# GIBRALTAR INDUSTRIES, INC. (ROCK) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from GIBRALTAR INDUSTRIES, INC.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/912562/000091256225000007/rock-20241231.htm
Accession: 0000912562-25-000007
Filing date: 2025-02-19
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/ROCK/
All MD&A years: /company/ROCK/mda/
Previous year: /company/ROCK/mda/fy2023/ (FY 2023)
Next year: /company/ROCK/mda/fy2025/ (FY 2025)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s risk factors and its consolidated financial statements and notes thereto included in Item 1A and Item 8, respectively, of this Annual Report on Form 10-K. Certain information set forth in this Item 7 constitutes “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based, in whole or in part, on management’s beliefs, estimates, assumptions, and currently available information. For a more detailed discussion of what constitutes a forward-looking statement and of some of the factors that could cause actual results to differ materially from such forward-looking statements, please refer to the “Safe Harbor Statement” on page 4 of this Annual Report on Form 10-K.

Company Overview

The Company is a leading manufacturer and provider of products and services for the residential, renewable energy, agtech, and infrastructure markets.

The Company operates and reports its results in the following four reporting segments:

•Residential

•Renewables

•Agtech

•Infrastructure

The Company serves customers primarily in North America including home improvement retailers, wholesalers, distributors, contractors, renewable energy (solar) developers, institutional and commercial growers of fruits, vegetables, flowers and other plants. The Company's operational infrastructure provides the necessary scale to support local, regional, and national customers in each of its markets.

Demand for products and services in the segments and end markets the Company's businesses serve are subject to economic conditions that are influenced by various factors. These factors include but are not limited to changes in general economic conditions, interest rates, exchange rates, commodity costs, federal subsidies for renewable energy projects, supply limitations that impact the availability of solar modules and therefore solar racking installations, demand for residential construction, demand for repair and remodeling, governmental policies and funding, tax policies and incentives, tariffs, trade policies, weather patterns, the level of non-residential construction and infrastructure projects, demand for renewable energy sources, and climate change. The Company believes the key elements of its strategy outlined in Item 1. Business of this Annual Report on Form 10-K will allow the Company to respond timely to these factors.

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Operating Performance Measures

The Company uses certain operating performance measures, specifically consolidated gross margin, operating margin by segment and consolidated operating margin, to manage its businesses, set operational goals, and establish performance targets for incentive compensation for its employees. The Company defines consolidated gross margin as a percentage of total consolidated gross profit to total consolidated net sales. The Company defines 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. The Company believes gross margin and operating margin may be useful to investors in evaluating the profitability of its segments and the Company on a consolidated basis.

Results of Operations

Year Ended December 31, 2024 Compared to Year Ended December 31, 2023

For a discussion of the Company's results of operations for the year ended December 31, 2023 and for a comparison of such results of operations for the year ended December 31, 2022 results please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 that was filed with the SEC on February 21, 2024.

The following table sets forth selected results of operations data (in thousands) and its percentages of net sales for the years ended December 31:

[[GREPCENT_TABLE]]
[["","2024","","2023"],["Net sales","$","1,308,764","","","100.0","%","","$","1,377,736","","","100.0","%"],["Cost of sales","956,936","","","73.1","%","","1,015,770","","","73.7","%"],["Gross profit","351,828","","","26.9","%","","361,966","","","26.3","%"],["Selling, general, and administrative expense","197,505","","","15.1","%","","207,440","","","15.1","%"],["Intangible asset impairment","11,300","","","0.9","%","","3,797","","","0.3","%"],["Income from operations","143,023","","","10.9","%","","150,729","","","10.9","%"],["Interest (income) expense","(6,171)","","","(0.5)","%","","3,002","","","0.2","%"],["Other income","(24,731)","","","(1.9)","%","","(1,265)","","","(0.1)","%"],["Income before taxes","173,925","","","13.3","%","","148,992","","","10.8","%"],["Provision for income taxes","36,585","","","2.8","%","","38,459","","","2.8","%"],["Net income","$","137,340","","","10.5","%","","$","110,533","","","8.0","%"]]
[[/GREPCENT_TABLE]]

The following table sets forth the Company’s net sales by reportable segment for the years ended December 31 (in thousands):

