QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-37793
_________________________________________
Atkore Inc.
(Exact name of registrant as specified in its charter)
_________________________________________
Delaware
90-0631463
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
16100 South Lathrop Avenue, Harvey, Illinois60426
(Address of principal executive offices) (Zip Code)
708-339-1610
(Registrant’s telephone number, including area code)
________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common Stock, $.01 par value per share
ATKR
New York Stock Exchange
_____________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
_____________________
As of January 27, 2023, there were 39,504,703 shares of the registrant’s common stock, $0.01 par value per share, outstanding.
See Notes to unaudited condensed consolidated financial statements.
2
ATKORE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended
(in thousands)
Note
December 30, 2022
December 24, 2021
Net income
$
173,492
$
204,843
Other comprehensive (loss) income, net of tax:
Change in foreign currency translation adjustment
11,262
(1,458)
Change in unrecognized loss related to pension benefit plans
4
62
125
Total other comprehensive (loss) income
8
11,324
(1,333)
Comprehensive income
$
184,816
$
203,510
See Notes to unaudited condensed consolidated financial statements.
3
ATKORE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share data)
Note
December 30, 2022
September 30, 2022
Assets
Current Assets:
Cash and cash equivalents
$
307,827
$
388,751
Accounts receivable, less allowance for current and expected credit losses of $2,488 and $2,544, respectively
506,854
528,904
Inventories, net
9
445,780
454,511
Prepaid expenses and other current assets
63,342
80,654
Total current assets
1,323,803
1,452,820
Property, plant and equipment, net
10
418,550
390,220
Intangible assets, net
11
426,900
382,706
Goodwill
11
323,214
289,330
Right-of-use assets, net
69,733
71,035
Deferred tax assets
6
5,683
9,409
Other long-term assets
3,481
3,476
Total Assets
$
2,571,364
$
2,598,996
Liabilities and Equity
Current Liabilities:
Accounts payable
210,850
244,100
Income tax payable
12,941
5,521
Accrued compensation and employee benefits
29,903
61,273
Customer liabilities
111,154
99,447
Lease obligations
13,850
13,789
Other current liabilities
68,326
77,781
Total current liabilities
447,024
501,911
Long-term debt
12
761,074
760,537
Long-term lease obligations
56,835
57,975
Deferred tax liabilities
6
16,152
15,640
Other long-term liabilities
15,237
13,146
Total Liabilities
1,296,322
1,349,209
Equity:
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 39,867,895 and 41,351,350 shares issued and outstanding, respectively
400
415
Treasury stock, held at cost, 260,900 and 260,900 shares, respectively
(2,580)
(2,580)
Additional paid-in capital
490,611
500,117
Retained earnings
825,433
801,981
Accumulated other comprehensive loss
8
(38,822)
(50,146)
Total Equity
1,275,042
1,249,787
Total Liabilities and Equity
$
2,571,364
$
2,598,996
See Notes to unaudited condensed consolidated financial statements.
4
ATKORE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
(in thousands)
Note
December 30, 2022
December 24, 2021
Operating activities:
Net income
$
173,492
$
204,843
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
25,967
20,046
Deferred income taxes
6
3,275
(5,720)
Stock-based compensation
5,270
3,427
Amortization of right-of-use assets
3,538
3,124
Other non-cash adjustments to net income
1,410
4,050
Changes in operating assets and liabilities, net of effects from acquisitions
Accounts receivable
26,841
(12,301)
Inventories
11,565
(75,091)
Prepaid expenses and other current assets
(6,930)
(11,591)
Accounts payable
(48,826)
(13,335)
Accrued and other liabilities
(36,070)
(23,171)
Income taxes
38,787
1,823
Other, net
532
1,088
Net cash provided by operating activities
198,851
97,192
Investing activities:
Capital expenditures
(35,006)
(9,358)
Proceeds from sale of properties and equipment
—
432
Acquisition of businesses, net of cash acquired
(82,181)
(36,098)
Net cash used in investing activities
(117,187)
(45,024)
Financing activities:
Issuance of common stock, net of shares withheld for tax
(14,775)
(24,505)
Repurchase of common stock
(150,056)
(104,543)
Net cash used for financing activities
(164,831)
(129,048)
Effects of foreign exchange rate changes on cash and cash equivalents
2,243
(450)
Decrease in cash and cash equivalents
(80,924)
(77,330)
Cash and cash equivalents at beginning of period
388,751
576,289
Cash and cash equivalents at end of period
$
307,827
$
498,959
Supplementary Cash Flow information
Capital expenditures, not yet paid
$
7,227
$
1,501
Operating lease right-of-use assets obtained in exchange for lease liabilities
$
1,181
$
1,066
Acquisitions of businesses, not yet paid
14,125
$
2,864
See Notes to unaudited condensed consolidated financial statements.
5
ATKORE INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
Common Stock
Treasury Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Equity
(in thousands)
Shares
Amount
Amount
Balance as of September 30, 2022
41,351
$
415
$
(2,580)
$
500,117
$
801,981
$
(50,146)
$
1,249,787
Net income
—
—
—
—
173,492
—
173,492
Other comprehensive income
—
—
—
—
—
11,324
11,324
Stock-based compensation
—
—
—
5,270
—
—
5,270
Issuance of common stock, net of shares withheld for tax
200
1
—
(14,776)
—
—
(14,775)
Repurchase of common stock
(1,683)
(16)
—
—
(150,040)
—
(150,056)
Balance as of December 30, 2022
39,868
$
400
$
(2,580)
$
490,611
$
825,433
$
(38,822)
$
1,275,042
Common Stock
Treasury Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Equity
(in thousands)
Shares
Amount
Amount
Balance as of September 30, 2021
45,997
$
461
$
(2,580)
$
506,921
$
388,660
$
(28,726)
$
864,736
Net income
—
—
—
—
204,843
—
204,843
Other comprehensive loss
—
—
—
—
—
(1,333)
(1,333)
Stock-based compensation
—
—
—
3,427
—
—
3,427
Issuance of common stock, net of shares withheld for tax
355
4
—
(24,509)
—
—
(24,505)
Repurchase of common stock
(958)
(10)
—
(104,537)
—
(104,547)
Balance as of December 24, 2021
45,394
$
455
$
(2,580)
$
485,839
$
488,966
$
(30,059)
$
942,621
See Notes to unaudited condensed consolidated financial statements.
