GIBRALTAR INDUSTRIES, INC. Certain information set forth herein includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and, therefore are, or may be deemed to be, "forward-looking statements." These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms "believes," "anticipates," "aspires," "expects," "estimates," "seeks," "projects," "intends," "plans," "may," "will" or "should" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, competition, strategies and the industries in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the "Risk Factors" disclosed in our Annual Report on Form 10-K along with Item 1A of this Form 10-Q. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition, liquidity, and the development of the industries in which we operate are consistent with the forward-looking statements contained in this quarterly report, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements that we make herein speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. We use certain operating performance measures, specifically consolidated gross margin, operating margin by segment and consolidated operating margin, to manage our businesses, set operational goals, and establish performance targets for incentive compensation for our employees. We define consolidated gross margin as a percentage of total consolidated gross profit to total consolidated net sales. We define operating margin by segment as a percentage of total income from operations by segment to total net sales by segment and consolidated operating margin as a percentage of total consolidated income from operations to total consolidated net sales. We believe consolidated gross margin and operating margin may be useful to investors in evaluating the profitability of our segments and Company on a consolidated basis.
Overview
The Company operates and reports its results in the following three reporting segments: •Renewable Energy and Conservation; •Residential Products; and •Industrial and Infrastructure Products. The Company serves customers primarily inNorth America including renewable energy (solar) developers, institutional and commercial growers of food and plants, home improvement retailers, wholesalers, distributors, and contractors. As ofJune 30, 2020 , we operated 44 facilities in 19 states,Canada ,China andJapan which includes 32 manufacturing facilities and five distribution centers. Our operational infrastructure provides the necessary scale to support local, regional, and national customers in each of our markets.
COVID-19 Update
While the Company continues to encounter challenges and uncertainty associated
with COVID-19, the pandemic did not have a material adverse effect on our
reported results for the three and six months ended
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Table of Contents
While most of our operations have been considered essential businesses and have
remained open during the pandemic, the decision to keep our team intact despite
some pandemic related softness in demand in certain businesses enabled us to
deliver revenue and earnings growth during this period. Our top priorities
continue to be focused on our organization, keeping the team and their families
as safe as possible, our supply chain operating well, and providing a high level
of responsiveness to customer needs. We will continue to actively monitor the
impact of the COVID-19 outbreak on operations for the remainder of 2020 and
beyond, and make adjustments to our operating protocols as necessary. The extent
to which our operations will be impacted by the outbreak will largely depend on
future developments, which are highly uncertain and cannot be accurately
predicted, including new information which may emerge concerning the severity,
or reemergence, of the outbreak and actions by government authorities to contain
the outbreak or respond to its impact, among other things. Refer to the
Company's Outlook section in this management discussion and analysis for
consideration relative to future periods.
Our Business
The end markets that our businesses serve are subject to changes in economic and competitive conditions that are influenced by various factors that could cause actual results to differ materially from current expectations. Such factors include, but are not limited to: •the impacts of the COVID-19 pandemic on the global economy, our customers, suppliers, employees, operations, business, liquidity and cash flows; •general economic conditions and conditions in the particular markets in which we operate; •changes in customer demand for residential construction, repair and remodeling, non-residential construction and infrastructure projects, botanical extraction equipment, and renewable energy sources; •capital spending, competitive factors and pricing pressures; •our ability to develop and launch new products in a cost-effective manner; •our ability to realize synergies from newly acquired businesses, and our ability to derive expected benefits from restructuring, productivity initiatives, liquidity enhancing actions, and other cost reduction actions; •changes in interest rates, exchange rates, commodity costs; •changes in governmental policies and funding, tax policies and incentives, tariffs, trade policies; •the need for protection of high value assets; and •climate change. We believe the key elements of our strategy discussed below will allow us to respond timely to the challenges presented by the COVID-19 pandemic and changes in the various factors that could cause our actual results to differ materially from current expectations. Business StrategyGibraltar's mission is to create compounding and sustainable value with strong leadership positions in higher growth and profitable end markets. The Company's operational foundation employs a Three-Pillar strategy focusing on three core tenets: Business Systems, Portfolio Management, and Organizational Development. 