||
Net current period other comprehensive income (loss) | 433 | (1,120 | ) | (687 | ) | |||||||
Balance as of March 27, 2020 | $ | (23,385 | ) | $ | (19,000 | ) | $ | (42,385 | ) | |||
(in thousands) | Defined benefit pension items | Currency translation adjustments | Total | |||||||||
Balance as of September 30, 2018 | $ | (6,048 | ) | $ | (10,390 | ) | $ | (16,438 | ) | |||
Other comprehensive loss before reclassifications | — | (1,794 | ) | (1,794 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | 40 | — | 40 | |||||||||
Net current period other comprehensive income (loss) | 40 | (1,794 | ) | (1,754 | ) | |||||||
Reclassification of stranded tax benefits (1) | (2,333 | ) | — | (2,333 | ) | |||||||
Balance as of March 29, 2019 | $ | (8,341 | ) | $ | (12,184 | ) | $ | (20,525 | ) | |||
(1) Due to the adoption of ASU 2018-02. | ||||||||||||
The following table presents the changes in accumulated other comprehensive loss by component for the six months ended March 27, 2020 and March 29, 2019.
(in thousands) | Defined benefit pension items | Currency translation adjustments | Total | |||||||||
Balance as of December 27, 2019 | $ | (23,611 | ) | $ | (12,771 | ) | $ | (36,382 | ) | |||
Other comprehensive loss before reclassifications | — | (6,229 | ) | (6,229 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | 226 | — | 226 | |||||||||
Net current period other comprehensive income (loss) | 226 | (6,229 | ) | (6,003 | ) | |||||||
Balance as of March 27, 2020 | $ | (23,385 | ) | $ | (19,000 | ) | $ | (42,385 | ) | |||
17
(in thousands) | Defined benefit pension items | Currency translation adjustments | Total | |||||||||
Balance as of December 28, 2018 | $ | (6,023 | ) | $ | (13,136 | ) | $ | (19,159 | ) | |||
Other comprehensive loss before reclassifications | — | 952 | 952 | |||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | 15 | — | 15 | |||||||||
Net current period other comprehensive income (loss) | 15 | 952 | 967 | |||||||||
Reclassification of stranded tax benefits (1) | (2,333 | ) | — | (2,333 | ) | |||||||
Balance as of March 29, 2019 | $ | (8,341 | ) | $ | (12,184 | ) | $ | (20,525 | ) | |||
(1) Due to the adoption of ASU 2018-02. | ||||||||||||
11. INVENTORIES, NET
A majority of the Company's inventories are recorded at the lower of cost (primarily last in, first out, or "LIFO") or market. Approximately 75% and 72% of the Company's inventories were valued at the lower of LIFO cost or market at March 27, 2020 and September 30, 2019, respectively. Interim LIFO determinations, including those at March 27, 2020, are based on management's estimates of future inventory levels and costs for the remainder of the current fiscal year.
(in thousands) | March 27, 2020 | September 30, 2019 | |||||
Purchased materials and manufactured parts, net | $ | 54,173 | $ | 52,742 | |||
Work in process, net | 22,461 | 21,424 | |||||
Finished goods, net | 169,601 | 151,924 | |||||
Inventories, net | $ | 246,235 | $ | 226,090 | |||
Total inventories would be $1,938 and $3,138 higher than reported as of March 27, 2020 and September 30, 2019, respectively, if the first-in, first-out method was used for all inventories. As of March 27, 2020, and September 30, 2019, the excess and obsolete inventory reserve was $12,946 and $14,295, respectively.
12. PROPERTY, PLANT AND EQUIPMENT
As of March 27, 2020, and September 30, 2019, property, plant and equipment at cost and accumulated depreciation were as follows:
(in thousands) | March 27, 2020 | September 30, 2019 | |||||
Land | $ | 20,053 | $ | 19,897 | |||
Buildings and related improvements | 128,511 | 127,061 | |||||
Machinery and equipment | 317,399 | 318,421 | |||||
Leasehold improvements | 8,941 | 9,055 | |||||
Software | 25,974 | 24,835 | |||||
Construction in progress | 23,287 | 21,264 | |||||
Property, plant and equipment | 524,165 | 520,533 | |||||
Accumulated depreciation | (277,861 | ) | (259,830 | ) | |||
Property, plant and equipment, net | $ | 246,304 | $ | 260,703 | |||
Depreciation expense for the three months ended March 27, 2020 and March 29, 2019 totaled $10,407 and $10,084, respectively. Depreciation expense for the six months ended March 27, 2020 and March 29, 2019 totaled $21,024 and $19,891 respectively.
18
13. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill are as follows:
(in thousands) | Electrical Raceway | Mechanical Products & Solutions | Total | ||||||||
Balance as of October 1, 2019 | $ | 149,668 | $ | 36,563 | $ | 186,231 | |||||
Exchange rate effects | 548 | — | 548 | ||||||||
Balance as of March 27, 2020 | $ | 150,216 | $ | 36,563 | $ | 186,779 | |||||
Goodwill balances as of October 1, 2019 and March 27, 2020 include $3,924 and $43,000 of accumulated impairment losses within the Electrical Raceway and MP&S segments, respectively.
The Company assesses the recoverability of goodwill and indefinite-lived trade names on an annual basis in accordance with ASC 350, "Intangibles - Goodwill and Other." The measurement date is the first day of the fourth fiscal quarter, or more frequently, if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit or the respective indefinite-lived trade name is less than the carrying value.
The following table provides the gross carrying value, accumulated amortization and net carrying value for each major class of intangible assets:
March 27, 2020 | September 30, 2019 | ||||||||||||||||||||||||
($ in thousands) | Weighted Average Useful Life (Years) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||
Amortizable intangible assets: | |||||||||||||||||||||||||
Customer relationships | 11 | $ | 353,642 | $ | (186,994 | ) | $ | 166,648 | $ | 353,256 | $ | (171,777 | ) | $ | 181,479 | ||||||||||
Other | 7 | 19,086 | (8,732 | ) | 10,354 | 19,086 | (7,761 | ) | 11,325 | ||||||||||||||||
Total | 372,728 | (195,726 | ) | 177,002 | 372,342 | (179,538 | ) | 192,804 | |||||||||||||||||
Indefinite-lived intangible assets: | |||||||||||||||||||||||||
Trade names | 92,880 | — | 92,880 | 92,880 | — | 92,880 | |||||||||||||||||||
Total | $ | 465,608 | $ | (195,726 | ) | $ | 269,882 | $ | 465,222 | $ | (179,538 | ) | $ | 285,684 | |||||||||||
Other intangible assets consist of definite-lived trade names, technology, non-compete agreements and backlogs. Amortization expense for the three months ended March 27, 2020 and March 29, 2019 was $8,071 and $8,196, respectively. Amortization expense for the six months ended March 27, 2020 and March 29, 2019 was $16,184 and $16,410, respectively. Expected amortization expense for intangible assets for the remainder of fiscal 2020 and over the next five years and thereafter is as follows:
(in thousands) | ||||
Remaining 2020 | $ | 19,437 | ||
2021 | 31,999 | |||
2022 | 30,591 | |||
2023 | 30,539 | |||
2024 | 26,050 | |||
2025 | 13,437 | |||
Thereafter | 24,949 | |||
Actual amounts of amortization may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets and other events.