[[GREPCENT_TABLE]]
[["","","Impact of"],["","2024","","2023","","Total Change","","Acquisitions","","Portfolio Management","","Ongoing Operations"],["Net sales:"],["Residential","$","782,519","","","$","814,803","","","$","(32,284)","","","$","3,480","","","$","\u2014","","","$","(35,764)"],["Renewables","285,405","","","330,738","","","(45,333)","","","\u2014","","","(11,724)","","","(33,609)"],["Agtech","152,811","","","144,967","","","7,844","","","\u2014","","","(4,059)","","","11,903"],["Infrastructure","88,029","","","87,228","","","801","","","\u2014","","","\u2014","","","801"],["Consolidated","$","1,308,764","","","$","1,377,736","","","$","(68,972)","","","$","3,480","","","$","(15,783)","","","$","(56,669)"]]
[[/GREPCENT_TABLE]]

Consolidated net sales decreased from 2023 by $69.0 million, or 5.0%, to $1.3 billion for 2024 compared to 2023. The decrease in revenue was the combined result of volume decline in the Company's Residential and Renewables segments along with portfolio management activities in the prior year, the 2023 sale of the Company's Japan-based solar racking business in the Renewables segment and the prior year liquidation of the processing business in the Agtech segment. The decrease was partially offset by growth in the Company's Agtech segment along with revenues generated from a 2023 acquisition in the Residential segment. Consolidated backlog decreased 24% to $252 million down from $330 million at the end of the prior year.

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Net sales in the Residential segment decreased 4.0%, or $32.3 million, to $782.5 million in 2024 compared to $814.8 million in 2023. Organic decline of 4.4% was driven by a slower residential market, including the repair and remodel sector. This decrease was partially offset by recent participation gains with existing and new customers along with $3.5 million of sales generated by the recent acquisition.

Net sales in the Renewables segment decreased by 13.7%, or $45.3 million, to $285.4 million in 2024 compared to $330.7 million in 2023. The decrease was driven by trade and regulatory headwinds associated with the two independent AD/CVD investigations which compelled the industry to significantly focus on completing panel installations and administrative reporting requirements ahead of the December 3, 2024 expiration of the tariff moratorium on panels granted through the two-year Presidential Proclamation from June 2022, along with the aforementioned portfolio management actions and other industry headwinds. Order backlog decreased 32% from the prior year as a result of these challenges.

Net sales in the Agtech segment increased 5.4%, or $7.8 million, to $152.8 million in 2024 compared to $145.0 million in 2023. The revenue increase was primarily driven by projects accelerating in our produce division, partially offset by $4.1 million of revenues recorded in the prior year related to the aforementioned portfolio management actions. Although backlog decreased 23% year over year in this segment, the Company anticipates the addition of new projects in both the produce and commercial markets as the Company completes design work and finalize products for launch.

Net sales in the Infrastructure segment increased 0.9%, or $0.8 million, to $88.0 million in 2024 compared to $87.2 million in 2023, the result of continued strong execution. Backlog increased 10% year over year. Demand and quoting remain strong, supported by continued investment at the federal and state levels.

The Company's consolidated gross margin increased to 26.9% for 2024 compared to 26.3% for 2023. This increase was the result of improved price to material cost alignment, continued operational efficiencies, along with 80/20 initiatives and favorable business and product mix.

Selling, general, and administrative ("SG&A") expenses decreased by $9.9 million, or 4.8%, to $197.5 million for 2024 from $207.4 million for 2023. The $9.9 million decrease was the result of lower performance-based compensation expense and sales commissions compared to the prior year along with a recovery on a receivable written down in 2023 associated with a distressed cannabis customer. SG&A expenses as a percentage of net sales was unchanged at 15.1% for both 2024 and 2023, respectively.

The Company recognized intangible asset impairment charges of $11.3 million in 2024 due to rebranding initiatives resulting in the discontinuation of indefinite-lived trademarks in the Agtech and Renewables segments of $6.0 million and $5.3 million, respectively. During 2023, the Company recognized intangible asset impairment charges of $3.8 million. The impairment was largely the result of a rebranding initiative that resulted in the discontinuation of an indefinite-lived trademark of $3.2 million in the Agtech segment, and to a lesser extent, the write-off of amortizing intangibles for $0.6 million related to a discontinued product line in the Renewables segment.