1.Business Systems - operational excellence and product innovation is supported by an execution review of the Company's monthly business performance, implementation of key investments, information technology operating and digital systems performance, and new product and services innovation. 2.Portfolio Management - acquisitions and portfolio management is focused on optimizing the Company's business portfolio and ensuring our human and financial capital are invested to provide sustainable, profitable growth while expanding our relevance to customers and shaping our markets. The recent acquisitions ofApeks, LLC ("Apeks") inAugust 2019 ,Thermo Energy Systems Inc. ("Thermo") inJanuary 2020 , andDelta Separations LLC andTeaching Tech LLC (collectively "Delta Separations") inFebruary 2020 were the direct result of executing our Portfolio Management strategy. 3.Organizational Development is the third pillar of our strategy. In order to execute Business Systems and Portfolio Management, the Company must have a strong organization to execute, and the organization must continuously develop and improve. The Company aspires to make our workplace the "Best Place to Work", by focusing on creating the best development and learning environment for our people, proactively operating businesses that mitigate environmental and climate related impacts, and engaging and supporting 25 -------------------------------------------------------------------------------- Table of Contents the communities in which we are located. We believe doing so helps us attract and retain the best people, enhancing our ability to execute our business plans. In addition to our Three-Pillar strategy, the Company: •implemented new management tools to complement our core 80/20 toolkit and drive improvements in our operating margins; •increased the percentage of our sales that are direct to end customers, allowing us to have a more meaningful connection with our end customers, providing the opportunity to better understand the challenges our customers face, and developing solutions to these challenges; and •continued to shift the focus of our portfolio to take advantage of rising tides in the renewable energy and conservation markets. We believe the key elements of our strategy have, and will continue to, enable us to respond timely to changes in the end markets we serve, including evolving changes due to the outbreak of COVID-19. We have and expect to continue to examine the need for restructuring of our operations, including consolidation of facilities, reducing overhead costs, curtailing investments in inventory, and managing our business to generate incremental cash. We believe our enhanced strategy enabled us to better react to volatility in commodity costs and fluctuations in customer demand, along with helping to improve margins. We have used the improved cash flows generated by these initiatives to pay down debt, improve our liquidity position, and invest in growth initiatives. Overall, we continue to strive to achieve stronger financial results, make more efficient use of capital, and deliver higher shareholder returns. Recent Developments OnFebruary 13, 2020 , the Company acquired the assets ofCalifornia -based Delta Separations, a privately held ethanol-based extraction systems manufacturer and training and laboratory design and operations consultative partner for$50 million in an all cash transaction. Delta Separations had revenue of approximately$46 million in 2019. OnJanuary 15, 2020 , the Company acquired the assets of Canadian-based Thermo, a privately held provider of commercial greenhouse solutions inNorth America supporting the biologically grown organic food market, in an all cash transaction for approximately$7 million . The Company also expects to invest approximately$42 million into Thermo to provide an appropriate level of working capital. Thermo is expected to contribute annual revenue at a run rate of approximately$75 million . OnAugust 30, 2019 , the Company acquired all of the outstanding membership interests of Apeks, a designer and manufacturer of botanical oil extraction systems utilizing subcritical and supercritical carbon dioxide. The acquisition was financed through cash on hand of$12 million . Apeks had trailing twelve months of revenues as ofJune 30, 2019 of$17.7 million . The results of operations of Apeks have been included in the Renewable Energy and Conservation segment of the Company's consolidated financial statements from the date of acquisition. 26 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months EndedJune 30, 2020 Compared to the Three Months EndedJune 30, 2019 The following table sets forth selected results of operations data (in thousands) and its percentage of net sales for the three months endedJune 30 : 2020 2019 Net sales$ 285,814 100.0 %$ 262,655 100.0 % Cost of sales 213,556 74.7 % 199,097 75.8 % Gross profit 72,258 25.3 % 63,558 24.2 % Selling, general, and administrative expense 37,667 13.2 % 36,952 14.1 % Income from operations 34,591 12.1 % 26,606 10.1 % Interest expense 214 0.1 % 219 0.0 % Other income (1,787) (0.6) % (13) 0.0 % Income before taxes 36,164 12.6 % 26,400 10.1 % Provision for income taxes 8,872 3.1 % 6,487 2.5 % Net income$ 27,292 9.5 %$ 19,913 7.6 %
