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ATKORE INTERNATIONAL HOLDINGS INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and shall be read together with, the condensed financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Information in this MD&A is intended to assist the reader in obtaining an understanding of the condensed financial statements, information about the Company's business segments and how the results of those segments impact the Company's results of operations and financial condition as a whole, as well as how certain accounting principles affect the Company's condensed financial statements. The Company's results for interim periods are not necessarily indicative of annual operating results. The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report particularly in "Cautionary Note Regarding Forward-Looking Statements." Executive Summary Atkore International Holdings Inc. ("the Company," "we," "our," "us," or "Atkore") is a global manufacturer of fabricated steel tubes and pipes, pre-wired armored cables, cable management systems and metal framing systems. Our products are used primarily in non-residential construction applications, including installation of electrical systems, site perimeter security fences, steel pipe scaffolding, fire sprinkler pipe and protection systems and metal framing for various support structures. We operate 24 manufacturing facilities and 14 distribution facilities that are strategically located to efficiently receive materials from our suppliers as well as deliver products to our customers. Our global footprint has been streamlined in recent years to improve manufacturing capacity utilization across our facilities and to enhance the efficiency of our transportation and logistics networks. We distribute our products to end-users through several distinct channels, including electrical distributors, home improvement retailers, industrial distributors, HVAC and plumbing distributors, datacom distributors and original equipment manufacturers ("OEMs"), as well as directly to a small number of general contractors. Many of our products are ultimately installed into non-residential and multi-family residential buildings during new construction and renovation by end-users, who are typically trade contractors. We serve a diverse group of end markets, including commercial construction, diversified industrials, power generation, agricultural, retail, transportation and government. The majority of our sales and operations are in North America. In the three months ended December 27, 2013 and December 28, 2012, 92% and 91%, respectively, of our net sales were tied to customers located in the U.S. We also have manufacturing and sales presence in the United Kingdom, China, Australia and New Zealand. Our business is largely dependent on the non-residential construction industry. Approximately 75% and 73% of our net sales in the three months ended December 27, 2013 and December 28, 2012, respectively, were related to U.S. non-residential construction, where our product installation typically lags U.S. non-residential starts by three to nine months. U.S. non-residential construction starts, as reported by McGraw-Hill Construction - Dodge, Research & Analytics, reached a historic low of 680 million square feet in calendar year 2010, and their projection for calendar year 2014 is 900 million square feet. This level of activity is significantly below the previous cyclical troughs witnessed from 1967 through 2008, during which time non-residential construction starts did not fall below 936 million square feet in any given calendar year. We expect to capitalize on any recovery in non-residential construction activity over the coming years and potentially drive higher margins by leveraging the scalability of our operations. We own or have rights to trademarks or trade names that we use in conjunction with the operation of our business, including, but not limited to, Allied Tube & Conduit®, Unistrut®, Power Strut®, Telespar®, Cope®, AFC Cable Systems®, Kaf-Tech®, Flo-Coat®, Gatorshield®, Kwik-Fit®, Razor Ribbon® , Columbia MBF®, FlexHead ® and SprinkFLEX®, all of which are registered in the U.S., except ColorSpec™. Reorganization of Segments As a result of the acquisition of Heritage Plastics, Inc., Heritage Plastics Central, Inc. and Heritage Plastics West, Inc. (collectively "Heritage Plastics") and Liberty Plastics, LLC ("Liberty Plastics") on September 17, 2013, effective September 28, 2013, the Company set up a new operating segment, Plastic Pipe and Conduit ("PPC") to manage and incorporate Heritage Plastics and Liberty Plastics with the existing business of Georgia Pipe to create better business development, greater coordination, and enhanced customer focus. Ridgeline Pipe Manufacturing ("Ridgeline"), which was acquired on October 11, 2013, is also included in the PPC operating segment. In addition, as part of reorganization, the Company's power-strut business was moved from the Pipe, Tube, and Conduit North America ("PTC NA") operating segment to the Cable Management North America operating segment. This restructuring aligns the internal management and functional 35 -------------------------------------------------------------------------------- Table of Contents support assets based on the Company's product and service offerings and better reflects how our chief operating decision maker allocates resources and assesses performance. As the result of the reorganization, the PTC NA operating segment and PPC operating segment are aggregated and continued to be reported within the Global Pipe, Tube and Conduit reportable segment. The Company continues to have the same two reportable segments: 1) Global Pipe, Tube & Conduit and 2) Global Cable & Cable Management. The product categories that pertain to each reportable segment are