ATKORE INC. The following information should be read in conjunction with the accompanying consolidated financial statements and related notes included in this Annual 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 elsewhere in this report, particularly in "Special Note Regarding Forward-Looking Statements and Information" and "Risk Factors" included elsewhere in this Annual Report. The percentages provided below reflect rounding adjustments. Accordingly, figures expressed as percentages when aggregated may not be the arithmetic sum of the percentages that precede them. Business Factors Influencing our Results of Operations We are a leading manufacturer of Electrical products primarily for the non-residential construction and renovation markets and Safety & Infrastructure for the construction and industrial markets. The Electrical segment manufactures high quality products used in the construction of electrical power systems including conduit, cable and installation accessories. The Safety & Infrastructure segment designs and manufactures solutions including metal framing, mechanical pipe, perimeter security and cable management for the protection and reliability of critical infrastructure. We believe we hold #1 or #2 positions inthe United States by net sales in the vast majority of our products. The quality of our products, the strength of our brands and our scale and presence provide what we believe to be a unique set of competitive advantages that position us for profitable growth.
The following factors may affect our results of operations in any given period:
Economic Conditions. Our business depends on demand from customers across various end markets, including wholesale distributors, OEMs, retail distributors and general contractors. Our products are primarily used by trade contractors in the construction and renovation of non-residential structures such as commercial office buildings, healthcare facilities and manufacturing plants. In fiscal 2021, 90% of our net sales were to customers located inthe United States . As a result, our business is heavily dependent on the health ofthe United States economy, in general, and onUnited States non-residential construction activity, in particular. A strongerUnited States economy and robust non-residential construction generally increase demand for our products. In fiscal 2021, our sales and cost of sales were impacted by sharp increases in the prices of the raw materials used in our products. We generally sell our products on a spot basis and as such, were able to pass some of these increases on to our customers. Additionally, we participated in the broader economic recovery from the COVID-19 pandemic as our customers began to resume their operations at pre-pandemic levels of activity. We believe that our business and demand for our products is influenced by two main economic indicators:United States gross domestic product, or "GDP," and non-residential construction starts, measured in square footage.The United States non-residential construction market has experienced modest growth over the past few years, in line with United States GDP. Our historic results have been positively impacted by growth in the non-residential construction market, as such growth leads to greater demand for our products. MR&R activity generally increases and represents a greater share of non-residential construction activity during challenging periods in the economic or construction cycle. During those periods, our MR&R demand as a percentage of total demand typically increases, providing a more consistent revenue stream for our business. Impacts of COVID-19. The outbreak of 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, customers and end markets face some uncertainty and delays in the timing of work. In particular, some construction site closures or project delays have occurred, and job sites have had to adjust to increased physical distancing and health-related precautions. Given the continued volatility within the economic impacts of the pandemic it is too difficult to make any judgment on how significant COVID-19 effects could 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 32 -------------------------------------------------------------------------------- future. The extent to which COVID-19 will impact our business will depend on future developments and public health advancements, which are highly uncertain and cannot be predicted with confidence. Currently, we have no COVID-19 related facility closures as we look to serve our current levels of demand. In response to COVID-19, we have implemented a variety of countermeasures to promote the health and safety of our employees during this pandemic, including health screening, physical distancing practices, enhanced cleaning, use of personal protective equipment, business travel restrictions, and remote work capabilities. Raw Materials. We use a variety of raw materials in the manufacture of our products, which primarily include steel, copper and PVC resin. We believe that sources for these raw materials are well established, generally available and are in sufficient quantity that we may avoid disruption in our business. The cost to procure these raw materials is subject to price fluctuations, often as a result of macroeconomic conditions. Our cost of sales may be affected by changes in the market price of these materials, and to a lesser extent, other commodities, such as zinc, aluminum, electricity, natural gas and diesel fuel. The prices at which we sell our products may adjust upward or downward based on raw material price changes. We believe several factors drive the pricing of our products, including the quality of our products, the ability to meet customer delivery expectations and co-loading capabilities, as well as the prices of our raw material inputs. Historically, we have not engaged in hedging strategies for raw material purchases. Our results may be impacted by inventory sales at costs higher or lower than current prices we pay for similar items. Working Capital. Our working capital requirements are impacted by our operational activities. Our inventory levels may be impacted from time to time, due to delivery lead times from our suppliers. Our cash collection cycle is generally one to two months longer than our cash payment cycle. If our working capital requirements increase and we are unable to finance our working capital on terms and conditions acceptable to us, we may not be able to obtain raw materials to respond to customer demand, which could result in a loss of sales.