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 years ended December 31 (in thousands):

[[GREPCENT_TABLE]]
[["","2024","","2023","","Total Change"],["Income from operations:"],["Residential","$","148,784","","19.0","%","","$","143,068","","17.6","%","","$","5,716"],["Renewables","3,349","","1.2","%","","30,160","","9.1","%","","(26,811)"],["Agtech","11,040","","7.2","%","","(928)","","(0.6)","%","","11,968"],["Infrastructure","21,295","","24.2","%","","18,529","","21.2","%","","2,766"],["Unallocated Corporate Expenses","(41,445)","","(3.2)","%","","(40,100)","","(2.9)","%","","(1,345)"],["Consolidated income from operations","$","143,023","","10.9","%","","$","150,729","","10.9","%","","$","(7,706)"]]
[[/GREPCENT_TABLE]]

The Residential segment operating margin increased to 19.0% in 2024 from 17.6% in 2023. The increase in operating margin was driven by effective price/cost management, solid execution and 80/20 productivity initiatives.

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The Renewables segment generated an operating margin of 1.2% in 2024 compared to 9.1% in 2023. The decrease in operating margin was impacted by lower volume resulting from the aforementioned trade and regulatory challenges in this segment along with product line mix associated with the launch and learning curve of the new tracker product line in the current year. Furthermore, margin was impacted by restructuring activities related to addressing customer issues arising from discontinued solar tracker solutions and the indefinite-lived trademark impairment charge recorded in the current year.

The Agtech segment generated an operating margin of 7.2% in 2024 compared to (0.6)% in 2023. The year over year improvement in operating margin was due to the result of volume leverage, product mix shift and improved execution along with the recovery on a receivable written down in 2023 associated with a distressed cannabis customer and the impact of prior year portfolio management actions.

The Infrastructure segment operating margin increased to 24.2% in 2024 compared to 21.2% in 2023. The margin improvement was driven by favorable product line mix, 80/20 productivity initiatives and strong operating execution.

Unallocated corporate expenses increased $1.3 million, or 3.4%, to $41.4 million in 2024 from $40.1 million for 2023.

The Company recorded interest income of $6.2 million for 2024, compared to interest expense of $3.0 million for 2023. Income in the current year was the result of earnings on certain interest-bearing cash accounts. Expense in the prior year was the result of outstanding balances on the Company's revolving credit facility during 2023, while no amounts were outstanding during 2024.

The Company recorded other income of $24.7 million in 2024, compared to $1.3 million in 2023. The current year income is primarily the result of a $25.3 million gain related to the sale of the Company's electronic locker business within its Residential segment. In 2023, the income is the combined result of foreign currency translation fluctuations and changes in the fair market valuation allowance related to the liquidation of the processing business, offset by a $0.6 million pre-tax net loss relating to the sale of the Company's Japan-based solar racking business within its Renewables segment.

The Company recognized a provision for income taxes of $36.6 million, an effective tax rate of 21.0%, for 2024 compared with a provision for income taxes of $38.5 million, an effective tax rate of 25.8%, for 2023. The effective tax rate for 2024 was equal to the U.S. federal statutory rate of 21% due to state taxes and nondeductible permanent differences offset by a partial release of the valuation allowance previously recorded on a capital loss carryforward that can be utilized due to the 2024 sale of the Company's electronic locker business within its Residential segment. The effective tax rate for 2023 exceeded 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.

Liquidity and Capital Resources

The following table sets forth the Company's liquidity position as of (in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2024","","December 31, 2023"],["Cash and cash equivalents","","$","269,480","","","$","99,426"],["Availability on revolving credit facility","","395,069","","","396,056"],["","","$","664,549","","","$","495,482"]]
[[/GREPCENT_TABLE]]

Sources of Liquidity

The Company's primary sources of liquidity are comprised of cash on hand and available borrowing capacity provided under the Company's Credit Agreement. The Credit Agreement provides for a revolving credit facility and letters of credit in an aggregate amount equal to $400 million and terminates on December 8, 2027. The Company can request additional financing to increase the revolving credit facility to $700 million or enter into a term loan of up to $300 million subject to conditions set forth in the Credit Agreement. See Note 8 to the Company's consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information on the Company’s Credit Agreement.

