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” disclosed in our Annual Report on Form 10-K along with Item 1A of this Form 10-Q. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition, liquidity, and the development of the industries in which we operate are consistent with the forward-looking statements contained in this quarterly report, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements that we make herein speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
We use certain operating performance measures, specifically consolidated gross margin, operating margin by segment and consolidated operating margin, to manage our businesses, set operational goals, and establish performance targets for incentive compensation for our employees. We define consolidated gross margin as a percentage of total consolidated gross profit to total consolidated net sales. We define operating margin by segment as a percentage of total income from operations by segment to total net sales by segment and consolidated operating margin as a percentage of total consolidated income from operations to total consolidated net sales. We believe consolidated gross margin, 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. As part of our continuing operations at June 30, 2021, we operated 36 facilities, comprised of 26 manufacturing facilities, one distribution center, and nine offices, which are located in 16 states, Canada, China, and Japan. Our operational infrastructure provides the necessary scale to support regional and national customers in each of our markets.
COVID-19 Update
While the Company continues to encounter challenges and uncertainty associated with COVID-19, the pandemic did not have a material adverse effect on our reported results during 2021. Our top priority continues to be focused on our organization - keeping our team and their families as safe as possible, maintaining the timely and effective functioning of our supply chain operating and providing a high level of responsiveness to customer needs. We continue to proactively execute our pandemic “playbook” in 2021 and make adjustments to our operating protocols as we navigate forward. The extent to which our operations will be impacted by the outbreak, including but not limited to the current impact of supply chain, transportation and labor challenges, along with new requirements or regulations mandated by government authorities, remains uncertain and challenging to predict, Refer to the Company's Outlook section in this management discussion and analysis for consideration relative to future periods.
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 Business System is focused on deploying effective tools to drive growth, improve operating performance, and develop the organization. Our Business System challenges existing paradigms, drives day-to-day performance, forces prioritization of resources, challenges 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 and ensures 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 strengthening and scaling the organization 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 challenges noted above. We have and expect to continue to examine the need for restructuring of our operations, including consolidation of facilities, reducing overhead costs, curtailing investments in inventory, and managing our business to generate incremental cash. We believe our enhanced strategy has enabled us to better react to volatility in commodity and other input costs and fluctuations in customer demand, along with helping to improve margins. We have used the improved cash flows generated by these initiatives to pay down debt, improve our liquidity position, and invest in growth initiatives. Overall, we continue to strive to achieve stronger financial results, make more efficient use of capital, and deliver higher stockholder returns.
Recent Developments
During the first quarter of 2021, the Company sold its Industrial business as a result of its Portfolio Management strategy to focus on participation in higher value and faster growing markets. The Industrial business, previously reported in the Company's Industrial and Infrastructure Products segment, was reported as discontinued operations as of December 31, 2020.
During 2020, the Company completed the following acquisitions:
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Business Acquired
|
Date of Acquisition in 2020
|
Purchase price
( in millions) 1
|
Description
|
Segment
|
|
TerraSmart LLC
|
December 31
|
$
|
223.7
|
|
Provider of screw-based, ground-mount solar racking technology, particularly used for solar projects installed on challenging terrain
|
Renewables
|
|
Sunfig Corporation
|
December 11
|
$
|
3.8
|
|
Provider of software solutions that optimize solar energy investments through upstream design, performance and financial modeling
|
Renewables
|
|
Architectural Mailboxes
|
October 15
|
$
|
26.9
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|
Provider, designer, and developer of decorative residential mailboxes and related products
|
Residential
|
|
Delta Separations
|
February 13
|
$
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47.1
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|
Provider of ethanol-based extraction systems manufacturer and training and laboratory design and operations consultative partner
|
Agtech
|
|
Thermo Energy Systems
|
January 15
|
$
|
7.3
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|
Provider of commercial greenhouse solutions in North America supporting the biologically grown organic food market
|
Agtech
|
Note 1: Except for TerraSmart, which was financed through a combination of cash on hand and borrowings under the Company's revolving credit facility, all of the above 2020 acquisitions were funded from cash on hand. The purchase price for the acquisitions of TerraSmart, Sunfig, and Architectural Mailboxes represents the preliminary allocation to the assets acquired and liabilities assumed in each transaction. The purchase price shown above for Delta and Thermo represents the final purchase price in each transaction.