Labor Cost and Availability. Labor costs are a direct input into the manufacture of our products. Labor costs are capitalized as a cost of inventory.
Seasonality. In a typical year, our operating results are impacted by seasonality. Historically, sales of our products have been higher in the third and fourth quarters of each fiscal year due to favorable weather for construction-related activities.
Recent Acquisitions. In addition to our organic growth, we have transformed the Company through acquisitions in recent years, allowing us to expand our product offerings with existing and new customers. In accordance with accounting principles generally accepted inthe United States of America ("GAAP"), the results of our acquisitions are reflected in our financial statements from the date of each acquisition forward. Our acquisition strategy has focused primarily on growing market share by complementing our existing portfolio with synergistic products and expanding into end-markets that we have not previously served. In total, we have invested$145.0 million in acquisitions since 2019. We expect to continue to pursue synergistic acquisitions as part of our growth strategy to expand our product offerings. See Note 3, "Acquisitions" to the accompanying consolidated financial statements included elsewhere in this Annual Report. Foreign Currencies. In fiscal 2021, approximately 10% of our net sales came from customers located outsidethe United States , most of which were foreign currency sales denominated in British pounds sterling, European euros, Canadian dollars, Australian dollars, Chinese yuan, Russian rubles andNew Zealand dollars. The functional currency of our operations outsidethe United States is generally the local currency. Assets and liabilities of our non-U.S. subsidiaries are translated intoUnited States dollars using period-end exchange rates. Foreign revenue and expenses are translated at the monthly average exchange rates in effect during the period. Foreign currency translation adjustments are included as a component of other comprehensive income (loss) within our statements of comprehensive income. See "Quantitative and Qualitative Disclosures about Market Risk-Foreign Currency Risk."
See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" to the accompanying consolidated financial statements included elsewhere in this Annual Report.
33
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Emerging Industry Trends. Pressure from regulators, and expectations from
customers, to combat climate change may accelerate the move to more renewable
power generation, the electrification of buildings and transportation, and the
use of more sustainable methods in construction in our markets. The rapid market
growth for the use of digital technologies may continue to drive the need for
more digital infrastructure such as data centers and the need for advanced
warehousing and distribution centers to support e-commerce. Atkore offers
products including electrical conduit & fittings, electrical cable & cable
management, metal framing and racking structures that are commonly used in the
construction of new and renovated buildings, infrastructure, renewable power
systems, data centers, warehouses, and to connect electric vehicle charging
stations to the electrical grid. Increases in demand for these applications in
our markets may drive an increased demand for Atkore products.
Reportable Segments
We operate our business through two operating segments which are also our reportable segments: Electrical and Safety & Infrastructure. Our operating segments are organized based on primary market channel and, in most instances, the end use of products. We review the results of our operating segments separately for the purposes of making decisions about resource allocation and performance assessment. We evaluate performance on the basis of net sales and Adjusted EBITDA
Effective in the first quarter of fiscal 2021, the Company renamed and redefined its reportable segments.
The Electrical Raceway segment was renamed as the Electrical segment. The Electrical segment manufactures high quality products used in the construction of electrical power systems including conduit, cable, and installation accessories. This segment serves contractors in partnership with the electrical wholesale channel. The Mechanical Products & Solutions segment was renamed as the Safety & Infrastructure segment. This segment designs and manufactures solutions including metal framing, mechanical pipe, perimeter security, and cable management for the protection and reliability of critical infrastructure. These solutions are marketed to contractors, original equipment manufacturers and end users. Effective in the first quarter of fiscal 2021, the Company also implemented the Realignment of its segment financial reporting structure such that its domestic cable management and prefabrication modular businesses are now reflected in its Safety & Infrastructure segment. These businesses were previously reflected within the Electrical segment. See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" for additional information. Prior year results have been revised for the impact of the Realignment for comparability. Both segments use Adjusted EBITDA as the primary measure of profit and loss. Segment Adjusted EBITDA is the income (loss) before income taxes, adjusted to exclude unallocated expenses, depreciation and amortization, interest expense, net, loss on extinguishment of debt, restructuring charges, stock-based compensation, certain legal matters, transaction costs, gain on purchase of business, gain on sale of a business and other items, such as inventory reserves and adjustments, loss on disposal of property, plant and equipment, insurance recovery related to damages of property, plant and equipment, release of indemnified uncertain tax positions, and realized or unrealized gain (loss) on foreign currency impacts of intercompany loans and related forward currency derivatives. See Note 17, "Segment Information" to the accompanying consolidated financial statements included elsewhere in this Annual Report.