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Generally, the Company's foreign operations have generated cash flow from operations sufficient to invest in working capital and fund their capital improvements. As of December 31, 2024 and 2023, the Company's foreign subsidiaries held $8.9 million and $6.9 million of cash, respectively.

The Company believes that these sources, together with cash expected to be generated from operations, should provide the Company with ample liquidity and capital resources to meet both its short-term and long-term cash requirements and to continue to invest in operational excellence, growth initiatives and the development of the organization.

Uses of Cash / Cash Requirements

The Company's material short-term cash requirements primarily include accounts payable, certain employee and retiree benefit-related obligations, operating lease obligations, capital expenditures, and other purchase obligations originating in the normal course of business for inventory purchase orders and contractual service agreements. The Company's principal capital requirements are to fund its operations' working capital and capital improvements, as well as provide capital for acquisitions and to strategically allocate capital through repurchases of Company stock under the Company's current authorized program ending May 2, 2025. The Company 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 its business. See Notes 7, 9, 14 and 16 to the Company's consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further detail on the Company's accrued expenses, employee and retiree benefit-related obligations, operating lease obligations and historical capital expenditures.

Over the long-term, the Company expects that future investments, including strategic business acquisitions, may be financed through a number of sources, including internally available cash, availability under the Credit Agreement, new debt financing, the issuance of equity securities, or any combination of the aforementioned.

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, the Company's future liquidity may be adversely affected. See Item 1A. "Risk Factors - Risks Related to Financing and Accounting Matters - Increases in future levels of leverage and size of debt service obligations could adversely affect the Company's ability to raise additional capital to fund the Company's operations, limit the Company's ability to react to changes in the economy or the Company's industries and prevent the Company from meeting the Company's obligations."

Cash Flows

The following table sets forth selected cash flow data for the years ended December 31 (in thousands):

[[GREPCENT_TABLE]]
[["","2024","","2023"],["Cash provided by (used in):"],["Operating activities","$","174,264","","","$","218,476"],["Investing activities","8,544","","","(15,722)"],["Financing activities","(12,189)","","","(120,329)"],["Effect of exchange rate changes","(565)","","","(607)"],["Net increase in cash and cash equivalents","$","170,054","","","$","81,818"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operating activities for 2024 of $174.2 million consisted of net income of $137.3 million, non-cash net charges totaling $29.7 million, which include depreciation, amortization, intangible asset impairment, stock compensation, gain on sale of business, exit activity costs, benefit of deferred income taxes and other non-cash charges, and $7.2 million of cash generated from working capital and other net operating assets largely due increases in accounts payable, the result of the timing of purchases and vendor payments, and other current assets, the result of the timing of income taxes payments and other receivables incurred.

Net cash provided by operating activities for 2023 of $218.5 million consisted of net income of $110.5 million, non-cash net charges totaling $67.0 million, which include depreciation, amortization, intangible asset impairment, stock

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compensation, exit activity costs, provision for deferred income taxes and other non-cash charges, and $41.0 million of cash generated from working capital and other net operating assets largely due to the Company's focus on reducing its investment in inventory to better align with lower sales volumes while still meeting customer demand.

Investing Activities

Net cash provided by investing activities for 2024 of $8.5 million consisted of net proceeds of $28.1 million from the sale of the Company's electronic locker business within its Residential segment in the fourth quarter of 2024 and receipt of the $0.3 million final working capital settlement resulting from the sale of the Company's Japan-based solar racking business in the Company's Renewables segment in the fourth quarter of 2023, offset by net capital expenditures of $19.9 million.

Net cash used in investing activities for 2023 of $15.7 million consisted of net cash paid of $10.4 million for the acquisition of a privately held Utah-based company in the third quarter of 2023 and net capital expenditures of $13.9 million, offset by net proceeds of $8.0 million from the sale of the Company's Japan-based solar racking business in the Company's Renewables segment in the fourth quarter of 2023 and receipt of the $0.6 million final working capital settlement related to the 2022 acquisition of QAP.

