NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars and shares in thousands, except per share data)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    

Organization and Ownership Structure — Atkore International Group Inc. (the "Company" or "Atkore") was incorporated in the State of Delaware on November 4, 2010. Atkore is the sole stockholder of Atkore International Holdings Inc. ("AIH"), which in turn is the sole stockholder of Atkore International, Inc. ("AII").

Description of Business — The Company is a leading manufacturer of Electrical Raceway products primarily for the non-residential construction and renovation markets and Mechanical Pipe &Solutions ("MP&S") for the construction and industrial markets. Electrical Raceway products form the critical infrastructure that enables the deployment, isolation and protection of a structure's electrical circuitry from the original power source to the final outlet. MP&S frame, support and secure component parts in a broad range of structures, equipment and systems in electrical, industrial and construction applications.

    

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements of the Company included herein have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These unaudited condensed consolidated financial statements have been prepared in accordance with the Company's accounting policies and on the same basis as those financial statements included in the Company's latest Annual Report on Form 10-K for the year ended September 30, 2016 filed with the U.S. Securities and Exchange Commission (the "SEC") on November 29, 2016, and should be read in conjunction with those consolidated financial statements and the notes thereto. Certain information and disclosures normally included in the Company's annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.

    

The unaudited condensed consolidated financial statements include the assets and liabilities used in operating the Company's business. All intercompany balances and transactions have been eliminated in the consolidation. The results of companies acquired or disposed of are included in the unaudited condensed consolidated financial statements from the effective date of acquisition or up to the date of disposal.

    

These statements include all adjustments (consisting of normal recurring adjustments) that the Company considered necessary to present a fair statement of its results of operations, financial position and cash flows. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year.

 

Fiscal Periods — The Company has a fiscal year that ends on September 30. It is the Company's practice to establish quarterly closings using a 4-5-4 calendar. The Company's fiscal quarters end on the last Friday in December, March and June.

    

Use of Estimates — The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclose contingent assets and liabilities at the date of the condensed consolidated financial statements and report the associated amounts of revenues and expenses. Actual results could differ materially from these estimates.

Fair Value Measurements — Authoritative guidance for fair value measurements establishes a three-level hierarchy that ranks the quality and reliability of information used in developing fair value estimates. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. In cases where two or more levels of inputs are used to determine fair value, a financial instrument’s level is determined based on the lowest level input that is considered significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are summarized as follows:

Level 1-inputs are based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible as of the measurement date.

    

Level 2-inputs are based upon quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations for the asset or liability that are derived principally from or corroborated by market data for which the primary inputs are observable, including forward interest rates, yield curves, credit risk and exchange rates.

Level 3-inputs for the valuations are unobservable and are based on management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques such as option pricing models and discounted cash flow models.

See Note 15, ''Fair Value Measurements'' for further detail.

Recent Accounting Pronouncements — On May 10, 2017 , the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09 , " Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting ," which does not requires an entity to apply modification accounting if the fair value, vesting conditions and classification of the awards do not change. The effective date for public entities will be annual periods beginning after December 15, 2017, the Company's fiscal 2019. Early adoption is permitted. The Company adopted this standard during the three months ended June 30, 2017 and it did not have an impact on the financial statements.

On March 10, 2017 , the FASB issued ASU 2017-07 , " Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ," which requires an entity to report the service cost component of pension cost and postretirement benefit cost as compensation expense during the employee's service period. The other components of net periodic pension benefit costs will be presented outside a subtotal of income from operations. The effective date for public entities will be annual periods beginning after December 15, 2017, the Company's fiscal 2019. Early adoption is permitted. The new guidance will only impact presentation on the statements of operations.

On January 26, 2017 , the FASB issued ASU 2017-04 , " Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ," which allows an entity to perform its goodwill impairment test by comparing the fair value of a reporting segment with its carrying amount. If the carrying amount exceeds the fair value, the Company would recognize an impairment charge not to exceed the total amount of goodwill allocated to that reporting segment. The Company adopted this new standard beginning with fiscal 2017, and it did not have a material impact on the financial statements.

On January 5, 2017 , the FASB issued ASU 2017-01 , " Business Combinations (Topic 805): Clarifying the Definition of a Business ," which clarifies the definition of a business to assist entities in evaluating whether a transaction should be accounted for as an acquisition or disposal. The effective date for public entities will be annual periods beginning after December 15, 2017, the Company's fiscal 2019. Early adoption is permitted. The Company adopted this standard during the three months ended June 30, 2017 and it did not have an impact on the financial statements.

In May 2014, the FASB issued ASU 2014-09,  "Revenue from Contracts with Customers , " which provides guidance for revenue recognition. The update’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The effective date for public entities will be annual periods beginning after December 15, 2017, the Company's fiscal 2019. Early adoption is permitted but not prior to periods beginning after December 15, 2016. The Company continues to evaluate the impact of the guidance on its consolidated results of operations and financial condition. The Company has developed a multi-phase plan to (i) assess the impact of its adoption on its material revenue streams, (ii) evaluate the new disclosure requirements and (iii) identify and implement appropriate changes to its business processes, systems and controls to support recognition and disclosure under the new guidance. The Company is currently in the process of completing its initial analysis and performing detailed reviews of significant contracts to determine if any adjustments will be necessary to existing accounting policies, and to support an evaluation of the impact on its results of operations and financial condition.