6
ATKORE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars and shares in thousands, except per share data)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Organization and Ownership Structure — Atkore Inc. (the “Company”, “Atkore” or “AI”) is a leading manufacturer of Electrical products primarily for the non-residential construction and renovation markets and Safety & Infrastructure solutions for the construction and industrial markets. Atkore was incorporated in the State of Delaware on November 4, 2010 under the name Atkore International Group, Inc. As of December 30, 2022, Atkore was the sole stockholder of Atkore International Holdings Inc. (“AIH”), which in turn was the sole stockholder of Atkore International Inc. ("AII"). On December 31, 2022, AIH merged into AII, with AII being the surviving entity. Accordingly, Atkore is now the sole stockholder of AII.
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.
Basis of Presentation — The accompanying unaudited condensed consolidated financial statements of the Company included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s accounting policies and on the same basis as those financial statements included in the Company’s latest Annual Report on Form 10-K for the year ended September 30, 2022, filed with the U.S. Securities and Exchange Commission (the “SEC”) on November 18, 2022, and should be read in conjunction with those consolidated financial statements and the notes thereto. Certain information and disclosures normally included in the Company’s annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.
The unaudited condensed consolidated financial statements include the assets and liabilities used in operating the Company’s business. All intercompany balances and transactions have been eliminated in consolidation. The results of companies acquired or disposed of are included in the unaudited condensed consolidated financial statements from the effective date of acquisition or up to the date of disposal.
These statements include all adjustments (consisting of normal recurring adjustments) that the Company considered necessary to present a fair statement of its results of operations, financial position and cash flows. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year.
Fiscal Periods — The Company has a fiscal year that ends on September 30. The Company’s fiscal quarters typically end on the last Friday in December, March and June as it follows a 4-5-4 calendar.
Use of Estimates — The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclose contingent assets and liabilities at the date of the condensed consolidated financial statements and report the associated amounts of revenues and expenses. Actual results could differ materially from these estimates.
7
Recent Accounting Pronouncements
Atkore has not adopted any accounting standards in the current fiscal year. There are no accounting standards with adoption dates in the next fiscal year that are applicable to the Company.
2. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company’s revenue arrangements primarily consist of a single performance obligation to transfer promised goods which is satisfied at a point in time when title, risks and rewards of ownership, and subsequently control have transferred to the customer. This generally occurs when the product is shipped to the customer, with an immaterial amount of transactions in which control transfers upon delivery. The Company primarily offers assurance-type standard warranties that do not represent separate performance obligations.
The Company has certain arrangements that require it to estimate at the time of sale the amounts of variable consideration that should not be recorded as revenue as certain amounts are not expected to be collected from customers, as well as an estimate of the value of products to be returned. The Company principally relies on historical experience, specific customer agreements, and anticipated future trends to estimate these amounts at the time of sale and to reduce the transaction price. These arrangements include sales discounts and allowances, volume rebates, and returned goods. The Company records its obligations related to these items within the Customer Liabilities line on the balance sheet.
The Company records amounts billed to customers for reimbursement of shipping and handling costs within revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of goods sold. Sales taxes and other usage-based taxes are excluded from revenue. The Company does not evaluate whether the selling price includes a financing interest component for contracts that are less than a year. The Company also expenses costs incurred to obtain a contract, primarily sales commissions, as all obligations will be settled in less than one year.
The Company typically receives payment 30 to 60 days from the point it has satisfied the related performance obligation. See Note 16, “Segment Information” for revenue disaggregated by geography and product categories.
3. ACQUISITIONS
From time to time, the Company enters into strategic acquisitions in an effort to better service existing customers and to obtain new customers.
Fiscal 2023
On November 7, 2022, Atkore International Inc., acquired the assets of Elite Polymer Solutions (“Elite”), for a purchase price of $89,981. Elite is a manufacturer of high density polyethylene (HDPE) conduit, primarily serving the telecommunications, utility, and transportation markets. As a result of the acquisition, the Company preliminarily recognized $30,806 of goodwill, $55,260 of identifiable intangible assets, of which $55,000 relates to customer relationships with an estimated useful life of 7 years, and $3,915 of working capital and other net tangible assets. As of December 30, 2022, the purchase price allocation has not been finalized as the Company is finalizing working capital, inventory, intangible assets, deferred tax assets and liabilities and fixed asset fair values.
The acquisition in fiscal 2023 was funded using cash-on-hand. The Company incurred approximately $839 in acquisition-related expenses for this acquisition, which was recorded as a component of selling, general and administrative expenses.
Net sales and net income of the above acquisition are included in the condensed consolidated financial statement of operations for the post-acquisition period. Due to the immaterial nature of this acquisition,
8
the Company did not include the pro forma results of operations for this acquisition for the current period or the previous interim period.
Fiscal 2022
On August 31, 2022, Atkore International Inc., and Atkore HDPE, LLC, wholly-owned subsidiaries of the Company, acquired the outstanding stock of two separate, but related, companies doing business as Cascade Poly Pipe & Conduit (“Cascade”) and Northwest Polymers, for a total purchase price of $62,100, of which $52,738 was paid at closing and an additional purchase price payable of $9,362 was accrued. In the first quarter of fiscal 2023, the Company paid $3,111 of the accrued purchase price. Cascade is a manufacturer specializing in smooth wall HDPE conduit made from recycled materials, primarily serving the telecommunications, utility and datacom markets. Northwest Polymers is a leading recycler of PVC, HDPE and other plastics and a strategic supply partner to Cascade and other manufacturers. The purchase price allocation has not been finalized as the Company is finalizing working capital, inventory, intangible assets, deferred tax assets and liabilities and fixed asset fair values.