Results of Operations
Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020
The following table sets forth selected results of operations data and its percentage of net sales for the three months ended June 30 (in thousands):
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|
|
|
|
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|
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|
2021
|
|
2020
|
|
Net sales
|
$
|
348,389
|
|
|
100.0
|
%
|
|
$
|
255,184
|
|
|
100.0
|
%
|
|
Cost of sales
|
267,458
|
|
|
76.8
|
%
|
|
189,623
|
|
|
74.3
|
%
|
|
Gross profit
|
80,931
|
|
|
23.2
|
%
|
|
65,561
|
|
|
25.7
|
%
|
|
Selling, general, and administrative expense
|
49,522
|
|
|
14.2
|
%
|
|
34,813
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
31,409
|
|
|
9.0
|
%
|
|
30,748
|
|
|
12.0
|
%
|
|
Interest expense
|
245
|
|
|
0.0
|
%
|
|
222
|
|
|
0.0
|
%
|
|
Other income
|
(4,666)
|
|
|
(1.3)
|
%
|
|
(1,892)
|
|
|
(0.7)
|
%
|
|
Income before taxes
|
35,830
|
|
|
10.3
|
%
|
|
32,418
|
|
|
12.7
|
%
|
|
Provision for income taxes
|
9,457
|
|
|
2.7
|
%
|
|
7,961
|
|
|
3.1
|
%
|
|
Income from continuing operations
|
26,373
|
|
|
7.6
|
%
|
|
24,457
|
|
|
9.6
|
%
|
|
(Loss) income from discontinued operations
|
(424)
|
|
|
(0.2)
|
%
|
|
2,835
|
|
|
1.1
|
%
|
|
Net income
|
$
|
25,949
|
|
|
7.4
|
%
|
|
$
|
27,292
|
|
|
10.7
|
%
|
The following table sets forth the Company’s net sales by reportable segment for the three months ended June 30, (in thousands):
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
2021
|
|
2020
|
|
Total
Change
|
|
|
|
Acquisitions
|
|
Operations
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewables
|
$
|
107,751
|
|
|
$
|
55,950
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|
|
$
|
51,801
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|
|
|
|
$
|
49,825
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|
|
$
|
1,976
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Residential
|
164,209
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|
|
139,472
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|
|
24,737
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|
|
|
|
7,705
|
|
|
17,032
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|
|
Agtech
|
53,696
|
|
|
42,309
|
|
|
11,387
|
|
|
|
|
—
|
|
|
11,387
|
|
|
Infrastructure
|
22,733
|
|
|
17,453
|
|
|
5,280
|
|
|
|
|
—
|
|
|
5,280
|
|
|
Consolidated
|
$
|
348,389
|
|
|
$
|
255,184
|
|
|
$
|
93,205
|
|
|
|
|
$
|
57,530
|
|
|
$
|
35,675
|
|
Consolidated net sales increased by $93.2 million, or 36.5%, to $348.4 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The 36.5% increase in revenue was driven by the Renewables and Residential segments. Sales generated from our prior year acquisitions of TerraSmart and Architectural Mailboxes contributed 22.5%, or $57.5 million to the growth from the prior year quarter. The $35.7 million, or 14.0% increase in organic growth during the current year quarter was driven by volume increases across all of our segments, the result of strong end market demand and participation gains, along with increases in pricing to customers. Consolidated backlog increased 54% to $403 million up from $262 million at the end of the prior year quarter.
Net sales in our Renewables segment increased $51.8 million, or 92.5%, to $107.8 million for the three months ended June 30, 2021 compared to $56.0 million for the three months ended June 30, 2020. Sales generated from the prior year acquisition of TerraSmart of $49.8 million primarily contributed to the increase in the current year quarter. Organic revenue increased 3.5% during the quarter driven by strong demand across our broad offering of fixed tilt, tracker, canopy and electrical balance-of-system product solutions serving the community and commercial and industrial market segments. This growth was partially offset by headwinds impacting the solar industry including steel inflation, supply chain challenges with solar panels, as well as, a decline in safe-harbor related demand due to the extension of the investment tax credit in late 2020. Backlog improved 120% year over year, or 54% on a proforma basis for this segment.