Fiscal Periods
The Company has a fiscal year that ends on
Key Components of Results of Operations
Net sales
Net sales represents external sales of Electrical products to the non-residential construction and MR&R markets and Safety & Infrastructure products and solutions to the commercial and industrial markets. Net sales includes gross product sales and freight billed to our customers, net of allowances for rebates, sales incentives, trade promotions, product returns and discounts.
34
--------------------------------------------------------------------------------Cost of sales
Cost of sales includes all costs directly related to the production of goods for sale. These costs include direct material, direct labor, production related overheads, excess and obsolescence costs, lower-of-cost-or-market provisions, freight and distribution costs and the depreciation and amortization of assets directly used in the production of goods for sale.
Selling, general and administrative expenses
Selling, general and administrative expenses include payroll related expenses including salaries, wages, employee benefits, payroll taxes, variable cash compensation for both administrative and selling personnel and consulting and professional services fees. Also included are compensation expense for share-based awards, restructuring-related charges, third-party professional services and translation gains or losses for foreign currency trade transactions. Results of Operations
Fiscal 2021 Compared to Fiscal 2020
The results of operations for the fiscal years ended
Fiscal year ended
($ in thousands) September 30, 2021 September 30, 2020 Change ($) Change (%)
Net sales $ 2,928,014 $ 1,765,421 $ 1,162,593 65.9 %
Cost of sales 1,802,401 1,274,107 528,294 41.5 %
Gross profit 1,125,613 491,314 634,299 129.1 %
Selling, general and
administrative 293,019 219,496 73,523 33.5 %
Intangible asset amortization 33,644 32,262 1,382 4.3 %
Operating income 798,950 239,556 559,394 233.5 %
Interest expense, net 32,899 40,062 (7,163) (17.9) %
Loss on extinguishment of debt 4,202 273 3,929 1,439.2 %
Other income, net (18,152) (2,777) (15,375) 553.7 %
Income before income taxes 780,001 201,998 578,003 286.1 %
Income tax expense 192,144 49,696 142,448 286.6 %
Net income $ 587,857 $ 152,302 $ 435,555 286.0 %
Net sales
Change (%)
Volume 5.0 %
Average selling prices 55.4 %
Foreign exchange 1.0 %
Acquisitions 4.5 %
Net sales 65.9 %
Net sales for fiscal 2021 increased $1,162.6 million to $2,928.0 million , an
increase of 65.9%, compared to $1,765.4 million for fiscal 2020. The increase in
net sales is primarily attributed to increased average selling prices of $977.9
million which were mostly driven by the plastic pipe and conduit category within
the Electrical segment and increased net sales of $79.1 million due to the
acquisitions of Queen City Plastics and FRE Composites Group . Pricing for PVC
products, as well as other parts of the business, are expected to return to more
normal historical levels over time, but that time is uncertain. The increase in
net sales was also driven by an increase in sales volume of $88.4 million across
the majority of product categories within both the Electrical and the Safety &
Infrastructure segments.
35
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Cost of sales
Change (%)
Volume 5.0 %
Average input costs 30.4 %
Foreign exchange 1.2 %
Acquisitions 2.6 %
Other 2.3 %
Cost of sales 41.5 %
Cost of sales increased $528.3 million , or 41.5%, to $1,802.4 million for fiscal
2021 compared to $1,274.1 million for fiscal 2020. The increase was primarily
due to higher input costs of steel, copper and PVC resin of $386.5 million ,
higher sales volume of $64.0 million and the acquisitions of Queen City Plastics
and FRE Composites Group of $32.5 million .
Selling, general and administrative
Selling, general and administrative expenses increased$73.5 million , or 33.5%, to$293.0 million for fiscal 2021 compared to$219.5 million for fiscal 2020. The increase was primarily due to higher variable compensation of$24.1 million , higher sales commission expense of$22.4 million , increased general spending on business improvement initiatives of$10.8 million , the acquisitions of Queen City Plastics and theFRE Composites Group of$5.4 million , and higher stock compensation expense of$3.5 million partially offset by productivity efficiencies of$4.1 million . The majority of the remaining increase was primarily driven by the tight controls on expenditures put into place in the prior year at the onset of the COVID-19 pandemic.
Intangible asset amortization
Intangible asset amortization expense increased$1.4 million , or 4.3%, to$33.6 million for fiscal 2021 compared to$32.3 million for fiscal 2020. The increase in intangible asset amortization is primarily due to the 2021 acquisition ofFRE Composites Group . Interest expense, net Interest expense, net, decreased$7.2 million , or 17.9% to$32.9 million for fiscal 2021, compared to$40.1 million for fiscal 2020. The decrease is primarily due to a lower average principal balance in fiscal 2021 from which interest expense was derived. See Note 13, "Debt" to the accompanying consolidated financial statements included elsewhere in this Annual Report.