On June 22, 2022, Atkore International Inc., a wholly-owned subsidiary of the Company acquired all of the outstanding stock of United Poly Systems, LLC (“United Poly”), for a purchase price of $227,234. United Poly is a manufacturer of high density polyethylene (“HDPE”) pressure pipe and conduit, primarily serving the telecommunications, water infrastructure, renewables and energy markets. The purchase price allocation has not been finalized as the Company is finalizing working capital, inventory, intangible asset, deferred tax asset and liabilities and fixed asset fair values.
On May 19, 2022, Allied Tube and Conduit Corporation, wholly-owned subsidiary of the Company acquired the assets of Talon Products, LLC (“Talon”), for a purchase price of $4,193. Included in Talon’s purchase price is a purchase price payable of $402. Talon is a manufacturer of non-metallic, injection molded cable cleats, primarily serving the power distribution markets. The Company finalized the purchase price allocation of Talon in the fourth quarter of fiscal 2022.
On December 21, 2021, Atkore HDPE, LLC and Allied Tube and Conduit Corporation, wholly-owned subsidiaries of the Company, acquired the assets of Four Star Industries LLC (“Four Star”), for a purchase price of $23,195. Four Star is a manufacturer of high density polyethylene (HDPE) conduit, primarily serving the telecommunications, utility, infrastructure and datacom markets. The Company finalized the purchase price allocation of Four Star in the third quarter of fiscal 2022.
On December 20, 2021, Columbia-MBF Inc., a wholly-owned subsidiary of the Company acquired all of the outstanding stock of Sasco Tubes & Roll Forming Inc. (“Sasco”), for a purchase price of $16,184, of which $13,320 was paid at closing and additional purchase price payable of $2,864 was accrued. Sasco is a Canadian manufacturer of metal framing and related products serving the electrical, mechanical, construction and solar industries. The Company finalized the purchase price allocation of Sasco in the third quarter of fiscal 2022.
The acquisitions in fiscal 2022 were funded using cash-on-hand. The Company incurred approximately $3,424 in acquisition-related expenses for these acquisitions, which were recorded as a component of selling, general and administrative expenses.
9
The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed, based on their fair values. The following table summarizes the Level 3 fair values assigned to the net assets acquired and liabilities assumed as of the acquisition date for fiscal 2022:
(in thousands)
United Poly
Other
Total
Fair value of consideration transferred:
Cash consideration
$
227,234
$
93,044
$
320,278
Purchase price payable
—
12,628
12,628
Total consideration transferred
$
227,234
$
105,672
$
332,906
Fair value of assets acquired and liabilities assumed:
Cash
11,639
126
11,765
Accounts receivable
23,679
9,291
32,970
Inventories
13,455
8,111
21,566
Intangible assets
128,840
54,330
183,170
Fixed assets
13,648
8,533
22,181
Accounts payable
(11,940)
(5,086)
(17,026)
Income taxes
(15,542)
(2,075)
(17,617)
Other
(1,742)
244
(1,498)
Net assets acquired
162,037
73,474
235,511
Excess purchase price attributed to goodwill acquired
$
65,197
$
32,198
$
97,395
The Company estimates $31.1 million of the goodwill recognized by the fiscal 2022 acquisitions is deductible for tax purposes, $11.7 million that relates to United Poly and $19.4 million that relates to Cascade and Northwest Polymer. The Company estimates Goodwill recognized from the acquisitions in fiscal 2022 consists largely of the synergies and economies of scale from integrating this company with existing businesses.
The following table summarizes the fair value of intangible assets as of the acquisition date:
United Poly
Other
(in thousands)
Fair Value
Weighted Average Useful Life (Years)
Fair Value
Weighted Average Useful Life (Years)
Customer relationships
$
111,700
11
$
50,020
9
Other
17,140
8
4,310
8
Total intangible assets
$
128,840
$
54,330
Net sales and net income of the acquired companies are included in the consolidated statement of operations for the post-acquisition period. Due to the immaterial nature of the acquisitions acquired in the first quarter of fiscal 2022, the Company did not include the pro forma results of operations for these acquisitions for the current period or the previous interim period.
10
4. POSTRETIREMENT BENEFITS
The Company provides pension benefits through a number of noncontributory and contributory defined benefit retirement plans covering eligible U.S. employees. As of September 30, 2017, all defined pension benefit plans were frozen, whereby participants no longer accrue credited service. The net periodic benefit credit was as follows:
Three months ended
(in thousands)
Note
December 30, 2022
December 24, 2021
Interest cost
$
1,294
$
739
Expected return on plan assets
(1,257)
(1,348)
Amortization of actuarial loss
167
158
Net periodic benefit cost (credit)
5
$
204
$
(451)
5. OTHER (INCOME) AND EXPENSE, NET
Other (income) and expense, net consisted of the following:
Foreign exchange loss (gain) on intercompany loans
(149)
319
Pension-related benefits
204
(451)
Other (income) and expense, net
$
41
$
(308)
6. INCOME TAXES
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law. The IRA contains significant tax law changes, including a corporate alternative minimum tax of 15% on adjusted financial statement income, which if applicable for the Company would be effective beginning October 1, 2023, a 1% excise tax on stock repurchases after December 31, 2022, and various tax incentives which include, but are not limited to, credits related to the manufacturing of solar powered energy which will take effect January 1, 2023. The Company is currently evaluating this legislation and determining what impact it would have to the Company’s financial statements.
For the three months ended December 30, 2022 and December 24, 2021, the Company’s effective tax rate attributable to income before income taxes was 21.9% and 21.8%, respectively. For the three months ended December 30, 2022 and December 24, 2021, the Company’s income tax expense was $48,559 and $56,975 respectively. The increase in the current period effective tax rate was driven by a decrease in the excess tax benefit associated with stock compensation offset by a decrease in state tax expense.