Financing Activities

Net cash used in financing activities for 2024 of $12.2 million consisted of common stock repurchases. The Company paid $10.0 million in the current year for the repurchase of 154,796 shares under the Company's authorized share repurchase program. The remainder of the repurchased common stock of $2.2 million related to the net settlement of tax obligations for participants in the Company's equity incentive plans and excise taxes on stock repurchases.

Net cash used in financing activities for 2023 of $120.3 million consisted of net long-term debt payments of $91.0 million and $29.3 million of common stock repurchases. Net long-term debt payments consisted of $141.0 million in long-term debt payments, offset by $50.0 million in proceeds from borrowing on the Company's long-term debt credit facility. The Company paid $26.0 million in 2023 to repurchase of 538,575 shares under the Company's authorized share repurchase program. The remainder of the repurchased common stock of $3.3 million related to the net settlement of tax obligations for participants in the Company's equity incentive plans.

Critical Accounting Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. Such decisions include the selection of applicable principles and the use of judgment in their application, the results of which could differ from those anticipated.

A summary of the Company’s significant accounting policies are described in Note 1 of the Company’s consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Our most critical accounting estimates that require the most difficult, subjective and complex judgments include revenue recognition on contracts with customers. Management reviews these estimates on a regular basis and makes adjustments based on historical experience, current conditions, and future expectations. Management believes these estimates are reasonable, but actual results could differ from these estimates.

Revenue Recognition on Contracts with Customers

The vast majority of the Company's sales contracts are for standard products with revenue recognized at the point in time the Company transfers control to the customer. The point in time the Company transfers control is based on when the Company determines the customer has legal title, significant risks and rewards of ownership of the asset, and the Company has a present right to payment for the product. However, revenue representing approximately 36%, 35% and 40% of the Company's 2024, 2023 and 2022 consolidated net sales, respectively, was recognized over time under the cost-to-cost method as the Company satisfied its performance obligations. This method of revenue recognition pertains to activities within the Renewables, Agtech, and Infrastructure segments.

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Revenue recognized on contracts over time using the cost-to-cost method for measuring progress is recognized as work progresses toward completion based on the ratio of cumulative costs incurred to date to estimated total contract costs at completion. Revenues are recognized proportionally as costs are incurred under this method. Contract costs include all direct costs related to contract performance and factors inherent in the estimation process include direct labor hours, direct material costs, and other direct costs. The estimates of total costs to be incurred at completion of each contract are sensitive to significant judgments and assumptions, such as the expected costs to complete installation, which are affected by customer site-specific conditions as well as availability and cost of third-party contractors to complete the installation process. These estimates impact the timing and amount of net sales recognized on in-progress performance obligations with customers. The Company on a regular basis reviews its estimates and the progress and performance of the performance obligation for substantially all contracts that the Company recognizes revenue over time under the cost-to-cost method. Any adjustments or changes in these estimates affecting revenues are recognized in the period in which the change becomes known using the cumulative catch-up method of accounting, resulting in the cumulative effect of changes reflected in the period. When any individual contract's estimated total costs to be incurred exceeds the contract's transaction price, the Company recognizes the estimated contract loss in the period in which such loss is determined. A significant change in an estimate on one or more contracts could have a material effect on the Company's results of operations.

The following table summarizes the impact of the changes in contract estimates on net sales and the estimated contract losses recognized in the Company's operating results during the years ended December 31 (in millions):

[[GREPCENT_TABLE]]
[["","2024","","2023","","2022"],["Gross favorable effect of the changes in contract estimates on net sales","$","9.6","","","$","13.2","","","$","4.5"],["Gross unfavorable effect of the changes in contract estimates on net sales","(6.0)","","","(7.5)","","","(13.7)"],["Net favorable (unfavorable) effect of the change in contract estimates on sales","$","3.6","","","$","5.7","","","$","(9.2)"],["Estimated contract losses recognized","$","9.4","","","$","5.8","","","$","9.1"]]
[[/GREPCENT_TABLE]]

Recent Accounting Pronouncements

For additional information regarding recently issued accounting pronouncements, see Note 1 to the Company's consolidated financial statements in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.