Other income, net
Other income, net increased$15.4 million to income of$18.2 million for fiscal 2021, compared to income of$2.8 million for fiscal 2020. The increase was primarily due to a$15.5 million business interruption insurance recovery from a flood at one of the Company's manufacturing facilities. See Note 15, "Commitments and Contingencies" and Note 6, "Other Income, net" to the accompanying consolidated financial statements included elsewhere in this Annual Report. Income tax expense Income tax expense increased$142.4 million to$192.1 million , compared to$49.7 million for fiscal 2020. The Company's income tax rate remained consistent at 24.6% for fiscal 2021, compared to 24.6% for fiscal 2020. The increase in tax expense is due to higher income before taxes. See Note 7, "Income Taxes" to the accompanying consolidated financial statements included elsewhere in this Annual Report. 36 --------------------------------------------------------------------------------
Segment results
Electrical
Fiscal year ended
($ in thousands) September 30, 2021 September 30, 2020 Change ($) Change (%)
Net sales $ 2,233,299 $ 1,270,547 $ 962,752 75.8 %
Adjusted EBITDA 873,868 292,809 581,059 198.4 %
Adjusted EBITDA Margin 39.1 % 23.0 %
Net sales
Change (%)
Volume 3.8 %
Average selling prices 64.4 %
Foreign exchange 1.5 %
Acquisitions 6.1 %
Net sales 75.8 %
Net sales increased by $962.8 million , or 75.8%, to $2,233.3 million for fiscal
2021 compared to $1,270.5 million for fiscal 2020. The increase in net sales is
primarily attributed to increased average selling prices of $817.4 million which
were mostly driven by the plastic pipe and conduit and the metal electrical
conduit and fittings product categories, increased sales volume across most
product categories and increased net sales of $78.8 million from the
acquisitions of Queen City Plastics and FRE Composites Group .
Adjusted EBITDA
Adjusted EBITDA increased
Safety & Infrastructure
Fiscal year ended
($ in thousands) September 30, 2021 September 30, 2020 Change ($) Change (%)
Net sales $ 698,320 $ 497,523 $ 200,797 40.4 %
Adjusted EBITDA $ 81,827 $ 67,821 $ 14,006 20.7 %
Adjusted EBITDA Margin 11.7 % 13.6 %
Net sales
Change (%)
Volume 8.1 %
Average selling prices 32.3 %
Net sales 40.4 %
Net sales increased $200.8 million , or 40.4%, to $698.3 million for fiscal 2021
compared to $497.5 million for fiscal 2020. The increase is primarily attributed
to increased average selling prices of $160.4 million primarily driven by higher
input costs of steel as well as increases in sales volumes across most product
categories.
Adjusted EBITDA
Adjusted EBITDA increased $14.0 million , or 20.7%, to $81.8 million for fiscal
2021 compared to $67.8 million for fiscal 2020. The Adjusted EBITDA increase was
primarily due to the increase in average selling prices and volume discussed
above.
37
--------------------------------------------------------------------------------Fiscal 2020 Compared to Fiscal 2019
The results of operations for the fiscal years ended
Fiscal year ended
September 30, September 30,
($ in thousands) 2020 2019 Change ($) Change (%)
Net sales $ 1,765,421 $ 1,916,538 $ (151,117) (7.9) %
Cost of sales 1,274,107 1,419,338 (145,231) (10.2) %
Gross profit 491,314 497,200 (5,886) (1.2) %
Selling, general and
administrative 219,496 240,660 (21,164) (8.8) %
Intangible asset amortization 32,262 32,876 (614) (1.9) %
Operating income 239,556 223,664 15,892 7.1 %
Interest expense, net 40,062 50,473 (10,411) (20.6) %
Loss on extinguishment of debt 273 - 273 100.0 %
Other income, net (2,777) (11,478) 8,701 (75.8) %
Income before income taxes 201,998 184,669 17,329 9.4 %
Income tax expense 49,696 45,618 $ 4,078 8.9 %
Net income $ 152,302 $ 139,051 $ 13,251 9.5 %
Net sales
Change (%)
Volume (7.3) %
Average selling prices (2.0) %
Foreign exchange (0.1) %
Acquisitions 1.5 %
Net sales (7.9) %
Net sales for fiscal 2020 decreased $151.1 million to $1,765.4 million , a
decrease of 7.9%, compared to $1,916.5 million for fiscal 2019. The decrease is
primarily attributed to lower volume of $140.3 million predominantly due to the
impacts of COVID-19. The Company experienced volume declines in most of its
product categories with the exception of the plastic pipe and conduit product
category within the Electrical segment and the mechanical pipe product category
within the Safety & Infrastructure segment. Additionally, net sales decreased
$37.7 million due to lower average selling prices resulting from lower input
costs of steel, which was partially offset by higher average selling prices
resulting from higher input costs of PVC resin and copper. The decrease in net
sales was partially offset by $28.5 million of sales from the 2019 acquisitions.