A valuation allowance has been recorded against certain net operating losses in certain foreign jurisdictions. A valuation allowance is recorded when it is determined to be more likely than not that these assets will not be fully realized in the foreseeable future. The realization of deferred tax assets is dependent upon whether the Company can generate future taxable income in the appropriate character and jurisdiction to utilize the assets. The amount of the deferred tax assets considered realizable is subject to adjustment in future periods.
11
The Company recognizes the benefits of uncertain tax positions taken or expected to be taken in tax returns in the provision for income taxes only for those positions that we have determined are more likely than not to be realized upon examination. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the three months ended December 30, 2022, the balance of unrecognized tax benefits increased by $1,671 primarily due to uncertain tax positions in various state jurisdictions.
For the three months ended December 30, 2022, the Company made no additional provision for U.S. or non-U.S. income taxes for unrecognized deferred tax liabilities for temporary differences related to basis differences in investments in subsidiaries, as the investments are essentially permanent in duration.
7. EARNINGS PER SHARE
The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating securities as if all of the net earnings for the period had been distributed. The Company’s participating securities consist of share-based payment awards that contain a non-forfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common stockholders.
Basic earnings per common share excludes dilution and is calculated by dividing the net earnings allocated to common stock by the weighted-average number of common stock outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocated to common stock by the weighted-average number of shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended
(in thousands, except per share data)
December 30, 2022
December 24, 2021
Numerator:
Net income
$
173,492
$
204,843
Less: Undistributed earnings allocated to participating securities
2,807
3,642
Net income available to common shareholders
$
170,685
$
201,201
Denominator:
Basic weighted average common shares outstanding
40,085
45,980
Effect of dilutive securities: Non-participating employee stock options (1)
528
595
Diluted weighted average common shares outstanding
40,613
46,575
Basic earnings per share
$
4.26
$
4.38
Diluted earnings per share
$
4.20
$
4.32
(1) Stock options to purchase shares of common stock that would have been anti-dilutive are not included in the calculation. There were zero anti-dilutive options outstanding during the three months ended December 30, 2022 and December 24, 2021, respectively.
12
8. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive loss by component for the three months ended December 30, 2022 and December 24, 2021.
(in thousands)
Defined Benefit Pension Items
Currency Translation Adjustments
Total
Balance as of September 30, 2022
$
(16,795)
$
(33,351)
$
(50,146)
Other comprehensive income before reclassifications
—
11,262
11,262
Amounts reclassified from accumulated other comprehensive income, net of tax
62
—
62
Net current period other comprehensive income (loss)
62
11,262
11,324
Balance as of December 30, 2022
$
(16,733)
$
(22,089)
$
(38,822)
(in thousands)
Defined Benefit Pension Items
Currency Translation Adjustments
Total
Balance as of September 30, 2021
$
(19,318)
$
(9,408)
$
(28,726)
Other comprehensive loss before reclassifications
—
(1,458)
(1,458)
Amounts reclassified from accumulated other comprehensive income, net of tax
125
—
125
Net current period other comprehensive income (loss)
125
(1,458)
(1,333)
Balance as of December 24, 2021
$
(19,193)
$
(10,866)
$
(30,059)
9. INVENTORIES, NET
A majority of the Company’s inventories are recorded at the lower of cost (primarily last in, first out, or “LIFO”) or market or net realizable value, as applicable. Approximately 80% and 82% of the Company’s inventories were valued at the lower of LIFO cost or market at December 30, 2022 and September 30, 2022, respectively. Interim LIFO determinations, including those at December 30, 2022, are based on management’s estimates of future inventory levels and costs for the remainder of the current fiscal year.
(in thousands)
December 30, 2022
September 30, 2022
Purchased materials and manufactured parts, net
$
152,805
$
166,038
Work in process, net
50,059
61,182
Finished goods, net
242,916
227,291
Inventories, net
$
445,780
$
454,511
Total inventories would be $29,358 higher and $64,550 higher than reported as of December 30, 2022 and September 30, 2022, respectively, if the first-in, first-out method was used for all inventories. As of December 30, 2022, and September 30, 2022, the excess and obsolete inventory reserve was $19,598 and $18,996, respectively.
13
10. PROPERTY, PLANT AND EQUIPMENT
As of December 30, 2022, and September 30, 2022, property, plant and equipment and accumulated depreciation were as follows:
(in thousands)
December 30, 2022
September 30, 2022
Land
$
26,696
$
22,113
Buildings and related improvements
171,799
172,633
Machinery and equipment
437,739
427,460
Leasehold improvements
12,101
10,512
Software
40,022
36,884
Construction in progress
123,863
99,491
Property, plant and equipment, at cost
812,220
769,093
Accumulated depreciation
(393,670)
(378,873)
Property, plant and equipment, net
$
418,550
$
390,220
Depreciation expense for the three months ended December 30, 2022 and December 24, 2021 totaled $13,171 and $11,817 respectively.
11. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill are as follows:
(in thousands)
Electrical
Safety & Infrastructure
Total
Balance as of September 30, 2022
$
236,708
$
52,622
$
289,330
Goodwill acquired during year
30,806
14
30,820
Exchange rate effects
2,996
68
3,064
Balance as of December 30, 2022
$
270,510
$
52,704
$
323,214
Goodwill balances as of September 30, 2022 and December 30, 2022 include $3,924 and $43,000 of accumulated impairment losses within the Electrical and Safety & Infrastructure segments, respectively.
The Company assesses the recoverability of goodwill and indefinite-lived trade names on an annual basis in accordance with ASC 350, “Intangibles - Goodwill and Other.” The measurement date is the first day of the fourth fiscal quarter, or more frequently, if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit or the respective indefinite-lived trade name is less than the carrying value.