2. ACQUISITION

On May 18, 2017, the Company acquired all of the outstanding stock of Marco Cable Management , a designer and manufacturer of wire basket cable trays, PVC trunking and aluminum power poles. Marco Cable Management's product portfolio adds value to the Company's customers in the U.K. and expands its presence in the U.K. and Europe. The condensed consolidated financial statements include the results of the acquired company from the acquisition date. Net sales and net income of the acquired company included in the condensed consolidated statement of operations for the three and nine months ended June 30, 2017 , were insignificant.

Total inventories would be $5,859 and $18,433 higher than reported as of June 30, 2017 and September 30, 2016 , respectively, if the first-in, first-out method was used for all inventories. As of June 30, 2017 and September 30, 2016 , the excess and obsolete inventory reserve was $8,121 and $8,447 , respectively.

Depreciation expense for the three months ended June 30, 2017 and June 24, 2016 totaled $7,795 and $7,756 , respectively. Depreciation expense for the nine months ended June 30, 2017 and June 24, 2016 totaled $23,614 and $23,409 , respectively.

    

Goodwill acquired during the year from the Marco Cable Management acquisition is based on a preliminary purchase price allocation and is subject to final valuations of intangible assets and property, plant and equipment. Goodwill balances as of October 1, 2016 and June 30, 2017 include $3,924 and $43,000 of accumulated impairment losses for Electrical Raceway and MP&S , respectively.

 

The Company assesses the recoverability of goodwill and indefinite-lived trade names on an annual basis in accordance with Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other." The measurement date is the first day of the fourth fiscal quarter, or more frequently, if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than the carrying value. During the nine months ended June 30, 2017 , there were no such events or circumstances in accordance with ASC 350; therefore, the Company did not perform a test to assess the recoverability of goodwill or indefinite-lived trade names .

The following table provides the gross carrying value, accumulated amortization and net carrying value for each major class of intangible assets:

Other intangible assets consist of definite-lived trade names, technology, non-compete agreements and backlogs.

Amortization expense for the  three months ended June 30, 2017  and  June 24, 2016  was  $5,546  and  $5,566 , respectively. Amortization expense for the  nine months ended June 30, 2017 and  June 24, 2016  was  $16,628  and  $16,655 , respectively. Expected amortization expense for intangible assets for the remainder of 2017 and over the next five years and thereafter is as follows:

Actual amounts of amortization may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets and other events.

    

    

Term Loan Facilities — On April 9, 2014, AII entered into a credit agreement (the " Initial Credit Agreement ") for a $420,000 First Lien Term Loan Facility (the " Initial First Lien Term Loan Facility ") and a credit agreement for a $250,000 Second Lien Term Loan Facility (the " Second Lien Term Loan Facility "). The Initial First Lien Term Loan Facility was priced at 99.5% and carried an interest rate of LIBOR plus 3.5% with a LIBOR floor of 1.00% . The Second Lien Term Loan Facility was priced at 99.0% and carried an interest rate of LIBOR plus 6.75% with a LIBOR floor of 1.00% .

On December 22, 2016 , AII entered into an amendment to the Initial Credit Agreement , which amended and restated the Initial Credit Agreement and provided for a new $500,000 first lien term loan facility (the " First Lien Term Loan Facility "). Loans under the First Lien Term Loan Facility bear interest at either LIBOR plus an applicable margin equal to 3.0% or an alternate base rate plus an applicable margin equal to 2.0% and are guaranteed by AIH and the U.S. operating companies owned by AII. The First Lien Term Loan Facility matures on December 22, 2023, amortizes at a rate of 1.0% per annum and was priced at 99.75% . AII used proceeds from the First Lien Term Loan Facility and approximately $155 million of available cash to (i) repay all outstanding loans under the Initial First Lien Term Loan Facility and the Second Lien Term Loan Facility and (ii) pay related fees and expenses, including accrued interest . For the nine months ended June 30, 2017 , the Company recorded a $9,805 loss on the extinguishment of the Initial First Lien Term Loan Facility and the Second Lien Term Loan Facility .

    

The First Lien Term Loan Facility contains customary covenants typical for this type of financing, including without limitation, limitations on indebtedness, restricted payments including dividends, liens, restrictions on distributions from restricted subsidiaries, sales of assets, affiliate transactions, mergers and consolidations. The First Lien Term Loan Facility also contains customary events of default typical for this type of financing, including, without limitation, failure to pay principal and/or interest when due, failure to observe covenants, certain events of bankruptcy, the rendering of certain judgments, or the loss of any guarantee.