Cost of sales
Change (%)
Volume (7.3) %
Average input costs (3.9) %
Foreign exchange (0.3) %
Acquisitions 1.9 %
Other (0.6) %
Cost of sales (10.2) %
Cost of sales increased $145.2 million , or 10.2%, to $1,274.1 million for fiscal
2020 compared to $1,419.3 million for fiscal 2019. The decrease was primarily
due to lower volume of $103.8 million , the lower input costs of steel in excess
of higher input costs of resin and copper of $54.9 million , and $10.3 million ,
respectively, from favorable inventory adjustments related to changes in market
prices. The decrease was partially offset by incremental costs related to the
2019 acquisitions of $26.7 million .
38
--------------------------------------------------------------------------------Selling, general and administrative
Selling, general and administrative expenses decreased$21.2 million or 8.8%, to$219.5 million for fiscal 2020 compared to$240.7 million for fiscal 2019. The decrease was primarily due to cost savings as a result of COVID-19, in particular lower variable compensation of$6.0 million , reduced travel costs of$5.1 million and lower insurance costs of$3.0 million . Additionally, due to sales volume declines associated with COVID-19, commissions expense decreased$2.4 million . Lastly, the Company had a gain on the sale of property and equipment of$3.8 million offsetting expenses during fiscal 2020.
Intangible asset amortization
Intangible asset amortization expense decreased$0.6 million , or 1.9%, to$32.3 million for fiscal 2020 compared to$32.9 million for fiscal 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$10.4 million , or 20.6% to$40.1 million for fiscal 2020, compared to$50.5 million for fiscal 2019. The decrease is primarily due to lower interest rates and the Company's principal payments in fiscal 2019 and 2020 resulting in a lower principal balance in fiscal 2020 from which interest expense was derived. See Note 13, "Debt" to the accompanying consolidated financial statements included elsewhere in this Annual Report.
Other income, net
Other income, net decreased$8.7 million to income of$2.8 million for fiscal 2020, compared to income of$11.5 million for fiscal 2019, primarily due to the$7.4 million of income generated from a bargain purchase gain on the acquisition of Cor-Tek in fiscal 2019. See Note 3, "Acquisitions" and Note 6, "Other Income, net" to the accompanying consolidated financial statements included elsewhere in this Annual Report. Income tax expense Income tax expense increased$4.1 million , to$49.7 million , compared to$45.6 million for fiscal 2019. The Company's income tax rate decreased to 24.6% for fiscal 2020, compared to 24.7% for fiscal 2019. The decrease in the effective tax rate was primarily due to a larger benefit from the exercise of stock options. The increase in tax expense, despite the decrease in the rate, is due to higher income before taxes. See Note 7, "Income Taxes" to the accompanying consolidated financial statements included elsewhere in this Annual Report. 39 --------------------------------------------------------------------------------
Segment results
Electrical
Fiscal year ended
($ in thousands) September 30, 2020 September 30, 2019 Change ($) Change (%) Net sales$ 1,270,547 $ 1,390,327 $ (119,780) (8.6) % Adjusted EBITDA 292,809 285,217 7,592 2.7 % Adjusted EBITDA Margin 23.0 % 20.5 % Net sales Change (%) Volume (9.6) % Average selling prices (0.6) % Foreign exchange (0.1) % Acquisitions 2.0 % Other (0.4) % Net sales (8.6) % Net sales decreased$119.8 million , or 8.6%, to$1,270.5 million for fiscal 2020 compared to$1,390.3 million for fiscal 2019. Net sales decreased by$132.9 million due to lower volume primarily attributed to the impacts of COVID-19. The Electrical segment experienced declines predominately in the armored cable and fittings and the metal electrical conduit and fittings product categories, partially offset by volume gains in the plastic pipe and conduit product category. Additionally, net sales decreased by$8.6 million as a result of lower average selling prices resulting from lower input costs of steel, partially offset by higher input costs for resin and copper. The decrease in net sales was also partially offset by the 2019 acquisitions, which contributed$28.5 million in sales for fiscal 2020. Adjusted EBITDA Adjusted EBITDA increased$7.6 million , or 2.7%, to$292.8 million for fiscal 2020 compared to$285.2 million for fiscal 2019. The increase in Adjusted EBITDA was largely due to the benefit of lower material costs, operational efficiencies, and the contributions from the 2019 acquisitions, in excess of volume declines attributed to COVID-19.