The Company considered whether the adverse economic impacts of the novel coronavirus (COVID-19) outbreak, which were developing during the three months ended March 27, 2020, would indicate whether it is more likely than not that the fair value of its reporting units or its indefinite lived intangible assets would be below the carrying value.
19
For a majority of the Company’s operations, the fair values of its related reporting units and indefinite lived intangible assets significantly exceeded their respective carrying values as of the most recent impairment testing period in July 2019. For these reporting units and the indefinite lived intangibles, the Company concluded that it was not more likely than not that the fair value of these reporting units or indefinite lived intangible assets was less than the carrying value and therefore there was not a triggering event requiring the performance of an impairment test.
The economic impacts of the COVID-19 outbreak were more substantial for the Company’s reporting unit related to its operations in Europe, Middle East, and Africa (EMEA), due to the cross-border transactions that occur within those operations, the cross-border interactions needed to fully realize the synergies associated with recent in-region acquisitions and the COVID-19 related closing of these borders. The Company deemed the economic related developments of the outbreak to be a triggering event for the EMEA reporting unit as of March 27, 2020 and performed an updated goodwill impairment test as of that date.
The Company calculated the fair value of its EMEA reporting unit considering three valuation approaches: (a) the income approach; (b) the guideline public company method; and (c) a market approach using a transaction analysis. The income approach calculates the fair value of the reporting unit using a discounted cash flow approach. Internally forecasted future cash flows, which the Company believes reasonably approximate market participant assumptions, are discounted using a weighted average cost of capital (Discount Rate) developed for the specific reporting unit. The Discount Rate is developed using market observable inputs, as well as considering whether or not there is a measure of risk related to the specific reporting unit’s forecasted performance. Fair value under the guideline public company method is determined for the unit by applying market multiples for comparable public companies to the unit’s financial results. The key uncertainties in the income approach and the guideline company method calculations are the assumptions used in determining the reporting unit’s forecasted future performance, including revenue growth and EBITDA margins, as well as the perceived risk associated with those forecasts, along with selecting representative market multiples. Fair value under the transactional analysis is determined based on exchange prices in actual transactions and on asking prices for controlling interests in public or private companies currently offered for sale by applying market multiples for comparable public companies to the unit’s financial results. The key uncertainties in the transactional analysis calculations are the assumptions used in determining the reporting unit's comparable public companies, comparable transactions and the selection of the market multiples.
The EMEA reporting unit’s impairment test revealed that its fair value was greater than carrying value by an amount of less than 10%. The goodwill allocated to the EMEA reporting unit as of March 27, 2020 was $35,029. As a result, the impairment analysis is sensitive to changes in both business and valuation assumptions. Changes to these assumptions could result in revisions of management's estimates of the fair value of the reporting unit and could result in impairment charges in the future, which could be material to the Company's results of operations. The Company will continue to monitor for such changes in facts or circumstances. Goodwill impairment charges may be recognized in future periods to the extent changes in facts or circumstances occur, including deterioration in the macroeconomic environment, industry, and deterioration in the Company's performance or its future projections.
14. DEBT
Debt as of March 27, 2020 and September 30, 2019 was as follows:
(in thousands) | March 27, 2020 | September 30, 2019 | |||||
First Lien Term Loan Facility due December 22, 2023 | $ | 851,451 | $ | 851,361 | |||
Deferred financing costs | (5,757 | ) | (6,569 | ) | |||
Other | — | 525 | |||||
Total debt | $ | 845,694 | $ | 845,317 | |||
Less: Current portion | — | — | |||||
Long-term debt | $ | 845,694 | $ | 845,317 | |||
The asset-based credit facility (the "ABL Credit Facility") has aggregate commitments of $325,000 and is guaranteed by AIH and the U.S. operating companies owned by AII. AII's availability under the ABL Credit Facility was $298,226 and $301,882 as of March 27, 2020 and September 30, 2019, respectively.
15. FAIR VALUE MEASUREMENTS
20
Certain assets and liabilities are required to be recorded at fair value on a recurring basis.
The Company uses forward currency contracts to hedge the effects of foreign exchange relating to certain of the Company’s intercompany balances denominated in a foreign currency. These derivative instruments are not formally designated as hedges by the Company and the terms of these instruments range at inception from six months to five years. Short-term forward currency contracts are recorded in either other current assets or other current liabilities and long-term forward currency contracts are recorded in either other long-term assets or other long-term liabilities in the condensed consolidated balance sheet. The fair value gains and losses are included in other income, net within the condensed consolidated statements of operations. See Note 7, ''Other Income, net'' for further detail.
The total notional amounts of undesignated forward currency contracts were £44.1 million and £45.0 million as of March 27, 2020 and September 30, 2019, respectively. Cash flows associated with derivative financial instruments are recognized in the operating section of the condensed consolidated statements of cash flows. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.
The following table presents the Company's assets and liabilities measured at fair value:
March 27, 2020 | September 30, 2019 | |||||||||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash equivalents | $ | 83,235 | $ | — | $ | — | $ | 72,132 | $ | — | $ | — | ||||||||||||
Forward currency contracts | — | 4,089 | — | — | 3,420 | — | ||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Forward currency contracts | — | 134 | — | — | — | — | ||||||||||||||||||
The Company's remaining financial instruments consist primarily of cash, accounts receivable and accounts payable whose carrying value approximate their fair value due to their short-term nature.
The estimated fair value of financial instruments not carried at fair value in the condensed consolidated balance sheets were as follows:
March 27, 2020 | September 30, 2019 | |||||||||||||||
(in thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
First Lien Term Loan Facility due December 22, 2023 | $ | 852,120 | $ | 695,543 | $ | 852,120 | $ | 853,543 | ||||||||
In determining the approximate fair value of its long-term debt, the Company used the trading values among financial institutions, and these values fall within Level 2 of the fair value hierarchy. The carrying value of the ABL Credit Facility approximates fair value due to it being a market-linked variable rate debt.
16. COMMITMENTS AND CONTINGENCIES
The Company has obligations related to commitments to purchase certain goods. As of March 27, 2020, such obligations were $167,507 for the rest of fiscal year 2020 and $4,722 for fiscal year 2021 and beyond. These amounts represent open purchase orders for materials used in production.
Legal Contingencies —The Company is a defendant in a number of pending legal proceedings, some of which were inherited from its former parent, Tyco International Ltd. ("Tyco"), including certain product liability claims. Several lawsuits have been filed against the Company and the Company has also received other claim demand letters alleging that the Company's anti-microbial coated steel sprinkler pipe, which the Company has not manufactured or sold for several years, is incompatible with chlorinated polyvinyl chloride and caused stress cracking in such pipe manufactured by third parties when installed together in the same sprinkler system, which the Company refers to collectively as the "Special Products Claims." After an analysis of claims experience, the Company reserved its best estimate of the probable and reasonably estimable losses related to these matters. The Company's total product liability reserves for Special Products Claims and other product liability matters were $746 and $2,424 as of March 27, 2020 and September 30, 2019, respectively. As of March 27, 2020, the Company believes that the range of reasonably possible losses for Special Products Claims and other product liabilities is between $1,000 and $8,000.