Net sales in our Residential segment increased 17.7%, or $24.7 million, to $164.2 million for the three months ended June 30, 2021 compared to $139.5 million for the three months ended June 30, 2020. The increase from the prior year quarter was largely due to continued strong activity across all residential businesses along with increased pricing that offset challenges from supply chain dynamics related to material, labor and logistics availability. Sales from the prior year acquisition of Architectural Mailboxes also contributed $7.7 million to the increase in the current year quarter.
Net sales in our Agtech segment increased 27.0%, or $11.4 million, to $53.7 million for the three months ended June 30, 2021 compared to $42.3 million for the three months ended June 30, 2020. The revenue increase was led by solid demand across the produce, commercial, car wash, retail and processing equipment segments, despite the shift in timing of projects from the second quarter into future quarters as schedules have been impacted by permit delays, re-scoping of projects and supply chain disruptions. While backlog experienced a slight and temporary decrease of 7% year over year, due to the impact of re-scoping of projects and supply chain disruptions impacting project scheduling, subsequent order activity is accelerating backlog momentum.
Net sales in our Infrastructure segment increased 29.7%, or $5.3 million, to $22.7 million for the three months ended June 30, 2021 compared to $17.5 million for the three months ended June 30, 2020. During the current year quarter, demand for fabricated and non-fabricated products from this segment increased as state project funding improved and the domestic economy strengthened. Backlog remained strong increasing 11% compared to the prior year quarter.
Our consolidated gross margin decreased to 23.2% for the three months ended June 30, 2021 compared to 25.7% for the three months ended June 30, 2020. The decrease was the result of lower gross margins generated from our recent acquisitions as we continue to integrate them operationally, along with timing and alignment of higher input costs to price increases, supply chain disruptions, and shifts in project timing in the Agtech and Renewables segments. Partially offsetting the decrease was improved operating execution in our core businesses compared to the prior year quarter.
Selling, general, and administrative ("SG&A") expenses increased by $14.7 million, or 42.3%, to $49.5 million for the three months ended June 30, 2021 from $34.8 million for the three months ended June 30, 2020. The $14.7 million increase was primarily due to $6.3 million of incremental SG&A expenses recorded quarter over quarter from our recent acquisitions and transaction costs to complete those acquisitions, along with $1.3 million of higher performance-based compensation expenses as compared to the prior year quarter. Additionally, we have invested in the development of our organization and safety of our team through actions including but not limited to the expansion of headcount in key positions and the launch of other improvement initiatives. Furthermore, healthcare costs increased year over year as prior year spend was down due to COVID-related closures of medical facilities, while the current year quarter spend was impacted by deferred treatments due to those closures. SG&A expenses as a percentage of net sales increased to 14.2% for the three months ended June 30, 2021 compared to 13.7% for the three months ended June 30, 2020.
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 June 30, (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Total
Change
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewables
|
$
|
9,510
|
|
|
8.8
|
%
|
|
$
|
8,422
|
|
|
15.1
|
%
|
|
$
|
1,088
|
|
|
|
|
|
|
|
|
|
|
Residential
|
27,155
|
|
|
16.5
|
%
|
|
27,964
|
|
|
20.0
|
%
|
|
(809)
|
|
|
|
|
|
|
|
|
|
|
Agtech
|
977
|
|
|
1.8
|
%
|
|
766
|
|
|
1.8
|
%
|
|
211
|
|
|
|
|
|
|
|
|
|
|
Infrastructure
|
4,186
|
|
|
18.4
|
%
|
|
2,801
|
|
|
16.0
|
%
|
|
1,385
|
|
|
|
|
|
|
|
|
|
|
Unallocated Corporate Expenses
|
(10,419)
|
|
|
(3.0)
|
%
|
|
(9,205)
|
|
|
(3.6)
|
%
|
|
(1,214)
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from operations
|
$
|
31,409
|
|
|
9.0
|
%
|
|
$
|
30,748
|
|
|
12.0
|
%
|
|
$
|
661
|
|
|
|
|
|
|
|
|
|
The Renewables segment generated an operating margin of 8.8% in the current year quarter compared to 15.1% in the prior year quarter. The decrease in operating margin was partly due to the expected lower margins generated by our recent acquisitions, the result of backlog amortization and integration costs, as we continue to integrate these businesses operationally. Additionally contributing to the decrease, was a one-time tariff credit received in the prior year quarter along with the impact of timing and alignment of price to input costs and project movement associated
with supply chain challenges. Partially offsetting the lower margin is improvement in our core business resulting from 80/20 productivity initiatives. TerraSmart's operating margin nearly doubled over the first quarter and remains on track relative to our full year integration plans.
