ATKORE INC. 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."
Impacts of COVID-19
The 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, 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 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, and remote work capabilities.
Results of Operations
The consolidated results of operations for the three months ended
Three months ended
($ in thousands) December 24, 2021 December 25, 2020 Change % Change
Net sales $ 840,801 $ 511,082 $ 329,719 64.5 %
Cost of sales 485,993 321,891 164,102 51.0 %
Gross profit 354,808 189,191 165,617 87.5 %
Selling, general and administrative 78,151 61,078 17,073 28.0 %
Intangible asset amortization 8,229 8,260 (31) (0.4) %
Operating income 268,428 119,853 148,575 124.0 %
Interest expense, net 6,918 8,254 (1,336) (16.2) %
Other income, net (308) (431) 123 (28.5) %
Income before income taxes 261,818 112,030 149,788 133.7 %
Income tax expense 56,975 26,964 30,011 111.3 %
Net income $ 204,843 $ 85,066 $ 119,777 140.8 %
19--------------------------------------------------------------------------------
Net sales
% Change
Volume (9.9) %
Average selling prices 72.0 %
Foreign exchange 0.2 %
Acquisitions 2.1 %
Other 0.1 %
Net sales 64.5 %
Net sales increased by $329.7 million , or 64.5%, to $840.8 million for the
three months ended December 24, 2021 , compared to $511.1 million for the three
months ended December 25, 2020 . The increase in net sales is primarily
attributed to increased average selling prices across the Company's products of
$368.0 million and increased net sales of $10.7 million due to the acquisitions
of Queen City Plastics and FRE Composites Group in the prior year. These
increases are offset by decreased sales volume of $50.7 million across varying
product categories within both the Electrical and the Safety & Infrastructure
segments. Pricing for PVC products, as well as other parts of the business, is
expected to return to more normal historical levels over time, but that time is
uncertain.
Cost of sales
% Change
Volume (10.5) %
Average input costs 53.5 %
Foreign exchange 0.2 %
Acquisitions 1.8 %
Other 6.0 %
Cost of sales 51.0 %
Cost of sales increased by $164.1 million , or 51.0%, to $486.0 million for the
three months ended December 24, 2021 compared to $321.9 million for the three
months ended December 25, 2020 . The increase was primarily due to higher input
costs of steel, copper and PVC resin of $172.2 million and the prior year
acquisitions of Queen City Plastics and FRE Composites Group of $5.7 million
partially offset by lower sales volume of $33.6 million across varying product
categories within both the Electrical and the Safety & Infrastructure segments.
Selling, general and administrative
Selling, general and administrative expenses increased by$17.1 million , or 28.0%, to$78.2 million for the three months endedDecember 24, 2021 compared to$61.1 million for the three months endedDecember 25, 2020 . The increase was primarily due to higher sales commission expense of$8.0 million , increased general spending on business improvement initiatives, including digital initiatives, of$3.6 million , and higher variable compensation of$2.1 million .
Intangible asset amortization
Intangible asset amortization expense remained fairly consistent to$8.2 million for the three months endedDecember 24, 2021 compared to$8.3 million for the three months endedDecember 25, 2020 .
Interest expense, net
Interest expense, net decreased by$1.3 million , or 16.2% to$6.9 million for the three months endedDecember 24, 2021 compared to$8.3 million for the three months endedDecember 25, 2020 . The decrease is primarily due to interest expense being derived from a lower average principal balance resulting from the Company's fiscal 2021 debt restructuring transactions.
Other income, net
Other income, net remained consistent at$0.3 million for the three months endedDecember 24, 2021 compared to$0.4 million for the three months endedDecember 25, 2020 . 20 --------------------------------------------------------------------------------
Income tax expense
The Company's income tax rate decreased to 21.8% for the three months ended
Segment Results
The Electrical segment manufactures high quality products used in the construction of electrical power systems including conduit, cable and installation accessories. This segment serves contractors in partnership with the electrical wholesale channel.
The Safety & Infrastructure segment designs and manufactures solutions including
metal framing, mechanical pipe, perimeter security and cable management for the
protection and reliability of critical infrastructure. These solutions are
marketed to contractors, original equipment manufacturers and end users.
Both segments use Adjusted EBITDA as the primary measure of profit and loss.
Segment Adjusted EBITDA is income (loss) before income taxes, adjusted to
exclude unallocated expenses, depreciation and amortization, interest expense,
net, restructuring charges, stock-based compensation, loss on extinguishment of
debt, certain legal matters, transaction costs and other items, such as
inventory reserves and adjustments, loss on disposal of property, plant and
equipment, insurance recovery related to damages of property, plant and
equipment, release of indemnified uncertain tax positions, and realized or
unrealized gain (loss) on foreign currency impacts of intercompany loans and
related forward currency derivatives. We define segment Adjusted EBITDA margin
as segment Adjusted EBITDA as a percentage of segment Net sales.