21
During fiscal 2019, Tyco and the Company agreed with a plaintiff to settle one Special Products Claim that was to go to trial. The Company agreed to fund the total settlement in exchange for Tyco's agreement to cap the Company's Special Products Claim deductible at $12,000, as opposed to the $13,000 cap negotiated within the original indemnity agreement. In conjunction with the payment of that settlement, Tyco and the Company examined the Company's total Special Products Claim payments and agreed that with that settlement payment and payment of a few other legal fee invoices, all of which have now been paid, the Company had met its $12,000 deductible obligation related to these Special Products Claims. Tyco, now Johnson Controls, Inc. ("JCI"), has a contractual obligation to indemnify the Company in respect of all remaining and future claims of incompatibility between the Company's antimicrobial coated steel sprinkler pipe and CPVC pipe used in the same sprinkler system. Tyco has defended and indemnified the Company on Special Products Claims as required.
At this time, the Company does not expect the outcome of the Special Products Claims proceedings, either individually or in the aggregate, to have a material adverse effect on its business, financial condition, results of operations or cash flows, and the Company believes that its reserves are adequate for all remaining contingencies for Special Products Claims.
During the three months ended March 27, 2020, one of the Company’s manufacturing facilities experienced a flood which resulted in damages to certain property, plant and equipment. This facility is covered under the Company’s property and casualty loss and business interruption insurance policies. The Company is currently in the process of finalizing its estimates related to the property, plant and equipment losses incurred. The range of loss is currently estimated to be between $4,560 and $13,000. This range excludes any amounts related to business interruption losses. The Company believes that, other than the $1,000 deductible expense under the related insurance claim, it will be reimbursed for substantially all other property, plant and equipment losses in connection with the event under its current insurance policies. The Company has recorded an estimated loss of $4,560 with a related insurance recovery of $3,560 within selling, general and administrative expenses in its condensed consolidated statements of operations for the three and six months ended March 27, 2020.
In addition to the matters discussed above, from time to time, the Company is subject to a number of disputes, administrative proceedings and other claims arising out of the ordinary conduct of the Company's business. These matters generally relate to disputes arising out of the use or installation of the Company's products, product liability litigation, contract disputes, patent infringement accusations, employment matters, personal injury claims and similar matters. On the basis of information currently available to the Company, it does not believe that existing proceedings and claims will have a material adverse effect on its business, financial condition, results of operations or cash flows. However, litigation is unpredictable, and the Company could incur judgments or enter into settlements for current or future claims that could adversely affect its business, financial condition, results of operations or cash flows.
17. GUARANTEES
The Company had outstanding letters of credit totaling $9,501 supporting workers' compensation and general liability insurance policies as of March 27, 2020. The Company also had surety bonds primarily related to performance guarantees on supply agreements and construction contracts, and payment of duties and taxes totaling $18,456 as of March 27, 2020.
In disposing of assets or businesses, the Company often provides representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. The Company does not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, the Company has no reason to believe that these uncertainties would have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.
In the normal course of business, the Company is liable for product performance and contract completion. In the opinion of management, such obligations will not have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.
22
18. SEGMENT INFORMATION
The Company has two operating segments, which are also its reportable segments. The Company's operating segments are organized based upon primary market channels and, in most instances, the end use of products.
Through its Electrical Raceway segment, the Company manufactures products that deploy, isolate and protect a structure's electrical circuitry from the original power source to the final outlet. These products, which include electrical conduit, armored cable, cable trays, mounting systems and fittings, are critical components of the electrical infrastructure for maintenance, repair and remodel markets. The vast majority of the Company's Electrical Raceway net sales are made to electrical distributors, who then serve electrical contractors and the Company considers both to be customers.
Through the MP&S segment, the Company provides products and services that frame, support and secure component parts in a broad range of structures, equipment and systems in electrical, industrial and construction applications. The Company's principal products in this segment are metal framing products and in-line galvanized mechanical tube. Through its metal framing business, the Company designs, manufactures and installs metal strut and fittings used to assemble mounting structures that support heavy equipment and electrical content in buildings and other structures.
Both segments use Adjusted EBITDA as the primary measure of profit and loss. Segment Adjusted EBITDA is the sum of income (loss) before income taxes, adjusted to exclude unallocated expenses, depreciation and amortization, interest expense, net, restructuring charges, stock-based compensation, certain legal matters, transaction costs and other items, such as inventory reserves and adjustments, release of indemnified uncertain tax positions, and the impact of foreign exchange gains or losses.
Intersegment transactions primarily consist of product sales at designated transfer prices on an arm's-length basis. Gross profit earned and reported within the segment is eliminated in the Company's consolidated results. Certain manufacturing and distribution expenses are allocated between the segments on a pro rata basis due to the shared nature of activities. Recorded amounts represent a proportional amount of the quantity of product produced for each segment. Certain assets, such as machinery and equipment and facilities, are not allocated to each segment despite serving both segments. These shared assets are reported within the MP&S segment. We allocate certain corporate operating expenses that directly benefit our operating segments, such as insurance and information technology, on a basis that reasonably approximates an estimate of the use of these services.
Three months ended | |||||||||||||||||||||||
March 27, 2020 | March 29, 2019 | ||||||||||||||||||||||
(in thousands) | External Net Sales | Intersegment Sales | Adjusted EBITDA | External Net Sales | Intersegment Sales | Adjusted EBITDA | |||||||||||||||||
Electrical Raceway | $ | 339,005 | $ | 700 | $ | 78,954 | $ | 353,119 | $ | 395 | $ | 67,375 | |||||||||||
MP&S | 116,649 | — | 16,144 | 116,190 | — | 17,421 | |||||||||||||||||
Eliminations | — | (700 | ) | — | (395 | ) | |||||||||||||||||
Consolidated operations | $ | 455,654 | $ | — | $ | 469,309 | $ | — | |||||||||||||||
Six months ended | |||||||||||||||||||||||
March 27, 2020 | March 29, 2019 | ||||||||||||||||||||||
(in thousands) | External Net Sales | Intersegment Sales | Adjusted EBITDA | External Net Sales | Intersegment Sales | Adjusted EBITDA | |||||||||||||||||
Electrical Raceway | $ | 679,793 | $ | 1,288 | $ | 149,175 | $ | 696,334 | $ | 586 | $ | 135,864 | |||||||||||
MP&S | 223,309 | — | 32,798 | 225,003 | — | 28,308 | |||||||||||||||||
Eliminations | — | (1,288 | ) | — | (586 | ) | |||||||||||||||||
Consolidated operations | $ | 903,102 | $ | — | $ | 921,337 | $ | — | |||||||||||||||
23
Presented below is a reconciliation of operating segment Adjusted EBITDA to Income before income taxes:
Three months ended | Six months ended | ||||||||||||||||
(in thousands) | March 27, 2020 | March 29, 2019 | March 27, 2020 | March 29, 2019 | |||||||||||||
Operating segment Adjusted EBITDA | |||||||||||||||||
Electrical Raceway | $ | 78,954 | $ | 67,375 | $ | 149,175 | $ | 135,864 | |||||||||
MP&S | 16,144 | 17,421 | 32,798 | 28,308 | |||||||||||||
Total | 95,098 | 84,796 | 181,973 | 164,172 | |||||||||||||
Unallocated expenses (a) | (8,092 | ) | (7,702 | ) | (17,257 | ) | (17,055 | ) | |||||||||
Depreciation and amortization | (18,478 | ) | (18,280 | ) | (37,208 | ) | (36,301 | ) | |||||||||
Interest expense, net | (10,564 | ) | (13,328 | ) | (21,184 | ) | (25,488 | ) | |||||||||
Restructuring charges | (2,645 | ) | (1,085 | ) | (2,865 | ) | (2,472 | ) | |||||||||
Stock-based compensation | (4,523 | ) | (1,834 | ) | (7,646 | ) | (4,816 | ) | |||||||||
Transaction costs | (6 | ) | (123 | ) | (57 | ) | (287 | ) | |||||||||
Other (b) | 1,503 | (2,636 | ) | (1,333 | ) | (2,842 | ) | ||||||||||
Income before income taxes | $ | 52,293 | $ | 39,808 | $ | 94,423 | $ | 74,911 | |||||||||
(a) Represents unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, human resources, information technology, business development and communications, as well as certain costs and earnings of employee-related benefits plans, such as stock-based compensation and a portion of self-insured medical costs.