as follows: Global Pipe, Tube & Conduit ("GPTC") • Pipe & Tube - consists of steel pipe for low pressure fire sprinkler applications and for low pressure conveyance of fluids and certain structural and fabrication applications and commercial quality tubing in a variety of shapes and sizes for industrial applications, such as agricultural buildings, conveyor belt tubing and highway signage (including in-line galvanized steel tubing products for many OEMs and structural applications), high strength fence framework that utilizes the in-line galvanization process to deliver consistent strength and quality, and barbed tape products for high security perimeter fences and polyvinyl chloride ("PVC") irrigation piping. • Conduit - consists of tubular raceways used for the protection and routing of electrical wire, including such products as electrical metallic tubing, intermediate metal conduit, rigid steel conduit, PVC conduit and aluminum rigid conduit, elbows and fittings. Global Cable & Cable Management ("GCCM") • Cable - consists of armored cable and metal-clad cable, including fire alarm and super neutral; ColorSpec™ ID System, self-grounding metal-clad cable, specialty cables and pre-fabricated wiring systems. • Cable Management - consists of systems that hold and protect electrical raceways, such as cable tray, cable ladder and wire basket, as well as metal framing or steel support structures using strut, channel and related fittings and accessories for both electrical and mechanical applications. Results of Operations We generally sell our products on a spot basis (and not under long-term contracts). As a result, as the cost to us of the raw materials that compose these products declines, our customers generally seek price concessions. In addition, we account for consumption of inventory in our cost of sales using the first-in, first-out method. This means that, in the short-term, in a declining price environment our net sales will decline and our gross margins will contract or even turn negative, assuming the quantities of the affected products sold remain constant, as we consume inventories valued at higher prices based on the first-in, first-out method. These declines may be material. Rising steel and copper prices have the opposite effect in the short-term, increasing both net sales and gross margin, assuming the quantities of the affected products sold remain constant. Three months Three months ended December ended December ($ in millions) 27, 2013 28, 2012 Change Net sales $ 395 $ 355 $ 40 Cost of sales 334 304 30 Gross margin 61 51 10 Selling, general and administrative expenses 50 45 5 Operating income 11 6 5 Interest expense, net 15 12 3 Loss from continuing operations before income taxes (4 ) (6 ) 2 Income tax benefit (1 ) (1 ) - Loss from continuing operations (3 ) (5 ) 2 Income from discontinued operations and disposal, net of income tax expense - 1 (1 ) Net loss $ (3 ) $ (4 ) $ 1 36-------------------------------------------------------------------------------- Table of Contents Net Sales Net sales increased $40 million for the three months ended December 27, 2013 to $395 million, from $355 million for the three months ended December 28, 2012. The increase was due primarily to sales of $36 million from the businesses that were acquired in the fourth quarter of fiscal year 2013 and first quarter of fiscal year 2014 in our Global Pipe, Tube and Conduit ("GPTC") segment. In addition, higher volume more than offset lower average selling prices for our Global Cable and Cable Management ("GCCM") products and had a favorable impact on net sales of $9 million, offset by a $4 million decrease in sales of GPTC products due primarily to lower volume, and an unfavorable foreign currency exchange impact of $1 million. Cost of Sales Cost of sales increased by $30 million to $334 million for the three months ended December 27, 2013, compared to $304 million for the three months ended December 28, 2012. The increase in cost of sales was due primarily to the costs of sales incurred at the acquired businesses of $32 million and higher sales volume of GCCM products, offset by lower copper and steel cost of $6 million. Gross Margin Gross margin increased by $10 million to $61 million for the three months ended December 27, 2013, compared to $51 million for the three months ended December 28, 2012. The increase in gross margin was due primarily to higher average selling prices and lower material costs for steel along with the comparatively higher margins generated by the acquired businesses. Selling, General & Administrative Selling, general and administrative expenses increased $5 million to $50 million for the three months ended December 27, 2013, compared to $45 million for the three months ended December 28, 2012. The increase was due primarily to $4 million general and administrative expenses related to the newly acquired businesses, and $1 million of foreign exchange losses related to a third-party receivable in connection with the sale of the Brazil business. Operating Income Operating income increased $5 million to $11 million for the three months ended December 27, 2013, compared to $6 million for the three months ended December 28, 2012. The increase was due primarily to higher gross margins of $10 million as a result of higher average selling prices for GPTC products and the impact of margins at the acquired businesses combined with positive performance at GCCM due to higher volume and lower raw material costs, offset by higher selling, general and administrative expenses of $5 million. Interest Expense, net Interest expense, net, was $15 million and $12 million for the three months ended December 27, 2013 and December 28, 2012, respectively. The increase in interest expense was due primarily to a loss on extinguishment of debt of $3 million, including an early