GIBRALTAR INDUSTRIES, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain information set forth herein includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and, therefore are, or may be deemed to be, “forward-looking statements.” These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “anticipates,” "aspires," “expects,” “estimates,” “seeks,” “projects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, competition, strategies and the industries in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk Factors” disclosures in our most recent Annual Report on Form 10-K along with Item 1A of this Quarterly Report on Form 10-Q. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition, liquidity, and the development of the industries in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements that we make herein speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. We use certain operating performance measures, specifically consolidated gross margin, operating margin by segment and consolidated operating margin, to manage our businesses, set operational goals, and establish performance targets for incentive compensation for our employees. We define consolidated gross margin as a percentage of total consolidated gross profit to total consolidated net sales. We define operating margin by segment as a percentage of total income from operations by segment to total net sales by segment and consolidated operating margin as a percentage of total consolidated income from operations to total consolidated net sales. We believe consolidated gross margin, operating margin and consolidated operating margin may be useful to investors in evaluating the profitability of our segments and Company on a consolidated basis. Overview Gibraltar Industries, Inc. (the "Company") is a leading manufacturer and provider of products and services for the renewable energy, residential, agtech, and infrastructure markets. The Company operates and reports its results in the following four reporting segments: • Renewables; • Residential; • Agtech; and • Infrastructure. The Company serves customers primarily in North America including renewable energy (solar) developers, home improvement retailers, wholesalers, distributors, institutional and commercial growers of food and plants, and contractors. At March 31, 2022, we operated 33 facilities, comprised of 24 manufacturing facilities, one distribution center, and eight offices, which are located in 15 states, Canada, China, and Japan. Our operational infrastructure provides the necessary scale to support regional and national customers in each of our markets. 21 Table of Contents COVID Update and Recent Trends Our top priority continues to be focused on our organization - keeping our team and their families as safe as possible, maintaining our supply chain and providing a high level of responsiveness to customer needs. We continue to proactively execute our pandemic “playbook” and make adjustments to our operating protocols as we navigate forward. COVID-19, as well as broader market dynamics over the past two years, have resulted in impacts to our company, including increased material cost inflation, labor availability issues and logistics costs increases. We have also been impacted from supply constraints for materials and commodities used in our operations. In certain instances these constraints have resulted in project delays, cost inflation and logistics delays. We continue to work with our customers and suppliers in this dynamic environment to better align pricing, understand the existing and potential future impacts to our supply chain, and make efforts to mitigate such impacts as we expect these supply chain and labor availability pressures along with the impact of material cost, labor and logistics inflation will continue throughout 2022. In early 2022, the U.S. Department of Commerce ("USDOC") was petitioned to investigate alleged circumvention of antidumping and countervailing duties on Chinese imports of solar panels produced in other countries in Southeast Asia. In March 2022, the USDOC announced that it would investigate the circumvention alleged in the petition. As the timing and progress of many of our customers’ projects depend upon the supply of solar panels, our operating results could be impacted. As such, we are working closely with customers to assess any potential exposure to the USDOC’s solar panel anti-circumvention investigation. Business Strategy The Company's mission is to create compounding and sustainable value for our stockholders and other stakeholders with strong and relevant leadership positions in higher growth, profitable end markets focused on addressing some of the world's most challenging opportunities. The foundation of the Company's strategy is built on three core pillars: Business System, Portfolio Management, and Organization Development. 1. Business System reflects the necessary systems, processes, and management tools required to deliver consistent and continuous performance improvement, every day. Our Business System is a critical enabler to grow, scale, and deliver our plans. Our focus is on deploying effective tools to drive growth, improve operating performance, and develop the organization utilizing 80/20 and lean quote-to-cash initiatives along with digital systems for speed, agility and responsiveness. Our Business System challenges existing paradigms, drives day-to-day performance, forces prioritization of resources, tests our business models, and brings focus to new product and services development and innovation. 