Safety & Infrastructure
Fiscal year ended
($ in thousands) September 30, 2020 September 30, 2019 Change ($) Change (%)
Net sales $ 497,523 $ 527,511
Adjusted EBITDA $ 67,821 $ 77,407
Adjusted EBITDA Margin 13.6 % 14.7 %
Net sales
Change (%)
Volume (1.4) %
Average selling prices (5.5) %
Other 1.2 %
Net sales (5.7) %
Net sales decreased $30.0 million , or 5.7%, to $497.5 million for fiscal 2020
compared to $527.5 million for fiscal 2019. The decrease was primarily due to
lower average selling prices driven by lower input prices for steel of $29.1
million . Additionally, net sales decreased from lower sales volume of $7.5
million as a result of the impacts of COVID-19 for most product categories with
the exception of the mechanical pipe product category.
40
--------------------------------------------------------------------------------Adjusted EBITDA
Adjusted EBITDA decreased$9.6 million , or 12.4%, to$67.8 million for fiscal 2020 compared to$77.4 million for fiscal 2019. The Adjusted EBITDA decrease is primarily due to the lower volume and the mix of products sold in the prior year period, partially offset by cost reductions in response to the impacts of COVID-19 on volume.
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$576.3 million as ofSeptember 30, 2021 , of which$75.5 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 tothe United States . Our cash and cash equivalents increased$291.8 million fromSeptember 30, 2020 , primarily due to cash provided from operating activities, partially offset by debt repayments, capital expenditures and share repurchases. 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 our operational needs. As ofSeptember 30, 2021 , there were no outstanding borrowings under the ABL Credit Facility (excluding$9.5 million of standby letters of credit issued under the ABL Credit Facility). The borrowing base was estimated to be$325.0 million and approximately$315.5 million was available under the ABL Credit Facility as ofSeptember 30, 2021 .
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 and IT initiatives aimed to facilitate the ease of doing business withAtkore . We have purchase commitments of$247.2 million and$5.3 million for the years 2022 and 2023, which represent purchases of raw materials in the normal course of business for which all significant terms have been confirmed. As ofSeptember 30, 2021 , we had$73.0 million of income tax liability, gross unrecognized tax benefits of$0.7 million and gross interest and penalties of$0.1 million . Of these amounts,$0.7 million is classified as a non-current liability in the consolidated balance sheet.
The projected company pension contribution for fiscal 2022 is
Servicing of our existing debt instruments includes the following estimated cash
outflows:
Less than 1 More than 5
($ in thousands) Year 1-3 Years 3-5 Years Years Total
Senior Notes due June 2031 $ - $ -
$ -
- - - $ 371,095 $ 371,095
Facility Due May 2028
Interest payments (a) 27,868 55,889 55,601 98,592 237,950
Total $ 27,868 $ 55,889 $ 55,601 $ 869,687 $ 1,009,045 (a) Interest expense is estimated based on outstanding loan balances assuming principal payments are made according to the payment
schedule and interest rates as of
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 Credit
Facilities. 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.
We do not have any off-balance sheet financing arrangements that we believe are
reasonably likely to have a material current or future effect on our financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
41
--------------------------------------------------------------------------------Limitations on Distributions and Dividends by Subsidiaries
AI, 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 them so that they 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 Credit Facilities 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 Credit Facilities 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 Senior Secured 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. AII has been in compliance with the covenants under the agreements for all periods presented. See Note 13, "Debt" to the accompanying consolidated financial statements included elsewhere in this Annual Report. Cash Flows The table below summarizes cash flow information derived from our statements of cash flows for the fiscal years endedSeptember 30, 2021 andSeptember 30, 2020 . Fiscal year ended (in thousands) September 30, 2021 September 30, 2020 Change ($) Change (%) Cash flows provided by (used in): Operating activities $ 572,902 $ 248,762$ 324,140 130.3 % Investing activities (97,961) (27,513) (70,448) 256.1 % Financing activities (184,456) (61,179) (123,277) 201.5 %
Operating activities
During fiscal 2021, operating activities provided$572.9 million of cash, compared to$248.8 million during fiscal year 2020. The$324.1 million increase was primarily driven by improved operating income of$559.4 million year over year was partially offset by an increase of$137.7 million in net working capital balances.