(b) Represents other items, such as inventory reserves and adjustments, realized or unrealized gain (loss) on foreign currency transactions, loss on disposal of property, plant and equipment, insurance recovery related to damages of property, plant and equipment and release of certain indemnified uncertain tax positions.
The Company's net sales by geography were as follows for the six months ended March 27, 2020 and March 29, 2019:
Three months ended | Six months ended | |||||||||||||||
(in thousands) | March 27, 2020 | March 29, 2019 | March 27, 2020 | March 29, 2019 | ||||||||||||
United States | $ | 401,055 | $ | 408,007 | $ | 797,195 | $ | 803,635 | ||||||||
Other Americas | 7,655 | 8,977 | 14,242 | 18,209 | ||||||||||||
Europe | 37,241 | 38,808 | 69,327 | 72,670 | ||||||||||||
Asia-Pacific | 9,703 | 13,517 | 22,338 | 26,823 | ||||||||||||
Total | $ | 455,654 | $ | 469,309 | $ | 903,102 | $ | 921,337 | ||||||||
24
The table below shows the amount of net sales from external customers for each of the Company's product categories which accounted for 10% or more of consolidated net sales in either period for the six months ended March 27, 2020 and March 29, 2019:
Three months ended | Six months ended | |||||||||||||||
(in thousands) | March 27, 2020 | March 29, 2019 | March 27, 2020 | March 29, 2019 | ||||||||||||
Metal Electrical Conduit and Fittings | $ | 125,609 | $ | 134,131 | $ | 249,451 | 265,378 | |||||||||
Armored Cable and Fittings | 82,615 | 88,629 | 166,438 | 172,973 | ||||||||||||
PVC Electrical Conduit and Fittings | 71,341 | 66,183 | 144,229 | 134,416 | ||||||||||||
Cable Tray and Cable Ladders | 51,103 | 51,138 | 101,349 | 96,912 | ||||||||||||
Other raceway products | 8,337 | 13,038 | 18,326 | 26,655 | ||||||||||||
Electrical Raceway | 339,005 | 353,119 | 679,793 | 696,334 | ||||||||||||
Mechanical Pipe | 65,694 | 62,039 | 124,025 | 122,707 | ||||||||||||
Metal Framing and Fittings | 30,676 | 30,450 | 58,533 | 59,061 | ||||||||||||
Other MP&S products | 20,279 | 23,701 | 40,751 | 43,235 | ||||||||||||
MP&S | 116,649 | 116,190 | 223,309 | 225,003 | ||||||||||||
Net sales | $ | 455,654 | $ | 469,309 | $ | 903,102 | $ | 921,337 | ||||||||
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward- looking statements. Factors that could cause or contribute to these differences include those factors discussed below and included or referenced elsewhere in this report, particularly in the sections entitled "Forward-Looking Statements" and "Risk Factors".
Recent Developments
The recent outbreak of the novel coronavirus (COVID-19) has continued to spread and is currently classified as a pandemic which is contributing to significant volatility and uncertainty in markets and the global economy. This heightened volatility and uncertainty makes it difficult for us to predict the extent of COVID-19’s impact on our operations going forward.
As of the date of this filing, we have seen some order softness in our business, but it is too early to make any judgment on how significant this will become. Factors that contribute to our ability to adjust to the outbreak include currently being deemed an “essential business”, benefiting from mostly localized supply chains, and continuing to take actions within our control to minimize the disruptive impacts of the outbreak. However, there can be no assurance that we will not be materially and adversely impacted in the future.
Results of Operations
The results of operations for the three months ended March 27, 2020 and March 29, 2019 were as follows:
Three months ended | ||||||||||||||
($ in thousands) | March 27, 2020 | March 29, 2019 | Change | % Change | ||||||||||
Net sales | $ | 455,654 | $ | 469,309 | $ | (13,655 | ) | (2.9 | )% | |||||
Cost of sales | 324,051 | 352,221 | (28,170 | ) | (8.0 | )% | ||||||||
Gross profit | 131,603 | 117,088 | 14,515 | 12.4 | % | |||||||||
Selling, general and administrative | 62,360 | 56,350 | 6,010 | 10.7 | % | |||||||||
Intangible asset amortization | 8,071 | 8,196 | (125 | ) | (1.5 | )% | ||||||||
Operating income | 61,172 | 52,542 | 8,630 | 16.4 | % | |||||||||
Interest expense, net | 10,564 | 13,328 | (2,764 | ) | (20.7 | )% | ||||||||
Other income, net | (1,685 | ) | (594 | ) | (1,091 | ) | 183.7 | % | ||||||
Income before income taxes | 52,293 | 39,808 | 12,485 | 31.4 | % | |||||||||
Income tax expense | 13,100 | 10,253 | 2,847 | 27.8 | % | |||||||||
Net income | $ | 39,193 | $ | 29,555 | $ | 9,638 | 32.6 | % | ||||||
Net sales
% Change | |||
Volume | (0.8 | )% | |
Average selling prices | (4.0 | )% | |
Foreign exchange | (0.3 | )% | |
Acquisitions | 2.3 | % | |
Other | (0.1 | )% | |
Net sales | (2.9 | )% | |
Net sales decreased by $13.7 million, or 2.9%, to $455.7 million for the three months ended March 27, 2020, compared to $469.3 million for the three months ended March 29, 2019. The decrease is primarily attributed to $18.6 million of lower average selling prices resulting from lower commodity input costs of steel and resin. Additionally, net sales decreased by $3.6 million due to lower volume, primarily in the armored cable and fittings product category sold within the Electrical Raceway segment, partially offset by higher volume in the mechanical pipe product category sold within the Mechanical
26
Products & Solutions segment. The decrease in net sales was partially offset by increased sales of $10.6 million from the acquisition of the assets of United Structural Products, LLC. ("US Tray") and Rocky Mountain Pipe ("Cor-Tek") and the acquisition of Flytec Systems Ltd. and its parent holding company, Modern Associates Ltd., in fiscal 2019 (together, the "2019 acquisitions").
Cost of sales
% Change | |||
Volume | (1.1 | )% | |
Average input costs | (8.5 | )% | |
Foreign exchange | (0.3 | )% | |
Acquisitions | 2.5 | % | |
Other | (0.6 | )% | |
Cost of sales | (8.0 | )% | |
Cost of sales decreased by $28.2 million, or 8.0%, to $324.1 million for the three months ended March 27, 2020 compared to $352.2 million for the three months ended March 29, 2019. The decrease was primarily due to the lower input costs of steel and resin of $29.8 million, lower volume of $4.0 million, and $3.6 million from inventory adjustments related to changes in market prices. The decrease in cost of sales is partially offset by incremental costs of $9.0 million due to the 2019 acquisitions.