2. Portfolio Management is focused on optimizing the Company’s business portfolio in higher growth markets with leadership positions ensuring our financial capital and human resources are effectively and efficiently deployed to deliver sustainable, profitable growth while increasing our relevance with customers and shaping our markets. For a description of recent portfolio management activities, see the actions described below in the Recent Developments section. 3. Organization Development drives the Company’s continuous focus on ensuring we have the right design and structure to scale the organization in order to execute the Company’s plans and meet commitments. The Company aspires to make our place of work the "Best Place to Work", where we focus on creating an environment for our people to have the best opportunity for success, continue to develop, grow, and learn. At core of this pillar is the Company’s development process focused on helping employees reach their potential, improve performance, develop career roadmaps, identify ongoing education requirements, and respective succession plans. We believe doing so helps us attract and retain the best people so we can execute our business plans. We believe the key elements of our strategy have, and will continue to, enable us to respond timely to changes in the end markets we serve, including evolving changes due to COVID-19 and the broader market dynamics experienced over the past two years. We have and expect to continue to examine the need for restructuring of our operations, including consolidation of facilities, reducing overhead costs, curtailing investments in working capital, and managing our business to generate incremental cash. We believe our strategy enables us to respond to volatility in commodity and other input costs and fluctuations in customer demand, along with striving to maintain 22 Table of Contents and improve margins. We have used cash flows generated by these initiatives to minimize debt, improve our liquidity position, and invest in growth initiatives. Overall, we continue to strive to achieve stronger financial results, make more efficient use of capital, and deliver higher stockholder returns. Recent Developments In May 2022, the Company's Board of Directors authorized a share repurchase program of up to $200 million of the Company's issued and outstanding common stock. The program has a duration of three years, ending May 2, 2025. Repurchases may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. Any such repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The repurchase program may be suspended or discontinued at any time at the Company's discretion. The Company has not made repurchases under the repurchase program to date. During the first quarter of 2022, the Company committed to a plan to sell its processing equipment business, which is a business within the Company's Agtech reportable segment, as a result of its portfolio management strategy in order to focus its resources on the higher growth and more profitable growing business within the Agtech segment. The processing equipment business has been classified as held for sale as of March 31, 2022. During the first quarter of 2021, the Company sold its Industrial business which was previously included in the Company's Industrial and Infrastructure Products segment, now the Infrastructure segment and was reported as discontinued operations as of December 31, 2020. Results of Operations Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021 The following table sets forth selected results of operations data and its percentage of net sales for the three months ended March 31 (in thousands): 2022 2021 Net sales $ 317,865 100.0 % $ 287,592 100.0 % Cost of sales 253,021 79.6 % 227,574 79.1 % Gross profit 64,844 20.4 % 60,018 20.9 % Selling, general, and administrative expense 43,649 13.7 % 47,203 16.4 % Income from operations 21,195 6.7 % 12,815 4.5 % Interest expense 485 0.2 % 444 0.2 % Other expense 153 0.0 % 315 0.1 % Income before taxes 20,557 6.5 % 12,056 4.2 % Provision for income taxes 5,101 1.6 % 1,560 0.6 % Income from continuing operations 15,456 4.9 % 10,496 3.6 % Income from discontinued operations — 0.0 % 2,266 0.8 % Net income $ 15,456 4.9 % $ 12,762 4.4 % 23 Table of Contents The following table sets forth the Company’s net sales by reportable segment for the three months ended March 31, (in thousands): Impact of 2022 2021 Total Change Portfolio Management Ongoing Operations Net sales: Renewables $ 78,783 $ 85,512 $ (6,729) $ — $ (6,729) Residential 179,485 140,217 39,268 — 39,268 Agtech 42,428 46,739 (4,311) (3,150) (1,161) Infrastructure 17,169 15,124 2,045 — 2,045 Consolidated $ 317,865 $ 287,592 $ 30,273 $ (3,150) $ 33,423 Consolidated net sales increased by $30.3 million, or 10.5%, to $317.9 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The 10.5% increase in revenue was driven by the Residential and Infrastructure segments, which more than offset volume declines in both our Renewables and Agtech segments. The improvement year over year was driven by a 15% increase in pricing to customers, partially offset by a net volume decline of 5%. The increase during the current year quarter was driven by participation gains and price in our Residential segment, partially offset by continued supply chain challenges in the Renewables segment. While the Company committed to a plan of sale of its Processing business within the Agtech segment, and has reclassified the assets and liabilities as held-for-sale on the March 31, 2022 balance sheet, the Company will continue reporting its operating results in the Company's consolidated operating results from continuing operations until the sale of the business is completed. Consolidated backlog increased 23% to $437 million up from $355 million at the end of the prior year quarter. Net sales in our Renewables segment decreased $6.7 million, or 7.8%, to $78.8 million for the three months ended March 31, 2022 compared to $85.5 million for the three months ended March 31, 2021. Revenue decreased as anticipated by 7.8% during the quarter as a result of solar project schedule delays and disruptions related to supply chain challenges as well as impacts from severe winter weather early in the quarter. Backlog improved 41% year over year, driven by continued end market demand for this segment. Net sales in our Residential segment increased 28.0%, or $39.3 million, to $179.5 million for the three months ended March 31, 2022 compared to $140.2 million for the three months ended March 31, 2021. The increase from the prior year quarter, the seventh consecutive quarter of double-digit growth, was driven by market demand, additional price actions, and participation gains, particularly in the building products and mail and package businesses. Net sales in our Agtech segment decreased 9.2%, or $4.3 million, to $42.4 million for the three months ended March 31, 2022 compared to $46.7 million for the three months ended March 31, 2021. Excluding the impact of the processing equipment business which has been classified as held for sale as of March 31, 2022, revenue declined in our produce and cannabis businesses due to continued licensing and permit delays, and scheduled timing of projects. Despite these headwinds, the commercial greenhouse business continued solid growth across its core product lines serving the retail, institutional and car wash markets. Backlog increased 17% year over year.. Net sales in our Infrastructure segment increased 13.9%, or $2.0 million, to $17.2 million for the three months ended March 31, 2022 compared to $15.1 million for the three months ended March 31, 2021. The increase in revenue was driven by growth in demand for fabricated products. While order backlog declined 7% as compared to the prior year quarter, on timing of orders and revenues, the segment's pipeline and bidding activity remain strong. Management continues to expect the impact of incremental government spending on infrastructure toward the end of 2022. Our consolidated gross margin decreased to 20.4% for the three months ended March 31, 2022 compared to 20.9% for the three months ended March 31, 2021. The decrease was largely the result of continued and anticipated supply chain disruptions, materials cost inflation along with labor availability, and severe winter weather related inefficiencies in several of our businesses. Largely offsetting these impacts were improved operating execution from lean enterprise initiatives, supply chain optimization activities, favorable revenue mix and the impact of participation gains in several of our other businesses. 24 Table of Contents Selling, general, and administrative ("SG&A") expenses decreased by $3.6 million, or 7.5%, to $43.6 million for the three months ended March 31, 2022 from $47.2 million for the three months ended March 31, 2021. The decrease year over year was largely due to lower performance-based compensation expense for equity-based awards tied to the Company's 200-day average stock price which declined as compared to the prior year quarter. SG&A expenses as a percentage of net sales decreased to 13.7% for the three months ended March 31, 2022 compared to 16.4% for the three months ended March 31, 2021. The following table sets forth the Company’s income from operations and income from operations as a percentage of net sales by reportable segment for the three months ended March 31, (in thousands): Impact of 2022 2021 Total Change Portfolio Management Ongoing Operations Income from operations: Renewables $ (6,984) (8.9) % $ (521) (0.6) % $ (6,463) $ — $ (6,463) Residential 33,435 18.6 % 22,934 16.4 % 10,501 — 10,501 Agtech 31 0.1 % 929 2.0 % (898) (1,689) 791 Infrastructure 1,181 6.9 % 2,037 13.5 % (856) — (856) Unallocated Corporate Expenses (6,468) (2.0) % (12,564) (4.4) % 6,096 — 6,096 Consolidated income from operations $ 21,195 6.7 % $ 12,815 4.5 % $ 8,380 $ (1,689) $ 10,069 The Renewables segment generated an operating margin of (8.9)% in the current year quarter compared to (0.6)% in the prior year quarter. The decrease in operating margin on lower volume was the result of project management inefficiencies related to project delays and disruptions associated with market supply chain disruptions and an unanticipated level of inflation on structural steel used in solar canopy projects that carried over from the end of the prior year into the first two months of the current year quarter. Furthermore, severe winter weather resulted in project inefficiencies during the quarter. We continue executing our integration plans which remain on track. The Residential segment generated an operating margin of 18.6% in the current year quarter compared to 16.4% in the prior year quarter. The increase in operating margin was the result of favorable price / cost management, segment mix, and 80/20 initiatives. Our Agtech segment generated an operating margin of 0.1% in the current year quarter compared to 2.0% in the prior year quarter. Excluding the impact of the Processing business which has been classified as held for sale as of March 31, 2022, operating profit and margin improved year over year, the result of continued execution from 80/20 and lean enterprise initiatives, ongoing integration activities, improved business mix, and supply chain optimization projects. Our Infrastructure segment generated an operating margin of 6.9% during the three months ended March 31, 2022 compared to 13.5% during the three