The Residential segment generated an operating margin of 16.5% in the current year quarter compared to 20.0% in the prior year quarter. The decrease in operating margin was the result of accelerated inflation, material and labor availability and the timing and alignment of price actions and input costs. While multiple price increases have been implemented, historically, operating margin alignment lags and recovers within a one to two quarter period. Partially offsetting the lower margin is continued solid execution and continued benefits from 80/20 simplification initiatives.
Our Agtech segment generated an operating margin of 1.8% during both the three months ended June 30, 2021 and 2020, respectively. Operating margin was flat due to the combined results of improvements in the legacy greenhouse structures, cannabis greenhouse structures, and processing equipment businesses along with lower restructuring and acquisition costs incurred as compared to the prior year quarter. These improvements were essentially offset by abovementioned movement of certain projects into the second half of the year, higher input costs, and supply chain and logistics challenges incurred in the current year quarter.
Our Infrastructure segment generated an operating margin of 18.4% during the three months ended June 30, 2021 compared to 16.0% during the three months ended June 30, 2020. The increase was driven by higher margin mix resulting from increased non-fabricated product volumes, along with strong execution on higher volumes and continued investment in 80/20 productivity initiatives.
Unallocated corporate expenses increased $1.2 million from $9.2 million during the three months ended June 30, 2020 to $10.4 million during the three months ended June 30, 2021. The increase in expense was primarily the result of $1.1 million of higher performance-based compensation expenses as compared to the prior year quarter.
Interest expense was $0.2 million for both the three months ended June 30, 2021 and 2020, respectively. Expense in the current year quarter was the net result of $32.3 million in the outstanding balance on the Company's revolving credit facility as of June 30, 2021, partially offset by interest income. No amounts were outstanding under our revolving credit facility during the three months ended June 30, 2020.
The Company recorded other income of $4.7 million for the three months ended June 30, 2021, compared to $1.9 million recorded for the three months ended June 30, 2020. The $2.8 million increase from the prior year quarter was largely the result of a $4.7 million gain recognized on the sale of securities received from the sellers of Thermo Energy Systems, Inc. ("Thermo") to settle indemnification claims, partially offset by a $1.9 million pre-tax gain in the prior year quarter on the sale of the Company's self-guided apartment tour application business within the Residential segment.
We recognized a provision for income taxes of $9.5 million and $8.0 million, with effective tax rates of 26.4% and 24.6% for the three months ended June 30, 2021, and 2020, respectively. The effective tax rates for the three months ended June 30, 2021 and 2020, respectively, were greater than the U.S. federal statutory rate of 21% due to state taxes and nondeductible permanent differences partially offset by favorable discrete items due to an excess tax benefit on stock-based compensation.
Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
The following table sets forth selected results of operations data and its percentage of net sales for the six months ended June 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Net sales
|
$
|
635,981
|
|
|
100.0
|
%
|
|
$
|
470,585
|
|
|
100.0
|
%
|
|
Cost of sales
|
495,032
|
|
|
77.8
|
%
|
|
355,163
|
|
|
75.5
|
%
|
|
Gross profit
|
140,949
|
|
|
22.2
|
%
|
|
115,422
|
|
|
24.5
|
%
|
|
Selling, general, and administrative expense
|
96,725
|
|
|
15.2
|
%
|
|
71,897
|
|
|
15.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
44,224
|
|
|
7.0
|
%
|
|
43,525
|
|
|
9.2
|
%
|
|
Interest expense
|
689
|
|
|
0.1
|
%
|
|
266
|
|
|
0.0
|
%
|
|
Other income
|
(4,351)
|
|
|
(0.6)
|
%
|
|
(1,374)
|
|
|
(0.3)
|
%
|
|
Income before taxes
|
47,886
|
|
|
7.5
|
%
|
|
44,633
|
|
|
9.5
|
%
|
|
Provision for income taxes
|
11,017
|
|
|
1.7
|
%
|
|
10,274
|
|
|
2.2
|
%
|
|
Income from continuing operations
|
36,869
|
|
|
5.8
|
%
|
|
34,359
|
|
|
7.3
|
%
|
|
Income from discontinued operations
|
1,842
|
|
|
0.3
|
%
|
|
4,992
|
|
|
1.1
|
%
|
|
Net income
|
$
|
38,711
|
|
|
6.1
|
%
|
|
$
|
39,351
|
|
|
8.4
|
%
|
The following table sets forth the Company’s net sales by reportable segment for the six months ended June 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
2021
|
|
2020
|
|
Total
Change
|
|
|
|
Acquisitions
|
|
Operations
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewables
|
$
|
193,263
|
|
|
$
|
103,213
|
|
|
$
|
90,050
|
|
|
|
|
$
|
87,081
|
|
|
$
|
2,969
|
|
|
Residential
|
304,426
|
|
|
242,891
|
|
|
61,535
|
|
|
|
|
16,439
|
|
|
45,096
|
|
|
Agtech
|
100,435
|
|
|
91,543
|
|
|
8,892
|
|
|
|
|
4,600
|
|
|
4,292
|
|
|
Infrastructure
|
37,857
|
|
|
32,938
|
|
|
4,919
|
|
|
|
|
—
|
|
|
4,919
|
|
|
Consolidated
|
$
|
635,981
|
|
|
$
|
470,585
|
|
|
$
|
165,396
|
|
|
|
|
$
|
108,120
|
|
|
$
|
57,276
|
|
Consolidated net sales increased by $165.4 million, or 35.1%, to $636.0 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The 35.1% increase in revenue was driven by the Renewables and Residential segments. Sales generated from our prior year acquisitions of TerraSmart, Thermo, Delta Separations and Architectural Mailboxes contributed 23.0%, or $108.1 million to the growth from the prior year. The $57.3 million, or 12.1% increase, in organic growth during the current year was primarily the result of an increase in volume across all of our segments, the result of strong end market demand and participation gains, along with increases in pricing to customers. Consolidated backlog increased 54% to $403 million up from $262 million at the end of the prior year period.
Net sales in our Renewables segment increased $90.1 million, or 87.3%, to $193.3 million for the six months ended June 30, 2021 compared to $103.2 million for the six months ended June 30, 2020. Sales generated from the prior year acquisition of TerraSmart of $87.1 million, primarily contributed to the increase in the current year. Organic revenue increased 2.9% during the current year driven by strong demand across our broad offering of fixed tilt, tracker, canopy and electrical balance-of-system product solutions serving the community and commercial and industrial market segments. This growth was partially offset by projects impacted by headwinds impacting the solar industry including steel inflation, supply chain challenges with solar panels, as well as, a decline in safe-harbor related demand due to the extension of the investment tax credit in late 2020. Backlog improved 120% year over year, or 54% on a proforma basis for this segment.
Net sales in our Residential segment increased 25.3%, or $61.5 million, to $304.4 million for the six months ended June 30, 2021 compared to $242.9 million for the six months ended June 30, 2020. The increase from the prior year was largely due to continued strong demand across all residential businesses along with increased pricing and participation gains across that offset challenges from supply chain dynamics. Sales from the prior year acquisition of Architectural Mailboxes also contributed $16.4 million to the increase in the current year.