`
14
The following table provides the gross carrying value, accumulated amortization and net carrying value for each major class of intangible asset:
December 30, 2022
September 30, 2022
(in thousands)
Weighted Average Useful Life (Years)
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Amortizable intangible assets:
Customer relationships
11
$
587,768
$
(281,404)
$
306,364
$
532,768
$
(267,940)
$
264,828
Other
8
39,328
(11,603)
27,725
35,681
(10,602)
25,079
Total
627,096
(293,007)
334,089
568,449
(278,542)
289,907
Indefinite-lived intangible assets:
Trade names
92,811
—
92,811
92,799
—
92,799
Total
$
719,907
$
(293,007)
$
426,900
$
661,248
$
(278,542)
$
382,706
Other intangible assets consist of definite-lived trade names, technology, non-compete agreements and backlogs. Amortization expense for the three months ended December 30, 2022 and December 24, 2021 was $12,796 and $8,229, respectively. Expected amortization expense for intangible assets for the remainder of fiscal 2023 and over the next five years and thereafter is as follows:
(in thousands)
Remaining 2023
$
41,749
2024
49,999
2025
37,538
2026
36,017
2027
35,093
2028
25,808
Thereafter
107,885
Actual amounts of amortization may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets and other events.
12. DEBT
Debt as of December 30, 2022 and September 30, 2022 was as follows:
(in thousands)
December 30, 2022
September 30, 2022
Senior Secured Term Loan Facility due May 26, 2028
$
371,452
$
371,381
Senior Notes due June 2031
400,000
400,000
Deferred financing costs
(10,378)
(10,844)
Long-term debt
$
761,074
$
760,537
The asset-based credit facility (the “ABL Credit Facility”) has aggregate commitments of $325,000. AII is the borrower under the ABL Credit Facility which is guaranteed by the Company and all other
15
subsidiaries of the Company (other than AII) that are guarantors of the Senior Notes.AII’s availability under the ABL Credit Facility was $312,905 as of December 30, 2022 and September 30, 2022.
13. FAIR VALUE MEASUREMENTS
Certain assets and liabilities are required to be recorded at fair value on a recurring basis.
The Company periodically uses forward currency contracts to hedge the effects of foreign exchange relating to intercompany balances denominated in a foreign currency. These derivative instruments are not formally designated as a hedge by the Company. Short-term forward currency contracts are recorded in either other current assets or other current liabilities and long-term forward currency contracts are recorded in either other long-term assets or other long-term liabilities in the condensed consolidated balance sheet. The fair value gains and losses are included in other (income) and expense, net within the condensed consolidated statements of operations. See Note 5, “Other (Income) and Expense, net” for further detail.
Cash flows associated with derivative financial instruments are recognized in the operating section of the condensed consolidated statements of cash flows. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.
The Company had no active forward currency contracts or other derivative instruments as of December 30, 2022 or September 30, 2022, with the last such contract having expired in the third quarter of fiscal 2022.
The following table presents the Company’s assets and liabilities measured at fair value:
December 30, 2022
September 30, 2022
(in thousands)
Level 1
Level 2
Level 1
Level 2
Assets
Cash equivalents
$
234,940
$
—
$
291,757
$
—
The Company’s remaining financial instruments consist primarily of cash, accounts receivable and accounts payable whose carrying value approximate their fair value due to their short-term nature.
The estimated fair value of financial instruments not carried at fair value in the condensed consolidated balance sheets were as follows:
December 30, 2022
September 30, 2022
(in thousands)
Carrying Value
Fair Value
Carrying Value
Fair Value
Senior Secured Term Loan Facility due May 26, 2028
$
373,000
$
373,157
$
373,000
$
370,203
Senior Notes due June 2031
400,000
348,388
400,000
318,912
Total Debt
$
773,000
$
721,545
$
773,000
$
689,115
In determining the approximate fair value of its long-term debt, the Company used the trading values among financial institutions, and these values fall within Level 2 of the fair value hierarchy. The carrying value of the ABL Credit Facility approximates fair value due to it being a market-linked variable rate debt.
16
14. COMMITMENTS AND CONTINGENCIES
The Company has obligations related to commitments to purchase certain goods. As of December 30, 2022, such obligations were $262,500 for the rest of fiscal year 2023 and $9,067 for fiscal year 2024 and beyond. These amounts represent open purchase orders for materials used in production.
Insurable Liabilities — The Company maintains policies with various insurance companies for its workers’ compensation, product, property, general, auto, and executive liability risks. The insurance policies that the Company maintains have various retention levels and excess coverage limits. The establishment and update of liabilities for unpaid claims, including claims incurred but not reported, is based on management's estimate as a result of the assessment by the Company's claim administrator of each claim and an independent actuarial valuation of the nature and severity of total claims. The Company utilizes a third-party claims administrator to pay claims, track and evaluate actual claims experience, and ensure consistency in the data used in the actuarial valuation.
Legal Contingencies — Historically, a number of lawsuits have been filed against the Company and the Company has also received other claim demand letters alleging that the Company's anti-microbial coated steel sprinkler pipe, which the Company has not manufactured or sold for several years, is incompatible with chlorinated polyvinyl chloride and caused stress cracking in such pipe manufactured by third parties when installed together in the same sprinkler system, which the Company refers to collectively as the “Special Products Claims.” Tyco International Ltd. (“Tyco”), now Johnson Controls, Inc. (“JCI”), has a contractual obligation to indemnify the Company in respect of all remaining and future claims of incompatibility between the Company's antimicrobial coated steel sprinkler pipe and CPVC pipe used in the same sprinkler system. When Special Products Claims arise, JCI has defended and indemnified the Company as required.
As of September 30, 2022, the Company believes that the range of reasonably possible losses for Special Products Claims and other product liabilities is between $1,000 and $8,000.
At this time, the Company does not expect the outcome of the Special Products Claims proceedings, either individually or in the aggregate, to have a material adverse effect on its business, financial condition, results of operations or cash flows, and the Company believes that its reserves are adequate for all remaining contingencies for Special Products Claims.