redemption premium of $1 million and a write-off of $2 million of unamortized debt issuance costs related to the amendment of the Company's asset-based credit facility (the "Credit Facility") and the redemption of $41 million of our senior secured notes (the "Notes"), which bear interest at 9.875% per annum. Income Tax Expense For the three months ended December 27, 2013 and December 28, 2012, the Company's effective income tax rate attributable to loss from continuing operations before income taxes was 16.3% and 17%, respectively. The effective tax rate for the three months ended December 27, 2013 varied from the effective tax rate for the three months ended December 28, 2012 due to the difference in the proportion of losses in foreign jurisdictions without an associated tax benefit compared to overall losses recognized in the respective period. Loss from Discontinued Operations and Disposal, net of Income Tax Expense In August 2013, we determined that the Brazil business was no longer strategic to us. On August 26, 2013, Atkore International, our subsidiary, entered into a Share Purchase Agreement (the "Agreement") with Atkore International Indústria e Comércio de Aço e Materiais Elétricos Ltda. (the "Subsidiary"), Panatlantica S.A. ("Buyer") and Allied Switzerland GmbH ("Seller"). Pursuant to the Agreement, Seller agreed to sell to Buyer all of the shares of the Subsidiary for 98,700,000 37 -------------------------------------------------------------------------------- Table of Contents Brazilian Reais. The operations and cash flows of our Brazil business have been segregated from continuing operations and presented as discontinued operations for all of the periods presented. Atkore will not have any continuing involvement in the operations after the disposal transaction. On September 23, 2013, we completed the sale. For the three months ended December 27, 2013 and December 28, 2012, the Brazil business had income of $0 million and $1 million, net of tax, respectively, from operations. Results of Operations by Segment Segment information, as reorganized effective September 28, 2013, is consistent with how management manages the businesses, makes investing and resource allocation decisions and assesses operating performance. Selected information by business segment is presented below ($ in millions): Global Pipe, Tube & Conduit Three months Three months ended December ended December 27, 2013 28, 2012 Change Net sales $ 242 $ 210 $ 32 Operating income 9 5 4 Net Sales Net sales for the three months ended December 27, 2013 increased $32 million to $242 million, from $210 million for the three months ended December 28, 2012. The increase was attributable primarily to sales of $36 million from the businesses that were acquired in the fourth quarter of fiscal year 2013 and the first quarter of fiscal year 2014, and higher average selling prices of steel products of $5 million, offset by lower sales volume of steel products of $9 million. Operating Income Operating income increased $4 million to $9 million for the three months ended December 27, 2013, compared to $5 million in the three months ended December 28, 2012. The increase in operating income was due primarily to higher average selling prices of $5 million, $1 million of operating income from the acquired business, and lower average raw material steel costs of $1 million, offset by lower sales volume of GPTC products. Average selling prices were 3% higher during the three months ended December 27, 2013, compared to the three months ended December 28, 2012. Global Cable & Cable Management Three months Three months ended December ended December 27, 2013 28, 2012 Change Net sales $ 163 $ 154 $ 9 Operating income 12 10 2 Net Sales Net sales increased $9 million to $163 million for the three months ended December 27, 2013, compared to $154 million for the three months ended December 28, 2012. The increase was due primarily to higher sales volume partially offset by lower average selling prices for cable and cable management products. Operating Income Operating income for the three months ended December 27, 2013 increased $2 million to $12 million, compared to $10 million in the three months ended December 28, 2012. The increase was due primarily to the favorable impact of higher sales volume for cable and cable management products and lower average raw material copper costs, partially offset by lower average selling prices. Corporate and Other Corporate and Other as included in the footnotes to our financial statements represents corporate administrative expenses. 38 -------------------------------------------------------------------------------- Table of Contents Operating loss for Corporate and Other increased $1 million to $10 million for the three months ended December 27, 2013, compared to $9 million for the three months ended December 28, 2012. The increase was due primarily to higher acquisition and integration related costs related to the newly acquired businesses. Seasonality of Company's Business Our business experiences some seasonality, with historically increased demand in the second and third calendar quarters, as construction activity tends to pick up during these periods. However, this fluctuation can be offset by adverse economic conditions. Financial Position, Liquidity and Capital Resources General Our business is cyclical and cash flows from operating activities may fluctuate during the year and from year to year due to differences in demand and changes in economic conditions and commodity prices. We fund operating needs with cash from operations, cash on hand and available borrowing capacity under our Credit Facility. The amount of capital required to fund inventory and accounts receivable generally rises during periods of increased economic activity or increasing raw material prices. During economic slowdowns