Selling, general and administrative
Selling, general and administrative expenses increased by $6.0 million, or 10.7%, to $62.4 million for the three months ended March 27, 2020 compared to $56.4 million for the three months ended March 29, 2019. The increase was primarily due to higher stock compensation expense of $2.7 million, incremental costs resulting from fiscal 2019 acquisitions of $2.3 million, and higher restructuring costs of $1.6 million.
Intangible asset amortization
Intangible asset amortization expense decreased by $0.1 million, or 1.5%, to $8.1 million for the three months ended March 27, 2020 compared to $8.2 million for the three months ended March 29, 2019. The decrease in intangible asset amortization is primarily due to certain assets that reached the end of their amortized lives by the conclusion of fiscal 2019, partially offset by additional amortization resulting from fiscal 2019 acquisitions.
Interest expense, net
Interest expense, net decreased by $2.8 million, or 20.7% to $10.6 million for the three months ended March 27, 2020 compared to $13.3 million for the three months ended March 29, 2019. The decrease is primarily due to the Company's principal payments in fiscal 2019 resulting in a lower principal balance in fiscal 2020 from which interest expense was derived.
Other income, net
Other income, net increased by $1.1 million to $1.7 million for the three months ended March 27, 2020 compared to $0.6 million for the three months ended March 29, 2019 primarily due to gains from the Company's undesignated foreign currency derivative instruments partially offset by foreign exchange losses on intercompany loans.
Income tax expense
The Company's income tax rate decreased to 25.1% for the three months ended March 27, 2020 compared to 25.8% for the three months ended March 29, 2019. The decrease in the current period effective tax rate was primarily due to an increase in the excess tax benefit associated with stock compensation.
27
Segment results
Both segments use Adjusted EBITDA as the primary measure of profit and loss. Segment Adjusted EBITDA is the sum of income (loss) before income taxes, adjusted to exclude unallocated expenses, depreciation and amortization, interest expense, net, restructuring charges, stock-based compensation, certain legal matters, transaction costs and other items, such as inventory reserves and adjustments, release of indemnified uncertain tax positions, and the impact of foreign exchange gains or losses. We define segment Adjusted EBITDA margin as segment Adjusted EBITDA as a percentage of segment Net sales.
Electrical Raceway
Three months ended | |||||||||||||||
($ in thousands) | March 27, 2020 | March 29, 2019 | Change | % Change | |||||||||||
Net sales | $ | 339,705 | $ | 353,514 | $ | (13,809 | ) | (3.9 | )% | ||||||
Adjusted EBITDA | $ | 78,954 | $ | 67,375 | $ | 11,579 | 17.2 | % | |||||||
Adjusted EBITDA margin | 23.2 | % | 19.1 | % | |||||||||||
Net sales
% Change | |||
Volume | (3.8 | )% | |
Average selling prices | (2.7 | )% | |
Foreign exchange | (0.3 | )% | |
Acquisitions | 3.0 | % | |
Other | (0.1 | )% | |
Net sales | (3.9 | )% | |
Net sales decreased by $13.8 million, or 3.9%, to $339.7 million for the three months ended March 27, 2020 compared to $353.5 million for the three months ended March 29, 2019. The decrease in net sales is primarily driven by $13.5 million in lower volume, primarily in the armored cable and fitting product category, and lower average selling prices resulting from lower commodity input costs of steel and resin of $9.4 million. The decrease in net sales was partially offset by the 2019 acquisitions, which contributed $10.6 million in sales for the three months ended March 27, 2020.
Adjusted EBITDA
Adjusted EBITDA for the three months ended March 27, 2020 increased by $11.6 million, or 17.2%, to $79.0 million from $67.4 million for the three months ended March 29, 2019. Adjusted EBITDA margins increased to 23.2% for the three months ended March 27, 2020 compared to 19.1% for the three months ended March 29, 2019. The increase in Adjusted EBITDA was largely due to the benefit of lower material costs, operational efficiencies, and the contributions from the 2019 acquisitions.
Mechanical Products & Solutions
Three months ended | |||||||||||||||
($ in thousands) | March 27, 2020 | March 29, 2019 | Change | % Change | |||||||||||
Net sales | $ | 116,649 | $ | 116,190 | $ | 459 | 0.4 | % | |||||||
Adjusted EBITDA | $ | 16,144 | $ | 17,421 | $ | (1,277 | ) | (7.3 | )% | ||||||
Adjusted EBITDA margin | 13.8 | % | 15.0 | % | |||||||||||
28
Net sales
% Change | |||
Volume | 8.5 | % | |
Average selling prices | (7.9 | )% | |
Other | (0.2 | )% | |
Net sales | 0.4 | % | |
Net sales increased by $0.5 million, or 0.4%, for the three months ended March 27, 2020 to $116.6 million compared to $116.2 million for the three months ended March 29, 2019. The increase is primarily attributed to higher volume of $9.8 million primarily in the mechanical pipe product category, partially offset by the pass-through impact of lower average input costs of steel products of $9.2 million.
Adjusted EBITDA
Adjusted EBITDA decreased by $1.3 million, or 7.3%, to $16.1 million for the three months ended March 27, 2020 compared to $17.4 million for the three months ended March 29, 2019. Adjusted EBITDA margins decreased to 13.8% for the three months ended March 27, 2020 compared to 15.0% for the three months ended March 29, 2019. The Adjusted EBITDA decrease is primarily due to additional costs related to equipment maintenance at one of our facilities in the current period.
The results of operations for the six months ended March 27, 2020 and March 29, 2019 were as follows:
Six months ended | ||||||||||||||
($ in thousands) | March 27, 2020 | March 29, 2019 | Change | % Change | ||||||||||
Net sales | $ | 903,102 | $ | 921,337 | $ | (18,235 | ) | (2.0 | )% | |||||
Cost of sales | 654,655 | 693,993 | (39,338 | ) | (5.7 | )% | ||||||||
Gross profit | 248,447 | 227,344 | 21,103 | 9.3 | % | |||||||||
Selling, general and administrative | 118,575 | 112,729 | 5,846 | 5.2 | % | |||||||||
Intangible asset amortization | 16,184 | 16,410 | (226 | ) | (1.4 | )% | ||||||||
Operating income | 113,688 | 98,205 | 15,483 | 15.8 | % | |||||||||
Interest expense, net | 21,184 | 25,488 | (4,304 | ) | (16.9 | )% | ||||||||
Other income, net | (1,919 | ) | (2,194 | ) | 275 | (12.5 | )% | |||||||
Income before income taxes | 94,423 | 74,911 | 19,512 | 26.0 | % | |||||||||
Income tax expense | 20,440 | 18,407 | 2,033 | 11.0 | % | |||||||||
Net income | $ | 73,983 | $ | 56,504 | $ | 17,479 | 30.9 | % | ||||||
Net sales
% Change | |||
Volume | 1.3 | % | |
Average selling prices | (5.3 | )% | |
Foreign exchange | (0.2 | )% | |
Acquisitions | 2.5 | % | |
Other | (0.3 | )% | |
Net sales | (2.0 | )% | |
Net sales decreased by $18.2 million, or 2.0%, to $903.1 million for the six months ended March 27, 2020 compared to $921.3 million for the six months ended March 29, 2019. The decrease is primarily attributed to $48.7 million of lower average selling prices resulting from lower commodity input costs of steel and resin. The decrease in net sales was partially offset by increased sales of $23.0 million from the 2019 acquisitions and an increase in volume of $11.8 million primarily in the mechanical pipe product category sold within the Mechanical Products & Solutions segment.