In addition to the matters discussed above, from time to time, the Company is subject to a number of disputes, administrative proceedings and other claims arising out of the ordinary conduct of the Company’s business. These matters generally relate to disputes arising out of the use or installation of the Company’s products, product liability litigation, contract disputes, patent infringement accusations, employment matters, personal injury claims and similar matters. On the basis of information currently available to the Company, it does not believe that existing proceedings and claims will have a material adverse effect on its business, financial condition, results of operations or cash flows. However, litigation is unpredictable, and the Company could incur judgments or enter into settlements for current or future claims that could adversely affect its business, financial condition, results of operations or cash flows.
15. GUARANTEES
The Company had outstanding letters of credit totaling $12,095 supporting workers’ compensation and general liability insurance policies as of December 30, 2022. The Company also had surety bonds primarily related to performance guarantees on supply agreements and construction contracts, and payment of duties and taxes totaling $17,548 as of December 30, 2022.
In disposing of assets or businesses, the Company often provides representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. The Company does not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, the Company has no
17
reason to believe that these uncertainties would have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
In the normal course of business, the Company is liable for product performance and contract completion. In the opinion of management, such obligations will not have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
16. SEGMENT INFORMATION
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, stock-based compensation, loss on extinguishment of debt, certain legal matters, and other items, such as inventory reserves and adjustments, (gain) loss on disposal of property, plant and equipment, insurance recovery related to damages of property, plant and equipment, release of indemnified uncertain tax positions, realized or unrealized gain (loss) on foreign currency impacts of intercompany loans and related forward currency derivatives, gain on purchase of business, restructuring costs and transaction costs.
Intersegment transactions primarily consist of product sales at designated transfer prices on an arm’s-length basis. Gross profit earned and reported within the segment is eliminated in the Company’s consolidated results. Certain manufacturing and distribution expenses are allocated between the segments on a pro rata basis due to the shared nature of activities. Recorded amounts represent a proportional amount of the quantity of product produced for each segment. Certain assets, such as machinery and equipment and facilities, are not allocated to each segment despite serving both segments. These shared assets are reported within the Safety & Infrastructure segment. The Company allocates certain corporate operating expenses that directly benefit our operating segments, such as insurance and information technology, on a basis that reasonably approximates an estimate of the use of these services.
Three months ended
December 30, 2022
December 24, 2021
(in thousands)
External Net Sales
Intersegment Sales
Adjusted EBITDA
External Net Sales
Intersegment Sales
Adjusted EBITDA
Electrical
$
638,705
$
—
$
243,836
$
640,344
$
1,339
$
279,547
Safety & Infrastructure
195,116
143
33,404
200,457
53
27,432
Eliminations
—
(143)
—
(1,392)
Consolidated operations
$
833,821
$
—
$
840,801
$
—
18
Presented below is a reconciliation of operating Segment Adjusted EBITDA to Income before income taxes:
Three months ended
(in thousands)
December 30, 2022
December 24, 2021
Operating segment Adjusted EBITDA
Electrical
$
243,836
$
279,547
Safety & Infrastructure
33,404
27,432
Total
$
277,240
$
306,979
Unallocated expenses (a)
(13,395)
(13,969)
Depreciation and amortization
(25,967)
(20,046)
Interest expense, net
(9,488)
(6,918)
Stock-based compensation
(5,270)
(3,427)
Other (b)
(1,069)
(801)
Income before income taxes
$
222,051
$
261,818
(a) Represents unallocated selling, general and administrative activities and associated expenses including, in part, executive, legal, finance, human resources, information technology, business development and communications, as well as certain costs and earnings of employee-related benefits plans, such as stock-based compensation and a portion of self-insured medical costs.
(b) Represents other items, such as inventory reserves and adjustments, loss on disposal of property, plant and equipment, insurance recovery related to damages of property, plant and equipment, release of indemnified uncertain tax positions, gain on purchase of business. realized or unrealized gain (loss) on foreign currency impacts of intercompany loans and related forward currency derivatives, and restructuring charges.
The Company’s net sales by geography were as follows for the three months ended December 30, 2022 and December 24, 2021:
Three months ended
(in thousands)
December 30, 2022
December 24, 2021
United States
$
750,087
$
757,398
Other Americas
20,554
22,487
Europe
52,030
50,454
Asia-Pacific
11,150
10,462
Total
$
833,821
$
840,801
19
The table below shows the amount of net sales from external customers for each of the Company’s product categories which accounted for 10% or more of consolidated net sales in either period for the three months ended December 30, 2022 and December 24, 2021:
Three months ended
(in thousands)
December 30, 2022
December 24, 2021
Metal Electrical Conduit and Fittings
$
111,158
$
149,876
Electrical Cable & Flexible Conduit
123,726
115,695
Plastic Pipe and Conduit
316,165
290,179
Other Electrical products
87,656
84,594
Electrical
638,705
640,344
Mechanical Pipe
78,774
111,243
Other Safety & Infrastructure products
116,342
89,214
Safety & Infrastructure
195,116
200,457
Net sales
$
833,821
$
840,801
17. SUBSEQUENT EVENTS
Subsequent to quarter end, the Company has repurchased 0.9 million shares at a cost of $102.6 million as of January 31, 2023.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward- looking statements. Factors that could cause or contribute to these differences include those factors discussed below and included or referenced elsewhere in this report, particularly in the sections entitled “Forward-Looking Statements” and “Risk Factors.”
Incremental Market Uncertainties
We continue to monitor developments related to the novel coronavirus (“COVID-19”) pandemic to assess its impact on our business. Further uncertainty and delays in our end-markets could have a material adverse impact on the demand for our products. Some jurisdictions may raise taxes to help cover pandemic-related costs, and disruptions to or adverse conditions in the financial industry could affect our ability to obtain financing on favorable terms or at all.
Factors that contribute to our ability to adjust to the outbreak include 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.
In addition to the uncertainties brought about by COVID-19, recent events, including central bank interest rate increases, inflation and the Russia-Ukraine conflict, are creating additional uncertainty in the global economy, generally, and in the markets we operate in. COVID-19, the Russia-Ukraine conflict and other factors have had and will continue to have adverse effects on global supply chains, which may impact some aspects of our business. Furthermore, we are mindful of the effects that adverse weather can have on our domestic supply chain.