months ended March 31, 2021. The margin declined year over year as plate steel inflation impacted fixed price projects and the fabrication business experienced labor availability and inefficiencies related to adding second shift capacity to support increased demand. Unallocated corporate expenses decreased $6.1 million from $12.6 million during the three months ended March 31, 2021 to $6.5 million during the three months ended March 31, 2022. The decrease in expense was primarily the result of lower performance-based compensation expense for equity-based awards tied to the Company's 200-day average stock price which declined as compared to the prior year quarter. Interest expense increased slightly year over year with $0.5 million for the three months ended March 31, 2022 compared to $0.4 million for the three months ended March 31, 2021. The outstanding balances on the Company's revolving credit facility were $42.4 million and $58.0 million as of March 31, 2022, and 2021, respectively. We recognized a provision for income taxes of $5.1 million and $1.6 million, with effective tax rates of 24.8% and 12.9% for the three months ended March 31, 2022, and 2021, respectively. The effective tax rate for the three months ended March 31, 2022 was greater than the U.S. federal statutory rate of 21% due to state taxes and 25 Table of Contents nondeductible permanent differences partially offset by favorable discrete items due to an excess tax benefit on stock-based compensation. The effective tax rate for the three months ended March 31, 2021 was less than the U.S. federal statutory rate of 21% due to favorable discrete items due to an excess tax benefit on stock-based compensation, partially offset by state taxes and nondeductible permanent differences. Liquidity and Capital Resources The following table sets forth our liquidity position as of: (in thousands) March 31, 2022 December 31, 2021 Cash and cash equivalents $ 15,573 $ 12,849 Availability on revolving credit facility 351,505 369,305 $ 367,078 $ 382,154 Sources of Liquidity We believe that our cash on hand and available borrowing capacity provided under our Sixth Amended and Restated Credit Agreement (the "Senior Credit Agreement") provide us with ample liquidity and capital resources to invest in key business strategies that drive our mission. We have been able to weather the economic impacts of the COVID-19 pandemic and the broader market dynamics, including the current inflationary cost environment, while continuing to make investments that support our strategy. We continue to remain focused on managing our working capital, closely monitoring customer credit and collection activities, and working to extend payment terms. We believe our liquidity, together with the cash expected to be generated from operations, should be sufficient to fund working capital needs and stock repurchases and to invest in operational excellence and growth initiatives for the foreseeable future. Our Senior Credit Agreement provides us with liquidity and capital resources for use by our U.S. operations. Historically, our foreign operations have generated cash flow from operations sufficient to invest in working capital and fund their capital improvements. As of March 31, 2022, our foreign subsidiaries held $13.0 million of cash. Outstanding balances on our revolving credit facility under our Senior Credit Agreement accrue interest at a rate based on LIBOR plus an additional margin. We do not expect a material change in interest expense as a result of transitioning from a LIBOR rate to a new reference rate. See Note 7 to the Company's consolidated financial statements in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for further information on the Company’s Senior Credit Agreement . Uses of Cash / Cash Requirements Our material short-term cash requirements primarily include accounts payable, certain employee and retiree benefit-related obligations, operating lease obligations, interest payments on outstanding debt, repayments of borrowing on our revolving credit facility, capital expenditures, and other purchase obligations originating in the normal course of business for inventory purchase orders and contractual service agreements. Our principal capital requirements are to fund our operations' working capital and capital improvements, to provide capital for acquisitions and to strategically allocate capital through repurchases of Company stock. We will continue to invest in growth opportunities as appropriate while focusing on working capital efficiency and profit improvement opportunities to minimize the cash invested to operate our business. We intend to fund our cash requirements through cash generated from operations and, as necessary, from the availability on our revolving credit facility. In May 2022, the Company's Board of Directors authorized a share repurchase program of up to $200 million of the Company's issued and outstanding common stock. The program has a duration of three years, ending May 2, 2025. Repurchases may be made, from time to time, in amounts and at prices the Company deems appropriate, subject to market conditions, applicable legal requirements, debt covenants and other considerations. Any such repurchases may be executed using open market purchases, privately negotiated agreements or other transactions. The repurchase program may be suspended or discontinued at any time at the Company's discretion. The Company has not made repurchases under the repurchase program to date. During 2020, we opted to defer remittance of the employer portion of Social Security tax as provided in the Coronavirus, Aid, Relief and Economic Security Act ("CARES Act"), which allowed