29
Cost of sales
% Change | |||
Volume | 1.1 | % | |
Average input costs | (9.9 | )% | |
Foreign exchange | (0.2 | )% | |
Acquisitions | 2.7 | % | |
Other | 0.6 | % | |
Cost of sales | (5.7 | )% | |
Cost of sales decreased by $39.3 million, or 5.7% to $654.7 million for the six months ended March 27, 2020 compared to $694.0 million for the six months ended March 29, 2019. The decrease was primarily due to the lower input costs of steel and resin of $69.0 million. The decrease was partially offset by incremental costs related to the 2019 acquisitions of $19.0 million and higher volume of $7.5 million.
Selling, general and administrative
Selling, general and administrative expenses increased by $5.8 million, or 5.2% to $118.6 million for the six months ended March 27, 2020 compared to $112.7 million for the six months ended March 29, 2019. The increase was primarily due to $3.9 million increase in selling, general and administrative expenses resulting from the 2019 acquisitions and an increase of $2.9 million in stock-based compensation expense.
Intangible asset amortization
Intangible asset amortization expense decreased by $0.2 million, or 1.4% to $16.2 million for the six months ended March 27, 2020 compared to $16.4 million for the six months ended March 29, 2019. The decrease in intangible asset amortization is primarily due to certain assets that reached the end of their amortized lives by the conclusion of fiscal 2019, partially offset by additional amortization resulting from the fiscal 2019 acquisitions.
Interest expense, net
Interest expense, net, decreased by $4.3 million, or 16.9% to $21.2 million for the six months ended March 27, 2020 compared to $25.5 million for the six months ended March 29, 2019. The decrease is primarily due to the Company's principal payments in fiscal 2019 resulting in a lower principal balance in fiscal 2020 from which interest expense was derived.
Other income, net
Other income, net decreased by $0.3 million to $1.9 million for the six months ended March 27, 2020 compared to $2.2 million for the six months ended March 29, 2019 primarily due to lower gains from undesignated foreign currency derivative instruments, partially offset by foreign exchange gains on intercompany loans in the six months ended March 29, 2019.
Income tax expense
The Company's income tax rate decreased to 21.6% for the six months ended March 27, 2020 compared to 24.6% for the six months ended March 29, 2019. The decrease in the current period effective tax rate was primarily due to an increase in the excess tax benefit associated with stock compensation.
30
Electrical Raceway
Six months ended | |||||||||||||||
($ in thousands) | March 27, 2020 | March 29, 2019 | Change | % Change | |||||||||||
Net sales | $ | 681,081 | $ | 696,920 | $ | (15,839 | ) | (2.3 | )% | ||||||
Adjusted EBITDA | $ | 149,175 | $ | 135,864 | $ | 13,311 | 9.8 | % | |||||||
Adjusted EBITDA margin | 21.9 | % | 19.5 | % | |||||||||||
Net sales
% Change | |||
Volume | (1.0 | )% | |
Average selling prices | (4.1 | )% | |
Foreign exchange | (0.3 | )% | |
Acquisitions | 3.3 | % | |
Other | (0.2 | )% | |
Net sales | (2.3 | )% | |
Net sales decreased by $15.8 million, or 2.3%, to $681.1 million for the six months ended March 27, 2020 compared to $696.9 million for the six months ended March 29, 2019. The decrease in net sales is primarily driven by $28.6 million of lower average selling prices resulting from lower commodity input costs of steel and resin. Additionally, net sales decreased by $6.7 million due to lower volume, primarily in the armored cable and fitting product category. The decrease in net sales was partially offset by the 2019 acquisitions, which contributed $23.0 million in sales for the six months ended March 27, 2020.
Adjusted EBITDA
Adjusted EBITDA for the six months ended March 27, 2020 increased $13.3 million, or 9.8%, to $149.2 million from $135.9 million for the six months ended March 29, 2019. The increase was largely due to higher gross profit, operational efficiencies and incremental Adjusted EBITDA resulting from the 2019 acquisitions.
Mechanical Products & Solutions
Six months ended | |||||||||||||||
($ in thousands) | March 27, 2020 | March 29, 2019 | Change | % Change | |||||||||||
Net sales | $ | 223,309 | $ | 225,003 | $ | (1,694 | ) | (0.8 | )% | ||||||
Adjusted EBITDA | $ | 32,798 | $ | 28,308 | $ | 4,490 | 15.9 | % | |||||||
Adjusted EBITDA margin | 14.7 | % | 12.6 | % | |||||||||||
Net sales
Change (%) | |||
Volume | 8.3 | % | |
Average selling prices | (8.9 | )% | |
Other | (0.2 | )% | |
Net sales | (0.8 | )% | |
Net sales decreased by $1.7 million, or 0.8%, for the six months ended March 27, 2020 to $223.3 million compared to $225.0 million for the six months ended March 29, 2019. The decrease is primarily attributed to the pass-through impact of lower average input costs of steel products of $20.1 million, partially offset by higher volume of $18.6 million primarily in the mechanical pipe product category.
Adjusted EBITDA
31
Adjusted EBITDA increased $4.5 million, or 15.9%, to $32.8 million for the six months ended March 27, 2020 compared to $28.3 million for the six months ended March 29, 2019. Adjusted EBITDA increased primarily due to the higher gross profit and operational efficiencies.
Liquidity and Capital Resources
We believe we have sufficient liquidity to support our ongoing operations and to invest in future growth and create value for stockholders. Our cash and cash equivalents were $137.2 million as of March 27, 2020, of which $43.4 million was held at non-U.S. subsidiaries. Those cash balances at foreign subsidiaries may be subject to withholding or local country taxes if the Company's intention to permanently reinvest such income were to change and cash was repatriated to the United States.
In general, we require cash to fund working capital investments, acquisitions, capital expenditures, debt repayment, interest payments, taxes and share repurchases. We have access to the ABL Credit Facility to fund operational needs. As of March 27, 2020, there were no outstanding borrowings under the ABL Credit Facility and $9.5 million of letters of credit issued under the ABL Credit Facility. The borrowing base was estimated to be $307.7 million and approximately $298.2 million was available under the ABL Credit Facility as of March 27, 2020. Outstanding letters of credit count as utilization of the commitments under the ABL Credit Facility and reduce the amount available for borrowings.
The agreements governing the First Lien Term Loan Facility and the ABL Credit Facility (collectively, the "Credit Facilities") contain covenants that limit or restrict AII's ability to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates. AII has been in compliance with the covenants under the agreements for all periods presented.
We may from time to time repurchase our debt or take other steps to reduce our debt. These actions may include open market repurchases, negotiated repurchases or opportunistic refinancing of debt. The amount of debt, if any, that may be repurchased or refinanced will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations.