RESULTS OF OPERATIONS
The consolidated results of operations for the three months ended December 30, 2022 and December 24, 2021 were as follows:
Three months ended
(in thousands)
December 30, 2022
December 24, 2021
Change
% Change
Net sales
$
833,821
$
840,801
$
(6,980)
(0.8)
%
Cost of sales
499,468
485,993
13,475
2.8
%
Gross profit
334,353
354,808
(20,455)
(5.8)
%
Selling, general and administrative
89,977
78,151
11,826
15.1
%
Intangible asset amortization
12,796
8,229
4,567
55.5
%
Operating income
231,580
268,428
(36,848)
(13.7)
%
Interest expense, net
9,488
6,918
2,570
37.1
%
Other (income) and expense, net
41
(308)
349
(113.3)
%
Income before income taxes
222,051
261,818
(39,767)
(15.2)
%
Income tax expense
48,559
56,975
(8,416)
(14.8)
%
Net income
$
173,492
$
204,843
$
(31,351)
(15.3)
%
21
Net sales
% Change
Volume
5.2
%
Average selling prices
(12.4)
%
Foreign exchange
(0.9)
%
Acquisitions
7.0
%
Other
0.3
%
Net sales
(0.8)
%
Net sales decreased by $7.0 million, or 0.8%, to $833.8 million for the three months ended December 30, 2022, compared to $840.8 million for the three months ended December 24, 2021. The decrease in net sales is primarily attributed to decreased average selling prices across the Company’s products of $108.3 million and the unfavorable impact of foreign exchange rates of $7.6 million. These decreases were partially offset by increased net sales of $61.3 million from companies acquired during fiscal 2022 and fiscal 2023 and increased sales volume of $45.6 million. Average selling prices have declined as the Company continues to see normalization of pricing.
Cost of sales
% Change
Volume
6.0
%
Average input costs
(12.3)
%
Foreign exchange
(1.3)
%
Acquisitions
8.6
%
Other
1.8
%
Cost of sales
2.8
%
Cost of sales increased by $13.5 million, or 2.8%, to $499.5 million for the three months ended December 30, 2022 compared to $486.0 million for the three months ended December 24, 2021. The increase was primarily due to recent acquisitions during fiscal 2022 and fiscal 2023 of $41.2 million and higher sales volume of $29.0 million. This was partially offset by lower input costs of steel, copper and PVC resin of $59.2 million.
Selling, general and administrative
Selling, general and administrative expenses increased by $11.8 million, or 15.1%, to $90.0 million for the three months ended December 30, 2022 compared to $78.2 million for the three months ended December 24, 2021. The increase was primarily due to increased general spending on business improvement initiatives of $5.7 million, recent acquisitions in fiscal 2022 and 2023 of $5.5 million and $2.1 million spread across a variety of other spend categories, partially offset by lower variable compensation of $1.1 million and by lower transaction costs of $0.4 million,
Intangible asset amortization
Intangible asset amortization expense increased to $12.8 million for the three months ended December 30, 2022 compared to $8.2 million for the three months ended December 24, 2021. Increased amortization expense resulted from additional intangible assets acquired in business combinations in fiscal 2022 and 2023.
Interest expense, net
Interest expense, net increased by $2.6 million, or 37.1% to $9.5 million for the three months ended December 30, 2022 compared to $6.9 million for the three months ended December 24, 2021. The increase is primarily due to increased interest rates on our Senior Secured Term Loan Facility.
22
Other (income) and expense, net
Other (income) and expense, net decreased to $0.0 million other expense for the three months ended December 30, 2022 compared to $0.3 million other income for the three months ended December 24, 2021.
Income tax expense
The Company’s income tax rate increased to 21.9% for the three months ended December 30, 2022 compared to 21.8% for the three months ended December 24, 2021. The increase in the current period effective tax rate was driven by a decrease in the excess tax benefit associated with stock compensation offset by a decrease in state tax expense.
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, stock-based compensation, loss on extinguishment of debt, certain legal matters, and other items, such as inventory reserves and adjustments, (gain) loss on disposal of property, plant and equipment, insurance recovery related to damages of property, plant and equipment, release of indemnified uncertain tax positions, realized or unrealized gain (loss) on foreign currency impacts of intercompany loans and related forward currency derivatives, gain on purchase of business, restructuring costs and transaction costs. We define segment Adjusted EBITDA margin as segment Adjusted EBITDA as a percentage of segment Net sales.
Electrical
Three months ended
(in thousands)
December 30, 2022
December 24, 2021
Change
% Change
Net sales
$
638,705
$
641,683
$
(2,978)
(0.5)
%
Adjusted EBITDA
$
243,836
$
279,547
$
(35,711)
(12.8)
%
Adjusted EBITDA margin
38.2
%
43.6
%
Net sales
% Change
Volume
2.9
%
Average selling prices
(11.2)
%
Foreign exchange
(1.3)
%
Acquisitions
9.3
%
Other
(0.2)
%
Net sales
(0.5)
%
23
Net sales decreased by $3.0 million, or 0.5%, to $638.7 million for the three months ended December 30, 2022 compared to $641.7 million for the three months ended December 24, 2021. The decrease in net sales is primarily attributed to decreased average selling prices of $66.7 million and the unfavorable impact of foreign exchange rates of $7.6 million. These decreases were partially offset by increased net sales of $55.2 million from companies acquired during fiscal 2022 and fiscal 2023 and increased sales volume of $17.5 million, primarily in the metal electrical conduit and fittings and electrical cable and flexible conduit product lines.
Adjusted EBITDA
Adjusted EBITDA for the three months ended December 30, 2022 decreased by $35.7 million, or 12.8%, to $243.8 million from $279.5 million for the three months ended December 24, 2021. Adjusted EBITDA margins decreased to 38.2% for the three months ended December 30, 2022 compared to 43.6% for the three months ended December 24, 2021. The decrease in Adjusted EBITDA and Adjusted EBITDA margins was largely due to lower average selling prices over input costs.