Investing activities
During fiscal 2021, we used$98.0 million of cash for investing activities compared to$27.5 million during fiscal 2020. The$70.4 million increase in cash used by investing activities was primarily driven by$43.2 million in cash used for acquisitions in fiscal 2021 as well as increased capital expenditures of$30.7 million primarily driven by additional investments in productivity and digital initiatives. Financing Activities During fiscal 2021, we used$184.5 million for financing activities compared to$61.2 million during fiscal 2020. Cash used for financing activities during fiscal 2021 was primarily driven by payments of debt of$839.1 million and repurchases of shares of$135.1 million offset by proceeds from the issuance of debt of$798.0 million . For additional discussion of the debt transactions, see Note 13, "Debt" to the accompanying consolidated financial statements included elsewhere in this Annual Report.
The table below summarizes cash flow information derived from our statements of
cash flows for the fiscal years ended
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Fiscal year ended
(in thousands) September 30, 2020 September 30, 2019 Change ($) Change (%)
Cash flows provided by (used in):
Operating activities $ 248,762 $ 209,694 $ 39,068 18.6 %
Investing activities (27,513) (133,101) 105,588 (79.3) %
Financing activities (61,179) (78,180) 17,001 (21.7) %
Operating activities
During fiscal 2020, operating activities provided $248.8 million of cash,
compared to $209.7 million during fiscal year 2019. The $39.1 million increase
was primarily due to lower spending on working capital of $19.2 million driven
by improved collections and reduced purchases of inventory at lower prices as
well as improved operating income of $15.9 million .
Investing activities
During fiscal 2020, we used$27.5 million of cash for investing activities compared to$133.1 million during fiscal 2019. The$105.6 million decrease in cash used by investing activities is due primarily to$98.0 million in cash used for acquisitions in fiscal 2019 as well as the cash received from the sale of a property, plant and equipment in fiscal 2020 of$3.9 million .
Financing Activities
During fiscal 2020, we used$61.2 million for financing activities compared to$78.2 million during fiscal 2019. Financing activities decreased$17.0 million due to a reduction in debt repayments of$21.0 million compared to fiscal 2019.
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make estimates and assumptions relating to the reporting of results of operations, financial condition and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates under different assumptions or conditions. The following are our most critical accounting policies, which are those that require management's most difficult, subjective and complex judgments, requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The following discussion is not intended to represent a comprehensive list of our accounting policies. For a detailed discussion of the application of these and other accounting policies, see Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" to the accompanying consolidated financial statements included elsewhere in this Annual Report.
Revenue Recognition
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. Historically, adjustments related to these estimates have not been material.
Income Taxes
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In determining income for financial statement purposes, we must make certain
estimates and judgments. These estimates and judgments affect the calculation of
certain tax liabilities and the determination of the recoverability of certain
deferred tax assets, which arise from temporary differences between the tax and
financial statement recognition of revenue and expense. Certain deferred tax
assets are reviewed for recoverability and valued accordingly, considering
available positive and negative evidence, including our past results, estimated
future taxable income streams and the impact of tax planning strategies in the
applicable tax paying jurisdiction. A valuation allowance is established to
reduce deferred tax assets to the amount that is considered more likely than not
to be realized. Valuations related to tax accruals and assets can be impacted by
changes in accounting regulations, changes in tax codes and rulings, changes in
statutory tax rates, and changes in our forecasted future taxable income. Any
reduction in future taxable income, including but not limited to any future
restructuring activities, may require that we record an additional valuation
allowance against our deferred tax assets. An increase in the valuation
allowance could result in additional income tax expense in such period and could
have a significant impact on our future earnings.
In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations in a multitude of
jurisdictions across our global operations. Certain tax positions may be
considered uncertain requiring an assessment of whether an allowance should be
recorded. Our provision for uncertain tax positions provides a recognition
threshold based on an estimate of whether it is more likely than not that a
position will be sustained upon examination. We measure our uncertain tax
position as the largest amount of benefit that has greater than a 50% likelihood
of being realized upon ultimate settlement. We record interest and penalties
related to unrecognized tax benefits as a component of provision for income
taxes.
We recognize potential liabilities and record tax liabilities for anticipated
tax audit issues in the United States and other tax jurisdictions based on our
estimate of whether, and the extent to which, additional taxes will be due.
These tax liabilities are reflected net of related tax loss carryforwards. We
adjust these reserves in light of changing facts and circumstances; however, due
to the complexity of some of these uncertainties, the ultimate resolution may
result in a payment that is materially different from our current estimate of
the tax liabilities. If our estimate of tax liabilities proves to be less than
the ultimate assessment, an additional charge to expense would result. If
payment of these amounts ultimately proves to be less than the recorded amounts,
the reversal of the liabilities would result in tax benefits being recognized in
the period when we determine the liabilities are no longer necessary. See Note
7, "Income Taxes" to the accompanying consolidated financial statements included
elsewhere in this Annual Report.