Our use of cash may fluctuate during the year and from year to year due to differences in demand and changes in economic conditions primarily related to the prices of commodities we purchase.
Capital expenditures have historically been necessary to expand and update the production capacity and improve the productivity of our manufacturing operations.
Our ongoing liquidity needs are expected to be funded by cash on hand, net cash provided by operating activities and, as required, borrowings under the ABL Credit Facility. We expect that cash provided from operations and available capacity under the ABL Credit Facility will provide sufficient funds to operate our business, make expected capital expenditures and meet our liquidity requirements for at least the next twelve months, including payment of interest and principal on our debt.
Limitations on Distributions and Dividends by Subsidiaries
AIG, AII, and AIH are each holding companies, and as such have no independent operations or material assets other than ownership of equity interests in their respective subsidiaries. Each company depends on its respective subsidiaries to distribute funds to it so that it may pay obligations and expenses, including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us depends on their operating results, cash requirements and financial and general business conditions, as well as restrictions under the laws of our subsidiaries' jurisdictions.
The agreements governing the ABL Credit Facility significantly restrict the ability of our subsidiaries, including AII, to pay dividends, make loans or otherwise transfer assets from AII and, in turn, to us. Further, AII's subsidiaries are permitted under the terms of the ABL Credit Facility to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to AII and, in turn, to us. The First Lien Term Loan Facility requires AII to meet a certain consolidated coverage ratio on an incurrence basis in connection with additional indebtedness. The ABL Credit Facility contains limits on additional indebtedness based on various conditions for incurring the additional debt.
32
The table below summarizes cash flow information derived from our statements of cash flows for the periods indicated:
Six months ended | |||||||
(in thousands) | March 27, 2020 | March 29, 2019 | |||||
Cash flows provided by (used in): | |||||||
Operating activities | $ | 49,284 | $ | 42,789 | |||
Investing activities | (17,109 | ) | (72,805 | ) | |||
Financing activities | (17,421 | ) | (44,785 | ) | |||
Operating activities
During the six months ended March 27, 2020, the Company was provided $49.3 million by operating activities compared to $42.8 million during the six months ended March 29, 2019. The $6.5 million increase in cash provided was primarily due to higher gross profit, partially offset by lower cash flows from working capital.
Investing activities
During the six months ended March 27, 2020, the Company used $17.1 million in investing activities compared to $72.8 million during the six months ended March 29, 2019. The decrease in cash used in investing activities is primarily due the acquisition of Vergokan for $58.7 million during the six months ended March 29, 2019.
Financing Activities
During the six months ended March 27, 2020, the Company used $17.4 million in financing activities compared to $44.8 million used during the six months ended March 29, 2019. The decrease in cash used in financing activities is primarily due to $24.4 million of share repurchases and $21.0 million of debt repayments during the six months ended March 29, 2019, compared to $15.0 million of share repurchases during the six months ended March 27, 2020.
Contractual Obligations and Commitments
There have been no material changes in our contractual obligations and commitments since the filing of our Annual Report on Form 10-K.
Change in Critical Accounting Policies and Estimates
Other than as set forth below, there have been no material changes in our critical accounting policies and estimates since the filing of our Annual Report on Form 10-K.
Goodwill Impairments
Goodwill and other intangible assets primarily result from business acquisitions. The Company assesses the recoverability of goodwill and indefinite-lived trade names on an annual basis in accordance with Accounting Standards Codification ("ASC") 350 "Intangibles - Goodwill and Other." The measurement date is the first day of the fourth fiscal quarter, or more frequently, if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit or the respective indefinite-lived trade name is less than the carrying value. The Company can elect to perform a quantitative or qualitative test of impairment.
The Company considered whether the adverse economic impacts of the novel coronavirus (COVID-19) outbreak, which were developing during the three months ended March 27, 2020, would indicate whether it is more likely than not that the fair value of its reporting units or its indefinite lived intangible assets would be below the carrying value. The economic impacts of the COVID-19 outbreak were more substantial for the Company’s reporting unit related to its operations in Europe, Middle East, and Africa (EMEA), due to the cross-border transactions that occur within those operations, the cross-border interactions needed to fully realize the synergies associated with recent in-region acquisitions and the COVID-19 related closing of these borders. The Company deemed the economic related developments of the outbreak to be a triggering event for the EMEA reporting unit as of March 27, 2020 and performed an updated goodwill impairment test as of that date.
33
The Company calculated the fair value of its EMEA reporting unit considering three valuation approaches: (a) the income approach; (b) the guideline public company method; and (c) a market approach using a transaction analysis. The income approach calculates the fair value of the reporting unit using a discounted cash flow approach. Internally forecasted future cash flows, which the Company believes reasonably approximate market participant assumptions, are discounted using a weighted average cost of capital (Discount Rate) developed for the specific reporting unit. The Discount Rate is developed using market observable inputs, as well as considering whether or not there is a measure of risk related to the specific reporting unit’s forecasted performance. Fair value under the guideline public company method is determined for the unit by applying market multiples for comparable public companies to the unit’s financial results. The key uncertainties in the income approach and the guideline company method calculations are the assumptions used in determining the reporting unit’s forecasted future performance, including revenue growth and EBITDA margins, as well as the perceived risk associated with those forecasts, along with selecting representative market multiples. Fair value under the transactional analysis is determined based on exchange prices in actual transactions and on asking prices for controlling interests in public or private companies currently offered for sale by applying market multiples for comparable public companies to the unit’s financial results. The key uncertainties in the transactional analysis calculations are the assumptions used in determining the reporting unit's comparable public companies, comparable transactions and the selection of the market multiples.
The EMEA reporting unit’s impairment test revealed that its fair value was greater than carrying value by an amount of less than 10%. The goodwill allocated to the EMEA reporting unit as of March 27, 2020 was $35.0 million. As a result, the impairment analysis is sensitive to changes in both business and valuation assumptions. Changes to these assumptions could result in revisions of management's estimates of the fair value of the reporting unit and could result in impairment charges in the future, which could be material to our results of operations. We will continue to monitor for such changes in facts or circumstances. Goodwill impairment charges may be recognized in future periods to the extent changes in facts or circumstances occur, including deterioration in the macroeconomic environment, industry, and deterioration in our performance or our future projections.