Safety & Infrastructure
Three months ended
(in thousands)
December 30, 2022
December 24, 2021
Change
% Change
Net sales
$
195,259
$
200,510
$
(5,251)
(2.6)
%
Adjusted EBITDA
$
33,404
$
27,432
$
5,972
21.8
%
Adjusted EBITDA margin
17.1
%
13.7
%
Net sales
% Change
Volume
13.9
%
Average selling prices
(20.6)
%
Acquisitions
3.0
%
Other
1.1
%
Net sales
(2.6)
%
Net sales decreased by $5.3 million, or 2.6%, for the three months ended December 30, 2022 to $195.3 million compared to $200.5 million for the three months ended December 24, 2021. The decrease is primarily attributed to decreased average selling prices of $41.6 million driven by lower input costs of steel partially offset by higher volumes of $28.1 million, primarily in the construction and metal framing product lines, and increased net sales of $6.1 million from companies acquired during fiscal 2022.
Adjusted EBITDA
Adjusted EBITDA increased by $6.0 million, or 21.8%, to $33.4 million for the three months ended December 30, 2022 compared to $27.4 million for the three months ended December 24, 2021. Adjusted EBITDA margins increased to 17.1% for the three months ended December 30, 2022 compared to 13.7% for the three months ended December 24, 2021. The Adjusted EBITDA increase is primarily due to average selling prices declining slower than input costs.
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 $307.8 million as of December 30, 2022, of which $62.5 million was held at non-U.S. subsidiaries. Those cash balances at foreign
24
subsidiaries may be subject to withholding or local country taxes if the Company’s intention to permanently reinvest such income were to change and cash was repatriated to the United States.
In general, we require cash to fund working capital investments, acquisitions, capital expenditures, debt repayment, interest payments, taxes and share repurchases. We have access to the ABL Credit Facility to fund operational needs. As of December 30, 2022, there were no outstanding borrowings under the ABL Credit Facility and $12.1 million of letters of credit issued under the ABL Credit Facility. The borrowing base was estimated to be $325.0 million and approximately $312.9 million was available under the ABL Credit Facility as of December 30, 2022. 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.
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.
There have been no material changes in our contractual obligations and commitments since the filing of our Annual Report on Form 10-K.
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. On December 31, 2022, AIH merged into AII, with AII being the surviving entity. 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.
25
The table below summarizes cash flow information derived from our statements of cash flows for the periods indicated:
Three months ended
(in thousands)
December 30, 2022
December 24, 2021
Cash flows provided by (used in):
Operating activities
$
198,851
$
97,192
Investing activities
(117,187)
(45,024)
Financing activities
(164,831)
(129,048)
Operating activities
During the three months ended December 30, 2022, the Company was provided $198.9 million by operating activities compared to $97.2 million during the three months ended December 24, 2021. The $101.7 million increase in cash provided was primarily due to $81.5 million decrease in cash used in working capital primarily due to lower inventory and accounts receivable as well as $47.2 million of tax impacts, partially offset by decreased operating income.
Investing activities
During the three months ended December 30, 2022, the Company used $117.2 million in investing activities compared to $45.0 million during the three months ended December 24, 2021. Cash used in acquisitions increased in fiscal 2022 by $46.1 million primarily as a result of the acquisition of Elite Polymer in the first quarter of fiscal 2023. The remaining increase in cash used in investing activities was driven by $25.6 million of additional capital expenditures.
Financing Activities
During the three months ended December 30, 2022, the Company used $164.8 million in financing activities compared to $129.0 million used during the three months ended December 24, 2021. The increase in cash used in financing activities is primarily due to $45.5 million more cash used to repurchase common stock during the three months ended December 30, 2022 compared to the same period in the prior year.
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
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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 in the United States and international markets in which we operate;
•weakness or another downturn in the 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 in the United States;
•reduced production or distribution capacity due to interruptions in the operations of our facilities or those of our key suppliers;
•loss of a substantial number of our third-party agents or distributors or a dramatic deviation from the amount of sales they generate;
•security threats, attacks, or other disruptions to our information systems, or failure to comply with complex network security, data privacy and other legal obligations or the failure to protect sensitive information;
•possible impairment of goodwill or other long-lived assets as a result of future triggering events, such as declines in our cash flow projections or customer demand and changes in our business and valuation assumptions;
•safety and labor risks associated with the manufacture and in the testing of our products;
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•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 the SEC.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the quantitative and qualitative disclosures about market risks previously disclosed in our Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource
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constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of certain litigation involving the Company, see Note 14, “Commitments and Contingencies” to our unaudited condensed consolidated financial statements.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On November 16, 2021, the board of directors approved a share repurchase program, under which the Company may repurchase up to $400.0 million of its outstanding common stock. On April 26, 2022, the board of directors approved an amendment to the aforementioned plan, extending it to a total repurchase of the Company’s outstanding common stock of $800.0 million. On November 11, 2022, the board of directors approved an amendment to the aforementioned plan, extending it to a total repurchase authorization of the Company’s outstanding stock of $1,300.0 million. The share repurchase program will be funded from the Company’s available cash balances. As of December 30, 2022, there was $650.0 million of purchases remaining under the plan. This share repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be terminated at any time at the Company’s discretion.
The following table shows our purchases of our common stock under this plan during fiscal 2022 (in thousands, except per share data):
Period (4-5-4 calendar)
Total Number Of Shares Purchased
Avg Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Maximum Value of Shares that May Yet Be Purchased Under the Program
XBRL Taxonomy Schema Linkbase Document (formatted as inline XBRL)
101.CAL#
XBRL Taxonomy Calculation Linkbase Document
101.DEF#
XBRL Taxonomy Definition Linkbase Document
101.LAB#
XBRL Taxonomy Labels Linkbase Document
101.PRE#
XBRL Taxonomy Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
#
Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ATKORE INC.
(Registrant)
Date:
February 1, 2023
By:
/s/ David P. Johnson
Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