or periods of decreasing raw material costs, capital requirements generally decrease as a result of the reduction of inventories and accounts receivable. We maintain a substantial inventory of raw material and finished products to satisfy the prompt delivery requirements of our customers. Due to the timing differences between payments to our suppliers and receipts from customers, our liquidity needs have generally consisted of working capital necessary to finance receivables and inventory. Capital expenditures have historically been necessary to expand and update the production capacity and improve the productivity of our manufacturing operations. We expect our funds from operations and cash on hand will be sufficient to meet our capital expenditure requirements and we will utilize our Credit Facility or other lines of credit if additional funds are required to fund investments in our operations. We depend on cash on hand and our ability to generate cash flow from operations, borrow funds under our Credit Facility, and issue debt securities in the capital markets to maintain and expand our business. 39 -------------------------------------------------------------------------------- Table of Contents The following table is a summary of our cash flows for each period shown ($ in millions): Three months ended December Three months ended 27, 2013 December 28, 2012 Net cash provided by operating activities $ 3 $ 7 Capital expenditures (5 ) (3 ) Acquisitions of businesses, net of cash acquired (40 ) - Proceeds from sale of properties and equipment 1 - Net cash provided by discontinued investing activities - - Borrowings under Credit Facility 251 38 Repayments under Credit Facility (192 ) (38 ) Proceeds from short-term debt 1 2 Repayments of short-term debt (1 ) (3 ) Repayments of long-term debt (41 ) - Payment for debt financing costs and fees (2 ) - Other, net 3 - (Decrease) increase in cash and cash equivalents $ (22 ) $ 3 Operating activities During the three months ended December 27, 2013, operating activities provided $3 million, compared to $7 million during the three months ended December 28, 2012. Cash provided by operating activities during the three months ended December 27, 2013 decreased $4 million compared to the same period last year due primarily to a higher working capital levels in the current year resulting from the variance between the Company's payment terms and those of the newly acquired businesses. Investing activities During the three months ended December 27, 2013, we used $41 million for investing activities, compared to $3 million used for investing activities during the three months ended December 28, 2012. Capital expenditures were $5 million for the three months ended December 27, 2013, compared to $3 million during the three months ended December 28, 2012. Capital expenditures are primarily for replacement of equipment, repairs, and enhancements to our manufacturing operations. During the three months ended December 27, 2013, we received $1 million proceeds from sale of a building that was accounted for in assets held for sale. In addition, during the three months ended December 27, 2013, we received the second milestone payment of $3 million related to the divestiture of our joint venture in Saudi Arabia. During the three months ended December 27, 2013, we used $40 million to acquire the assets of Ridgeline, a manufacturer of PVC conduit. Investment activities are largely discretionary and future investment activities could be reduced significantly or eliminated as economic conditions warrant. We continually assess acquisition opportunities as they arise, and such opportunities may require additional financing. There can be no assurance, however, that any such opportunities will arise, that any such acquisitions will be consummated, or that any needed additional financing will be available on satisfactory terms, or at all, when required. Financing Activities On October 23, 2013, Atkore International, a subsidiary of the Company, entered into the Second Amendment to Credit Agreement and First Amendment to and Reaffirmation of Guarantee and Collateral Agreement dated as of such date, in respect of the Credit Agreement and the Guarantee and Collateral Agreement, each dated as of December 22, 2010. The amendment to the Credit Facility increased the aggregate commitments of the lenders to $300 million, reduced interest spreads and amended certain other terms. Availability under the Credit Agreement is subject to a borrowing base equal to the sum of 85% of eligible accounts receivable plus 80% of eligible inventory of each borrower and guarantor, subject to certain limitations. Availability under the Credit Facility was $159 million and $177 million as of December 27, 2013 and September 27, 2013, respectively. During the three months ended December 27, 2013, the Company had $59 million net borrowings under the Credit Facility, compared to zero net borrowings under the Credit Facility during the three months ended December 28, 40 -------------------------------------------------------------------------------- Table of Contents 2012. The increase in borrowings under the Credit Facility during the three months ended December 27, 2013 was mainly to fund the $40 million acquisition of the assets of Ridgeline which was completed on October 11, 2013, and the redemption of $41 million of the senior secured notes (the "Notes") on November 25, 2013 at a redemption price of 103% of the principal amount plus accrued interest. In connection with the amendment to the Credit Facility, we paid $1 million of debt financing costs. The Company also paid a premium of $1 million associated with the early redemption of the Notes. Based on our current development plans, we anticipate that our cash flow from operations, cash on hand, and availability under the Credit Facility