Net sales in our Agtech segment increased 9.7%, or $8.9 million, to $100.4 million for the six months ended June 30, 2021 compared to $91.5 million for the six months ended June 30, 2020. Sales generated from Thermo and Delta Separations acquired in the first quarter of 2020, contributed $4.6 million, to the increase in this segment.
Organic revenue increased $4.3 million, largely driven by growth in the produce market along with slower but improving market conditions for commercial, car wash, retail and processing equipment segments. Partially offsetting the segment increase was the shift in timing of projects from the current period into the second half of the year as schedules have been impacted by permit delays, re-scoping of projects and supply chain disruptions. While backlog experienced a slight and temporary decrease of 7% year over year, due to the impact of re-scoping of projects and supply chain disruptions impacting project scheduling, subsequent order activity is accelerating backlog momentum.
Net sales in our Infrastructure segment increased 14.9%, or $4.9 million, to $37.9 million for the six months ended June 30, 2021 compared to $32.9 million for the six months ended June 30, 2020. During the current year, demand for fabricated and non-fabricated products from this segment increased as the economy strengthened and state project funding improved. Backlog remained strong increasing 11% compared to the prior year.
Our consolidated gross margin decreased to 22.2% for the six months ended June 30, 2021 compared to 24.5% for the six months ended June 30, 2020. This decrease was the result of costs incurred during the current year related to the planned discontinuation of our organic solar tracker solution as we migrate towards the solution offered by our recently acquired TerraSmart business. Additionally, lower gross margins generated from our recent acquisitions contributed to the decline as we continue to integrate them operationally along with timing and alignment of higher input costs to price increases, supply chain disruptions, and shifts in project timing in the Agtech and Renewables segments. Partially offsetting the decrease was improved operating execution in all our core businesses compared to the prior year.
Selling, general, and administrative ("SG&A") expenses increased by $24.8 million, or 34.5%, to $96.7 million for the six months ended June 30, 2021 from $71.9 million for the six months ended June 30, 2020. The $24.8 million increase was primarily due to $12.9 million of incremental SG&A expenses recorded year over year from our recent acquisitions and transaction costs to complete those acquisitions, along with $4.6 million of higher performance-based compensation expenses as compared to the prior year. Additionally, we have invested in the development of our organization and safety of our team through actions including but not limited to the expansion of headcount in key positions and the launch of additional developmental improvement initiatives. Furthermore, healthcare costs increased year over year as prior year spend was down due to COVID-related closures of medical facilities, while the current year spend was impacted by deferred treatments due to those closures. Despite the above increases, SG&A expenses as a percentage of net sales modestly decreased to 15.2% for the six months ended June 30, 2021 compared to 15.3% for the six months ended June 30, 2020.
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 six months ended June 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Total
Change
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewables
|
$
|
8,989
|
|
|
4.7
|
%
|
|
$
|
12,781
|
|
|
12.4
|
%
|
|
$
|
(3,792)
|
|
|
|
|
|
|
|
|
|
|
Residential
|
50,089
|
|
|
16.5
|
%
|
|
41,689
|
|
|
17.2
|
%
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
Agtech
|
1,906
|
|
|
1.9
|
%
|
|
2,106
|
|
|
2.3
|
%
|
|
(200)
|
|
|
|
|
|
|
|
|
|
|
Infrastructure
|
6,223
|
|
|
16.4
|
%
|
|
4,377
|
|
|
13.3
|
%
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
Unallocated Corporate Expenses
|
(22,983)
|
|
|
(3.6)
|
%
|
|
(17,428)
|
|
|
(3.7)
|
%
|
|
(5,555)
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from operations
|
$
|
44,224
|
|
|
7.0
|
%
|
|
$
|
43,525
|
|
|
9.2
|
%
|
|
$
|
699
|
|
|
|
|
|
|
|
|
|
The Renewables segment generated an operating margin of 4.7% in the current year compared to 12.4% in the prior year. The decrease in operating margin was the combined result of costs incurred during the current year related to the discontinuation of our organic solar tracker solution along with expected lower margins generated by our recent acquisitions, the result of backlog amortization and integration costs, as we continue to integrate them operationally. Additionally contributing to the decrease, was a one-time tariff credit received in the prior year along with the impact of timing and alignment of price to input costs and project movement associated with supply chain challenges. Partially offsetting the lower margin is improvement in our core business resulting from 80/20 productivity initiatives. TerraSmart's operating margin continues to improve in the first half of 2021 and remains on track relative to our full year integration plans.