Electrical
Three months ended
($ in thousands) December 24, 2021 December 25, 2020 Change % Change
Net sales $ 641,683 $ 387,145 $ 254,538 65.7 %
Adjusted EBITDA $ 279,547 $ 133,273 $ 146,274 109.8 %
Adjusted EBITDA margin 43.6 % 34.4 %
Net sales
% Change
Volume (6.0) %
Average selling prices 68.6 %
Foreign exchange 0.3 %
Acquisitions 2.8 %
Net sales 65.7 %
Net sales increased by $254.5 million , or 65.7%, to $641.7 million for the three
months ended December 24, 2021 compared to $387.1 million for the three months
ended December 25, 2020 . The increase in net sales is primarily attributed to
increased average selling prices of $265.8 million across the Electrical product
lines and increased net sales of $10.6 million from the prior period
acquisitions of Queen City Plastics and FRE Composites Group . These increases
were partially offset by decreased sales volume of $23.4 million . Pricing for
PVC products, as well as other parts of the business, is expected to return to
more normal historical levels over time, but that time is uncertain.
Adjusted EBITDA
Adjusted EBITDA for the three months endedDecember 24, 2021 increased by$146.3 million , or 109.8%, to$279.5 million from$133.3 million for the three months endedDecember 25, 2020 . Adjusted EBITDA margins increased to 43.6% for the three months endedDecember 24, 2021 compared to 34.4% for the three months endedDecember 25, 2020 . The increase in Adjusted EBITDA and Adjusted EBITDA margins was largely due to higher average selling prices over input costs. 21 -------------------------------------------------------------------------------- Safety & Infrastructure Three months ended ($ in thousands) December 24, 2021 December 25, 2020 Change % Change Net sales$ 200,510 $ 124,765 $ 75,745 60.7 % Adjusted EBITDA $ 27,432 $ 14,252$ 13,180 92.5 % Adjusted EBITDA margin 13.7 % 11.4 % Net sales % Change Volume (22.0) % Average selling prices 81.9 % Acquisitions 0.1 % Other 0.7 % Net sales 60.7 % Net sales increased by$75.7 million , or 60.7%, for the three months endedDecember 24, 2021 to$200.5 million compared to$124.8 million for the three months endedDecember 25, 2020 . The increase is primarily attributed to increased average selling prices of$102.2 million driven by higher input costs of steel partially offset by lower volumes of$27.4 million primarily driven by decreases in the mechanical pipe product line.
Adjusted EBITDA
Adjusted EBITDA increased by$13.2 million , or 92.5%, to$27.4 million for the three months endedDecember 24, 2021 compared to$14.3 million for the three months endedDecember 25, 2020 . Adjusted EBITDA margins increased to 13.7% for the three months endedDecember 24, 2021 compared to 11.4% for the three months endedDecember 25, 2020 . The Adjusted EBITDA increase is primarily due to the price increases, partially offset by lower volume, discussed above.
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$499.0 million as ofDecember 24, 2021 , of which$54.6 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 . 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 ofDecember 24, 2021 , 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$325.0 million and approximately$315.5 million was available under the ABL Credit Facility as ofDecember 24, 2021 . 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 Senior Secured 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. 22 --------------------------------------------------------------------------------
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 the 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 payments of interest and principal on our debt.
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 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 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.
The table below summarizes cash flow information derived from our statements of cash flows for the periods indicated:
Three months ended
(in thousands) December 24, 2021
Cash flows provided by (used in):
Operating activities $ 97,192 $ 86,276
Investing activities (45,024) (14,258)
Financing activities (129,048) (78,981)
Operating activities
During the three months ended December 24, 2021 , the Company was provided $97.2
million by operating activities compared to $86.3 million during the three
months ended December 25, 2020 . The $10.9 million increase in cash provided was
primarily due to higher cash flows from the increase in operating income of
$148.6 million . This was partially offset by a $57.0 million increase in cash
used in working capital primarily due to higher inventory build during the first
quarter of fiscal 2022.
Investing activities
During the three months ended December 24, 2021 , the Company used $45.0 million
in investing activities compared to $14.3 million during the three months ended
December 25, 2020 . The increase in cash used in investing activities is
primarily due to the acquisitions of Sasco and Four Star for total cash paid of
$36.1 million during the three months ended December 24, 2021 .
Financing Activities
During the three months endedDecember 24, 2021 , the Company used$129.0 million in financing activities compared to$79.0 million used during the three months endedDecember 25, 2020 . The increase in cash used in financing activities is primarily due to$69.5 million more cash used to repurchase common stock during the three months endedDecember 24, 2021 compared to the same period in the prior year. 23 --------------------------------------------------------------------------------
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.
Changes in Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates since the filing of our Annual Report on Form 10-K.
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: •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; 24 -------------------------------------------------------------------------------- •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; •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 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, increases in the 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 Quarterly Report and from time to time in documents that we file with theSEC . You should read this Quarterly 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 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, 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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