will be adequate to meet our normal operating needs, capital expenditures and working capital requirements for our existing businesses over the next twelve months. If we require additional financing to meet our cyclical increases in working capital or operating needs, we may need to access the financial markets. The indenture governing our Notes and the agreement governing our Credit Facility contain significant covenants, including prohibitions on our ability to incur certain additional indebtedness and to make certain investments and to pay dividends. As of December 27, 2013, the Company was in compliance with all covenants of the Credit Facility and the Notes. Atkore International was not subject to the minimum fixed charge coverage ratio during any period subsequent to the establishment of the Credit Facility. See Note 8 to the condensed financial statements for further information. Change in Critical Accounting Policies and Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. There have been no material changes in our Critical Accounting Policies and Estimates as described in our Form 10-K for the fiscal year ended September 27, 2013. Item 3. Quantitative and Qualitative Disclosures About Market Risk In the normal course of conducting business, we are exposed to certain risks associated with potential changes in market conditions. These risks include fluctuations in foreign currency exchange rates, interest rates and commodity prices, including price fluctuations related to the purchase, production, or sale of steel and copper products. Accordingly, we have established a comprehensive risk management process to monitor, evaluate and manage the principal exposures to which we believe we are subject. Our market risk strategy has generally been to obtain competitive prices for our products and services and allow operating results to reflect market price movements dictated by supply and demand; however, we have from time to time made forward commodity purchases to manage exposure to fluctuations in the purchase of steel and copper metals. We may also seek to manage certain of these risks through the use of derivative financial instruments. Our portfolio of derivative financial instruments may, from time to time, include forward foreign currency exchange contracts, foreign currency options, interest rate swaps and forward commodity contracts. Derivative financial instruments related to interest rate sensitivity of debt obligations, intercompany cross-border transactions and anticipated non-functional currency cash flows are used with the goal of mitigating a significant portion of these exposures when it is cost effective to do so. To reduce the risk that a counterparty will be unable to honor its contractual obligations to us, we only enter into contracts with counterparties having at least an A-/A3 long-term debt rating. These counterparties are generally financial institutions and there is no significant concentration of exposure with any one party. We do not engage in metal futures trading, hedging activities or otherwise utilize derivative financial instruments for trading or speculative purposes. On October 23, 2013, Atkore International, a subsidiary of the Company, entered into the Second Amendment to Credit Agreement and First Amendment to and Reaffirmation of the Guarantee and Collateral Agreement of the Credit Agreement, dated as of December 22, 2010, which bears interest at a floating rate, generally LIBOR plus 1.50% to 2.00%. As a result, we are exposed to fluctuations in interest rates to the extent of our borrowings under the Credit Facility, which totaled $118 million at December 27, 2013. A 10% change in interest rates would impact our interest expense by less than $1 million based on the amounts outstanding at December 27, 2013. Item 4. Controls and Procedures As required by Rule 15d-15(e) under the Securities Exchange Act of 1934, the Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 27, 2013. The Company completed the acquisitions of Heritage Plastics and Liberty Plastics on September 17, 2013 and the acquisition of Ridgeline Manufacturing on October 11, 2013. As permitted by U.S. Securities and Exchange Commission regulations, management's assessment as of December 27, 2013 did not include the internal controls of Heritage Plastics, Liberty Plastics, and Ridgeline Manufacturing, which are included in our consolidated financial statements as of December 27, 2013. The combined total 41 -------------------------------------------------------------------------------- Table of Contents assets and net assets of Heritage Plastics and Liberty Plastics are $58 million and $105 million, respectively, and the total assets and net assets of Ridgeline Manufacturing are $43 million and $40 million, respectively, as of December 27, 2013. The combined net sales and net income for the three months ended December 27, 2013 for Heritage Plastics and Liberty Plastics were $29 million and $2 million, respectively, and the net sales and net income of Ridgeline Manufacturing were $7 million and $0 million, respectively. Based on that evaluation, which excluded an assessment of internal control over financial reporting of the acquired operations of Heritage Plastics, Liberty Plastics, and Ridgeline Manufacturing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 27, 2013. As a matter of practice, the Company's management continues to review and document internal control and procedures for financial reporting. From time to time, the Company may make changes aimed at enhancing the effectiveness of the controls and to ensure that the systems evolve with the business. During the three months ended December 27, 2013, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 42 -------------------------------------------------------------------------------- Table of Contents |