Recent Accounting Standards
See Note 1, ''Basis of Presentation and Summary of Significant Accounting Policies'' to our unaudited condensed consolidated financial statements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements and cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's beliefs and assumptions and information currently available to management. Some of the forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "shall," "should," "would," "could," "seeks," "aims," "projects," "is optimistic," "intends," "plans," "estimates," "anticipates" or other comparable terms. Forward-looking statements include, without limitation, all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include, without limitation, statements regarding our intentions, beliefs, assumptions or current expectations concerning, among other things, financial position; results of operations; cash flows; prospects; growth strategies or expectations; customer retention; the outcome (by judgment or settlement) and costs of legal, administrative or regulatory proceedings, investigations or inspections, including, without limitation, collective, representative or class action litigation; and the impact of prevailing economic conditions.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our actual results of operations, financial condition and liquidity, and the development of the market in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this quarterly report. In addition, even if our results of operations, financial condition and cash flows, and the development of the market 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. A number of important factors, including, without limitation, the risks and uncertainties discussed or referenced under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, could cause actual results and outcomes to differ materially from those reflected in the forward-looking statements. Additional factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, without limitation:
• | widespread outbreak of diseases, such as the recent novel coronavirus (COVID-19) pandemic; |
34
• | declines in, and uncertainty regarding, the general business and economic conditions in the United States and international markets in which we operate; |
• | weakness or another downturn in the United States non-residential construction industry; |
• | changes in prices of raw materials; |
• | pricing pressure, reduced profitability, or loss of market share due to intense competition; |
• | availability and cost of third-party freight carriers and energy; |
• | high levels of imports of products similar to those manufactured by us; |
• | changes in federal, state, local and international governmental regulations and trade policies; |
• | changes in foreign laws and legal systems, including as a result of Brexit; |
• | recent and future changes to tax legislation; |
• | adverse weather conditions; |
• | failure to generate sufficient cash flow from operations or to raise sufficient funds in the capital markets to satisfy existing obligations and support the development of our business; |
• | increased costs relating to future capital and operating expenditures to maintain compliance with environmental, health and safety laws; |
• | reduced spending by, deterioration in the financial condition of, or other adverse developments with respect to, one or more of our top customers; |
• | increases in our working capital needs, which are substantial and fluctuate based on economic activity and the market prices for our main raw materials, including as a result of failure to collect, or delays in the collection of, cash from the sale of manufactured products; |
• | work stoppage or other interruptions of production at our facilities as a result of disputes under existing collective bargaining agreements with labor unions or in connection with negotiations of new collective bargaining agreements, as a result of supplier financial distress, or for other reasons; |
• | challenges attracting and retaining key personnel or high-quality employees; |
• | changes in our financial obligations relating to pension plans that we maintain in the United States; |
• | reduced production or distribution capacity due to interruptions in the operations of our facilities or those of our key suppliers; |
• | loss of a substantial number of our third-party agents or distributors or a dramatic deviation from the amount of sales they generate; |
• | security threats, attacks, or other disruptions to our information systems, or failure to comply with complex network security, data privacy and other legal obligations or the failure to protect sensitive information; |
• | possible impairment of goodwill or other long-lived assets as a result of future triggering events, such as declines in our cash flow projections or customer demand and changes in our business and valuation assumptions; |
• | safety and labor risks associated with the manufacture and in the testing of our products; |
• | product liability, construction defect and warranty claims and litigation relating to our various products, as well as government inquiries and investigations, and consumer, employment, tort and other legal proceedings; |
• | our ability to protect our intellectual property and other material proprietary rights; |
• | risks inherent in doing business internationally; |
• | our inability to introduce new products effectively or implement our innovation strategies; |
• | the inability of our customers to pay off the credit lines extended to them by us in a timely manner and the negative impact on customer relations resulting from our collections efforts with respect to non-paying or slow-paying customers; |
• | our inability to continue importing raw materials, component parts and/or finished goods; |
• | the incurrence of liabilities and the issuance of additional debt or equity in connection with acquisitions, joint ventures or divestitures and the failure of indemnification provisions in our acquisition agreements to fully protect us from unexpected liabilities; |
• | failure to manage acquisitions successfully, including identifying, evaluating, and valuing acquisition targets and integrating acquired companies, businesses or assets; |
• | the incurrence of liabilities in connection with violations of the FCPA and similar foreign anti-corruption laws; |
• | the incurrence of additional expenses, increase in complexity of our supply chain and potential damage to our reputation with customers resulting from regulations related to "conflict minerals" |
• | disruptions or impediments to the receipt of sufficient raw materials resulting from various anti-terrorism security measures; |
• | restrictions contained in our debt agreements; |
• | failure to generate cash sufficient to pay the principal of, interest on, or other amounts due on our debt; and |
• | other risks and factors described in this report and from time to time in documents that we file with the SEC. |
35
You should read this Quarterly Report on Form 10-Q completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements attributable to us or persons acting on our behalf that are made in this quarterly report are qualified in their entirety by these cautionary statements. These forward-looking statements are made only as of the date of this Quarterly Report on Form 10-Q, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the quantitative and qualitative disclosures about market risks previously disclosed in our Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of certain litigation involving the Company, see Note 16, ''Commitments and Contingencies'' to our unaudited condensed consolidated financial statements.
Item 1A. Risk Factors
Other than as set forth below, there have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K.
Widespread detrimental public health conditions, and specifically the pandemic caused by the spread of COVID-19, could have a material adverse impact on our business, financial position, results of operations and cash flows.
We are closely monitoring developments related to the COVID-19 pandemic to assess its impact on our business. While we have implemented risk management and contingency plans and taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the COVID-19 pandemic and such measures may not adequately protect our business from the impact of such events. These impacts include disruptions or restrictions on our employees’ ability to travel as well as temporary closures of our facilities or the facilities of our customers, suppliers and other constituents of our supply chain. While still evolving, the COVID-19 pandemic has caused significant economic and financial turmoil both in the United States and around the world, and has fueled concerns that it will lead to a global recession. These conditions are expected to continue and worsen in the near term. This could have a material adverse impact on the demand for our products and our ability to obtain financing on favorable terms or at all.
While our operations are currently considered an “essential business”, the extent and duration of the impact of the COVID-19 pandemic remain highly uncertain and dependent on future developments that cannot be accurately predicted, such as the severity of the COVID-19 pandemic, the extent and effectiveness of containment actions, and the impacts of these and other factors on our operations and the global economy. These and other factors could have a material adverse impact on our business, financial position, results of operations and cash flows and may cause us to revisit or revise estimates of future earnings or other guidance we have previously provided to the markets.
While governmental and non-governmental organizations are engaging in efforts to combat the spread and severity of the COVID-19 pandemic and related public health issues, these measures may not be effective. We also cannot predict how legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues will impact our business. Such events or conditions could result in additional regulation or restrictions affecting the conduct of our business in the future.
Furthermore, the heightened uncertainty within the macroeconomic environment has caused our stock price to decline, and may cause our stock price to be highly volatile and decline further in the future, due in part to the volatility of the stock market and any general economic downturn.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table shows our purchases of our common stock during the three months ended March 27, 2020:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Program(1) | Maximum Value of Shares that May Yet Be Purchased Under the Program(1) | ||||||||||
December 28, 2019 to January 24, 2020 | — | $ | — | — | $ | 50,000 | ||||||||
January 25, 2020 to February 28, 2020 | 355.6 | $ | 38.18 | 355.6 | $ | 36,423 | ||||||||
February 29, 2020 - March 27, 2020 | 37.9 | $ | 37.85 | 37.9 | $ | 34,989 | ||||||||
Total | 393.5 | 393.5 | ||||||||||||
37
(1)On February 5, 2019, the board of directors approved a share repurchase program, under which the Company may repurchase up to $50.0 million of its outstanding common stock.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
38
Item 6. Exhibits
31.1# | ||||
31.2# | ||||
32.1# | ||||
32.2# | ||||
101.INS# | XBRL Instance Document (formatted as inline XBRL) | |||
101.SCH# | XBRL Taxonomy Schema Linkbase Document (formatted as inline XBRL) | |||
101.CAL# | ||||
101.DEF# | ||||
101.LAB# | ||||
101.PRE# | ||||
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||
# | Filed herewith | |||
39
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.
ATKORE INTERNATIONAL GROUP INC. | |||
(Registrant) | |||
Date: | May 5, 2020 | By: | /s/ David P. Johnson |
Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||
40