us to retain $4.4 million in cash during 2020 that would have otherwise been remitted to the federal government. The deferred tax payments were 26 Table of Contents required to be repaid in two installments occurring near the end of each year 2021 and 2022, of which $1.9 million was repaid in 2021 and the remaining $2.5 million will be repaid by the end of 2022. Over the long-term, we expect that future investments, including strategic business opportunities such as acquisitions, may be financed through a number of sources, including internally available cash, availability under our Senior Credit Agreement, new debt financing, the issuance of equity securities, or any combination of the above. All potential acquisitions are evaluated based on our acquisition strategy, which includes the enhancement of our existing products, operations, or capabilities, expanding our access to new products, markets, and customers, with the goal of creating compounding and sustainable stockholder value. These expectations are forward-looking statements based upon currently available information and may change if conditions in the credit and equity markets deteriorate or other circumstances change. To the extent that operating cash flows are lower than current levels, or sources of financing are not available or not available at acceptable terms, our future liquidity may be adversely affected. Except as disclosed above, there have been no material changes in our cash requirements since December 31, 2021, the end of fiscal year 2021. See Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021. Cash Flows The following table sets forth selected cash flow data for the three months ended March 31, (in thousands): 2022 2021 Cash (used in) provided by: Operating activities of continuing operations $ (7,754) $ (1,214) Investing activities of continuing operations (4,402) 22,600 Financing activities of continuing operations 15,039 (30,388) Discontinued operations — (2,187) Effect of foreign exchange rate changes (159) (134) Net increase (decrease) in cash and cash equivalents $ 2,724 $ (11,323) Operating Activities Net cash used in operating activities of continuing operations for the three months ended March 31, 2022 of $7.7 million consisted of income from continuing operations of $15.5 million and non-cash net charges totaling $10.3 million, which include depreciation, amortization, stock compensation, exit activity costs and other non-cash charges, offset by a $33.5 million investment in working capital and other net assets. The investment in working capital and other net assets was due to increases in inventory as a result of provisioning for potential supply chain disruptions and raw material and freight costs, along with an increase in accounts receivable as the result of seasonal increases in demand and a decrease in accounts payable as the result of timing of vendor payments. This was offset by an increase in accrued expenses and other non-current liabilities due to an increase in unbilled project revenues. Net cash used in operating activities of continuing operations for the three months ended March 31, 2021 of $1.2 million consisted of income from continuing operations of $10.5 million and non-cash net charges totaling $11.4 million, which include depreciation, amortization, stock compensation, exit activity costs and other non-cash charges, offset by a $23.1 million investment in working capital and other net assets. The investment in net working capital and other net assets was largely driven by an increase in inventory due to strong sales demand in our Residential segment and rising raw material prices, along with a decrease in accrued expenses correlated to payments made during the quarter under the Company's performance based incentive programs. Investing Activities Net cash used in investing activities of continuing operations for the three months ended March 31, 2022 of $4.4 million was primarily due to capital expenditures of $4.4 million. 27 Table of Contents Net cash provided by investing activities of continuing operations for the three months ended March 31, 2021 of $22.6 million was primarily due to $27.0 million in net proceeds received from the sale of the Company's Industrial business and capital expenditures of $4.4 million. Financing Activities Net cash provided by financing activities of continuing operations for the three months ended March 31, 2022 of $15.0 million was the result of $47.5 million in proceeds from borrowing on our long-term credit facility, offset by $29.0 million in payments on long-term debt and $3.5 million of common stock repurchases related to the net settlement of tax obligations for participants in the Company's equity incentive plans. Net cash used in financing activities of continuing operations for the three months ended March 31, 2021 of $30.4 million was primarily the result of $46.6 million in payments on long-term debt and $4.7 million of common stock repurchases related to the net settlement of tax obligations for participants in the Company's equity incentive plans, offset by $20.0 million in proceeds from long-term debt and $0.9 million from the issuance of common stock from stock option exercises during the period. Critical Accounting Estimates In the current year, there have been no material changes to our critical accounting estimates during the three months ended March 31, 2021 from those disclosed in the consolidated financial statements and accompanying notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. Recent Accounting Pronouncements See Note 2 to the Company's consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on recent accounting pronouncements.