Indefinite-Lived Intangible Assets and 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. 44 -------------------------------------------------------------------------------- For fiscal 2021, 2020 and 2019 the Company performed a quantitative impairment assessment for goodwill. The Company calculated the fair value of its six reporting units considering three valuation approaches: (a) the income approach; (b) the guideline public company method; and (c) the comparable transaction method. 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 each 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. The key uncertainties in these 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. Fair value under the guideline public company method is determined for each reporting unit by applying market multiples for comparable public companies to the reporting unit's financial results. Fair value under the comparable transaction method 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 guideline public company method and the comparable transaction method calculations are the assumptions used in determining the reporting unit's comparable public companies, comparable transactions and the selection of the market multiples. The Company did not record any goodwill impairments in fiscal 2021, 2020 or 2019. As ofSeptember 30, 2021 , the fair values of the reporting units exceeded their respective carrying amount by 10% or more. A 10% decrease in the discounted cash flows utilized in quantitative impairment assessment for each of the reporting units would not have changed our determination that the fair value of each reporting unit was in excess of its carrying value. As noted above, ASC 350 also requires that the Company test the indefinite-lived intangible assets for impairment at least annually. Under ASC 350, if the carrying value of the indefinite-lived asset is higher than its fair value, then the asset is deemed to be impaired and the impairment charge is estimated as the excess carrying value over the fair value. The Company calculated the fair value of its indefinite-lived intangible assets using the income approach, specifically the relief-from-royalty method. The relief-from-royalty method is used to estimate the cost savings that accrue to the owner of an intangible asset who would otherwise have to pay royalties or license fees on revenues earned through the use of the asset. Internally forecasted revenues, which the Company believes reasonably approximate market participant assumptions, are multiplied by a royalty rate to arrive at the estimated net after tax cost savings. The royalty rate used in the analysis is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. The net after tax cost savings are discounted using the Discount Rate. 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 indefinite lived intangible assets' forecasted performance. The key uncertainties in these calculations are the assumptions used in determining the revenue associated with each indefinite-lived intangible asset and the royalty rate. During fiscal year 2021, 2020, and 2019 the results indicated all indefinite-lived intangible assets had significant excess of fair value over the carrying value. A reasonably possible change in the estimated revenues associated with the indefinite-lived intangible assets, selected royalty rates or the residual growth rate would not result in an impairment of any of these assets. Inventories We account for inventory valuation for a majority of the Company using the last-in, first-out ("LIFO") method measured at the lower of cost or market value. We utilize the LIFO method of valuing inventories because it reflects how we monitor and manage our business and it matches current costs and revenues. Valuation of inventory using the LIFO method is made at the end of our fiscal year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on estimates of expected year-end inventory levels and costs. Other inventories, consisting mostly of foreign inventories, are measured using first-in, first-out ("FIFO") costing methods. Inventory cost, regardless of valuation method, includes direct material, direct labor and manufacturing overhead costs. In circumstances where inventory levels are in excess of anticipated market demand, where inventory is deemed technologically obsolete or not marketable due to its condition or where the inventory cost for an item exceeds its market value, we record a charge to cost of goods sold and reduce the inventory to its market value. 45 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" to the accompanying consolidated financial statements included elsewhere in this Annual Report.
Special Note Regarding Forward-Looking Statements and Information
This Annual Report on Form 10-K 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 Annual Report 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 Annual 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 Annual 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: •declines in, and uncertainty regarding, the general business and economic conditions inthe United States and international markets in which we operate; •weakness or another downturn inthe United States non-residential construction industry; •widespread outbreak of diseases, such as the novel coronavirus (COVID-19) pandemic; •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; •adverse weather conditions; •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, including inability or unwillingness to pay our invoices on time, 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; •changes in our financial obligations relating to pension plans that we maintain inthe 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; 46 -------------------------------------------------------------------------------- •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; •changes in foreign laws and legal systems, including as a result of Brexit; •our inability to introduce new products effectively or implement our innovation strategies; •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 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; •challenges attracting and retaining key personnel or high-quality employees; •future changes to tax legislation; •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; and •other risks and factors described in this report and from time to time in documents that we file with theSEC . You should read this Annual Report 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 Annual Report are qualified in their entirety by these cautionary statements. These forward-looking statements are made only as of the date of this Annual Report, 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.
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