The Residential segment generated an operating margin of 16.5% in the current year compared to 17.2% in the prior year. The decrease in operating margin was the result of accelerated inflation, material and labor availability
and the timing and alignment of price actions and input costs. While multiple price increases have been implemented, historically, operating margin alignment lags and recovers within a one to two quarter period. Partially offsetting the lower margin is continued solid execution and continued benefits from 80/20 simplification initiatives.
Our Agtech segment generated an operating margin of 1.9% during the six months ended June 30, 2021 compared to 2.3% during the six months ended June 30, 2020. The decrease in operating margin was the combined result of the abovementioned movement of certain projects into the second half of the year, higher input costs and supply chain and logistics challenges incurred in the current year along with integration delays incurred by Thermo during the earlier months of 2021. Partially offsetting the lower margin was improvements in the legacy greenhouse structures, cannabis greenhouse structures, and processing equipment businesses along with lower restructuring and acquisition costs incurred as compared to the prior year period.
Our Infrastructure segment generated an operating margin of 16.4% during the six months ended June 30, 2021 compared to 13.3% during the six months ended June 30, 2020. The increase was driven by higher margin mix resulting from increased non-fabricated product volumes, along with strong execution on higher volumes and higher revenue and continued investment in 80/20 productivity initiatives.
Unallocated corporate expenses increased $5.6 million from $17.4 million during the six months ended June 30, 2020 to $23.0 million during the six months ended June 30, 2021. The increase in expense was primarily the result of $4.2 million of higher performance-based compensation expenses as compared to the prior year.
Interest expense increased by $0.4 million to $0.7 million for the six months ended June 30, 2021 compared to $0.3 million for the six months ended June 30, 2020. The increase in expense was primarily the result of $32.3 million in the outstanding balance on the Company's revolving credit facility as of June 30, 2021. No amounts were outstanding under our revolving credit facility during the six months ended June 30, 2020.
The Company recorded other income of $4.4 million for the six months ended June 30, 2021 compared to the $1.4 million recorded for the six months ended June 30, 2020. The $3.0 million increase from the prior year was largely the result of a $4.7 million gain recognized on the sale of securities received from the sellers of Thermo to settle indemnification claims, partially offset by the prior year period $1.9 million pre-tax gain on the sale of the Company's self-guided apartment tour application business within the Residential segment.
We recognized a provision for income taxes of $11.0 million and $10.3 million, with effective tax rates of 23.0% for both the six months ended June 30, 2021, and 2020, respectively. The effective tax rates for the six months ended June 30, 2021 and 2020, respectively, were greater than the U.S. federal statutory rate of 21% due to state taxes and nondeductible permanent differences partially offset by favorable discrete items due to an excess tax benefit on stock-based compensation.
Outlook
The Company expects that the current business environment, which has been dynamic since the beginning of the year, to remain so throughout the second half of 2021, and will continue to manage inflation, minimize supply chain disruptions, operate in a tight labor market, and continue with its COVID operating protocols. The Company is currently positioned well with solid end market demand, record order backlog, a very healthy balance sheet, and strong focus on daily execution, acquisition integrations, and strengthening its organization and operating systems.
As such, the Company is maintaining its full year guidance of revenues based on its performance to date in 2021, which is consistent with its historical patterns, and outlook and initiatives for improving profitability across each business Consolidated revenue is expected to range between $1.30 billion and $1.35 billion, up from $1.03 billion in 2020 and GAAP EPS from continuing operations between $2.78 and $2.95, compared with $2.53 in 2020.