The following table sets forth the Company's net sales by reportable segment for
the three months ended
Change due to
Total
2020 2019 Change Acquisitions Operations
Net sales:
Renewable Energy and Conservation $ 98,259 $ 76,004 $ 22,255 $ 19,068 $ 3,187
Residential Products 139,472 130,433 9,039 - 9,039
Industrial and Infrastructure Products 48,263 56,547 (8,284) - (8,284)
Less: Intersegment sales (180) (329) 149 - 149
Net Industrial and Infrastructure
Products 48,083 56,218 (8,135) - (8,135)
Consolidated $ 285,814 $ 262,655 $ 23,159 $ 19,068 $ 4,091
Consolidated net sales increased by $23.2 million , or 8.8%, to $285.8 million
for the three months ended June 30, 2020 compared to the three months ended
June 30, 2019 . The 8.8% increase in revenue was largely the result of $19.1
million of sales generated from our first quarter 2020 acquisitions of Thermo
and Delta Separations and the prior year acquisition of Apeks. The $4.1 million
of organic growth in the quarter was primarily due to increased volume for both
our Residential Products segment and our Renewable Energy and Conservation
segment, which more than offset the volume decline in our Industrial and
Infrastructure Products segment.
Net sales in our Renewable Energy and Conservation segment increased 29.3%, or
$22.3 million , to $98.3 million for the three months ended June 30, 2020
compared to $76.0 million for the three months ended June 30, 2019 . Sales
generated from the current year acquisitions of Thermo and Delta Separations,
along with the prior year acquisition of Apeks, contributed $19.1 million to the
increase in the current year quarter. Organic growth of $3.2 million or 4.2% was
largely driven by healthy market dynamics and participation gains in our
renewable energy related businesses. These factors, along with the impact of
recent acquisitions contributed to the 15% improvement in backlog year over year
for this segment.
Net sales in our Residential Products segment increased 6.9%, or $9.0 million ,
to $139.5 million for the three months ended June 30, 2020 compared to $130.4
million for the three months ended June 30, 2019 . The increase from the prior
year quarter was largely due to strong repair and remodel activity by homeowners
during the COVID-19 pandemic along with participation gains.
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Table of Contents Net sales in our Industrial and Infrastructure Products segment decreased 14.4%, or$8.1 million , to$48.1 million for the three months endedJune 30, 2020 compared to$56.2 million for the three months endedJune 30, 2019 . Lower demand for its core industrial products during the COVID-19 pandemic resulted in a decrease in revenue in the Industrial businesses. Revenue in the Infrastructure business was comparable to the prior year quarter and its backlog continued to grow during the quarter. Our consolidated gross margin increased to 25.3% for the three months endedJune 30, 2020 compared to 24.2% for the three months endedJune 30, 2019 . This increase was the result of favorable alignment of material costs to customer selling prices, improved operating execution in all our core businesses compared to the prior year quarter, which included incremental costs for design refinement and field improvements for our solar tracking solution and benefits from our 80/20 simplification initiatives. Partially offsetting the above improvements were lower gross margins generated from our recent acquisitions. Selling, general, and administrative ("SG&A") expenses increased by$0.7 million , or 1.9%, to$37.7 million for the three months endedJune 30, 2020 from$37.0 million for the three months endedJune 30, 2019 . The$0.7 million increase was largely the result of$3.5 million in incremental SG&A expenses recorded quarter over quarter for our recent acquisitions, partially offset by a decrease in exit activity costs as compared to the prior year quarter along with a slowdown in spending due to COVID-19 pandemic-related restrictions on travel. Additionally, we have invested in the development of our organization and the safety of our team by reallocating SG&A spending. SG&A expenses as a percentage of net sales decreased to 13.2% for the three months endedJune 30, 2020 compared to 14.1% for the three months endedJune 30, 2019 . The following table sets forth the Company's income from operations and income from operations as a percentage of net sales by reportable segment for the three months endedJune 30 , (in thousands):
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