Liquidity and Capital Resources
Our principal capital requirements are to fund our operations' working capital and capital improvements and to provide capital for acquisitions. 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. The following table sets forth our liquidity position as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2021
|
|
December 31, 2020
|
|
Cash and cash equivalents
|
|
$
|
16,963
|
|
|
$
|
32,054
|
|
|
Availability on revolving credit facility
|
|
360,179
|
|
|
309,175
|
|
|
|
|
$
|
377,142
|
|
|
$
|
341,229
|
|
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 weather the economic impacts of the COVID-19 pandemic while continuing to invest in operational excellence, growth initiatives and the development of our organization. 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 growth initiatives.
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 June 30, 2021, our foreign subsidiaries held $14.9 million of cash in U.S. dollars.
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 will be repaid equally on December 31, 2021 and 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 revolving credit facility, 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 plans and 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 or expected levels, or sources of financing are not available or not available at acceptable terms, our future liquidity may be adversely affected.
Cash Flows
The following table sets forth selected cash flow data for the six months ended June 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Cash provided by (used in):
|
|
|
|
|
Operating activities of continuing operations
|
$
|
12,777
|
|
|
$
|
(10,967)
|
|
|
Investing activities of continuing operations
|
30,515
|
|
|
(57,800)
|
|
|
Financing activities of continuing operations
|
(56,292)
|
|
|
(4,384)
|
|
|
Discontinued operations
|
(2,178)
|
|
|
2,659
|
|
|
Effect of foreign exchange rate changes
|
87
|
|
|
(12)
|
|
|
Net decrease in cash and cash equivalents
|
$
|
(15,091)
|
|
|
$
|
(70,504)
|
|
Operating Activities
Net cash provided by operating activities of continuing operations for the six months ended June 30, 2021 of $12.8 million consisted of income from continuing operations of $36.9 million and non-cash net charges totaling $22.4
million, which include depreciation, amortization, stock compensation, exit activity costs and other non-cash charges, offset by a $46.5 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 rising material costs and accounts receivable due to seasonal increases in demand, offset by an increase in accounts payable as the result of seasonal increases in manufacturing activity.
Net cash used in operating activities of continuing operations for the six months ended June 30, 2020 of $11.0 million consisted of net income of $34.4 million and non-cash net charges totaling $12.8 million, which include depreciation, amortization, stock compensation, and other non-cash charges, more than offset by a $58.1 million investment in working capital and other net assets. The working capital investment was largely comprised of $42.4 million related to our acquisition of Thermo, which was undercapitalized at time of purchase in the first quarter of 2020.
Investing Activities
Net cash provided by investing activities of continuing operations for the six months ended June 30, 2021 of $30.5 million was primarily due to $40.0 million in net proceeds received from the sale of the Company's Industrial business, offset by capital expenditures of $9.5 million.
Net cash used in investing activities of continuing operations for the six months ended June 30, 2020 of $57.8 million primarily consisted of net cash paid for the acquisitions of Delta Separations of $47.1 million and Thermo of $7.3 million and capital expenditures of $4.2 million, offset by $0.8 million in proceeds from the sale of a business within the Residential Products segment and the sale of property and equipment.
Financing Activities
Net cash used in financing activities of continuing operations for the six months ended June 30, 2021 of $56.3 million was primarily the result of $83.6 million in payments on long-term debt and $4.8 million of purchases of treasury stock related to the net settlement of tax obligations for participants in the Company's equity incentive plans, offset by $31.2 million in proceeds from borrowing on our long-term credit facility and $0.9 million from the issuance of common stock from stock option exercises during the period.
Net cash used in financing activities of continuing operations for the six months ended June 30, 2020 of $4.4 million was primarily the result of purchases of treasury stock related to the net settlement of tax obligations for participants in the Company's equity incentive plans.
See Note 8 to the Company's consolidated financial statements in Part I, Item 1, Financial Statements, of this Form 10-Q for further information on the Company’s Senior Credit Agreement.
Off Balance Sheet Financing Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Contractual Obligations
Our contractual obligations have not changed materially from the disclosures included in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Critical Accounting Estimates
In the current year, there have been no changes to our critical accounting estimates 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, 2020.
Recent Accounting Pronouncements
See Note 2 to the Company's consolidated financial statements in Part I, Item 1 of this Form 10-Q for further information on recent accounting pronouncements.