ABL Credit Facility — On December 22, 2016 , AII entered into the Fifth Amendment to Credit Agreement and Third Amendment to and Reaffirmation of Guarantee and Collateral Agreement to amend its asset based credit facility (the " ABL Credit Facility "). The amendment, among other things, extended the maturity of the facility to December 22, 2021 and decreased the interest rate margins applicable to loans under the facility to (i) in the case of U.S. dollar-denominated loans, either (x) LIBOR plus an applicable margin ranging from 1.25% to 1.75% , or (y) an alternate base rate plus an applicable margin ranging from 0.25% to 0.75% or (ii) in the case of Canadian dollar-denominated loans, either (x) the BA rate plus an applicable margin ranging from 1.25% to 1.75% or (y) a Canadian prime rate plus an applicable margin ranging from 0.25% to 0.75% . The ABL Credit Facility has aggregate commitments of $325,000 and is guaranteed by AIH and the U.S. operating companies owned by AII. AII's availability under the ABL Credit Facility was $237,875 and $206,917 as of June 30, 2017 and September 30, 2016 , respectively. Availability under the ABL Credit Facility is subject to a borrowing base equal to the sum of 85% of eligible accounts receivable plus the lesser of (i) 80% of eligible inventory of each borrower and guarantor and (ii) 85% of the net orderly liquidation value of eligible inventory, subject to certain limitations. There were no borrowings outstanding under the ABL Credit Facility as of June 30, 2017 and September 30, 2016 , respectively.

    

The ABL Credit Facility contains customary representations and warranties and customary affirmative and negative covenants. Affirmative covenants include, without limitation, the timely delivery of quarterly and annual financial statements, certifications to be made by AIH, AII and each of its restricted subsidiaries, payment of obligations, maintenance of corporate existence and insurance, notices, compliance with environmental laws, and the grant of liens. The negative covenants include, without limitation: limitations on indebtedness, dividends and distributions, investments, prepayments or redemptions of subordinated indebtedness, amendments of subordinated indebtedness, transactions with affiliates, asset sales, mergers, consolidations and sales of all or substantially all assets, liens, negative pledge clauses, changes in fiscal periods, changes in line of business and changes in charter documents. Additionally, if the availability under the ABL Credit Facility falls below certain levels, AII would subsequently be required to maintain a minimum fixed charge coverage ratio. AII has not been subject to the minimum fixed charge coverage ratio during any period subsequent to the establishment of the ABL Credit Facility.

7. INCOME TAXES     

For the three months ended June 30, 2017 and June 24, 2016 , the Company's effective tax rate attributable to income before income taxes was 29.4% and 34.2% , respectively. For the three months ended June 30, 2017 and June 24, 2016 , the Company's income tax expense was $11,431 and $10,749 , respectively. The decrease in the effective tax rate was primarily due to the excess tax benefit associated with the exercise of stock options which is recognized as a reduction in tax expense in the current period.

    

For the nine months ended June 30, 2017 and June 24, 2016 , the Company's effective tax rate attributable to income before income taxes was 31.5% and 35.8% respectively. For the nine months ended June 30, 2017 and June 24, 2016 , the Company's income tax expense was $29,313 and $24,093 , respectively. The decrease in the effective tax rate was primarily due to the excess tax benefit associated with the exercise of stock options, which is reflected as a reduction in tax expense in the current period and the impact of nondeductible transaction costs in the prior period, not incurred in the current period.

The Company has recorded a valuation allowance against net operating losses in certain foreign jurisdictions. A valuation allowance is recorded when it is determined to be more likely than not that these deferred tax assets will not be fully realized in the foreseeable future. The realization of deferred tax assets is dependent upon whether the Company can generate future taxable income in the appropriate character and jurisdiction to utilize the assets. The amount of the deferred tax assets considered realizable is subject to adjustment in future periods.

    

The Company recognizes the benefits of uncertain tax positions taken or expected to be taken in tax returns in the provision for income taxes only for those positions that it has determined are more likely than not to be realized upon examination. The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company is fully indemnified by its former parent for uncertain tax positions taken prior to December 22, 2010.

For the nine months ended June 30, 2017 , the Company made no additional provision for U.S. or non-U.S. income taxes on the undistributed income of subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to basis differences in investments in subsidiaries, as such income is expected to be indefinitely reinvested, the investments are essentially permanent in duration, or the Company has concluded that no additional tax liability will arise as a result of the distribution of such income.

    

The amortization of actuarial loss is included as a component of cost of sales on the Company's condensed consolidated statements of operations .

9. EARNINGS PER SHARE

    

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period .

 

    

Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period , adjusted to include the number of shares of common stock that would have been outstanding had potentially dilutive shares of common stock been issued. The dilutive effect of stock options, performance stock units and restricted stock units are reflected in diluted earnings per share by applying the treasury stock method. There are no other potentially dilutive instruments outstanding. For the three and nine months ended June 24, 2016 , as the Company settled all employee stock options in cash, the potential issuance of shares of common stock related to these options did not affect diluted shares. Holders of certain stock-based compensation awards are eligible to receive dividends. Net earnings allocated to participating securities were not significant for the three and nine months ended June 30, 2017 and June 24, 2016 .

The Company anticipates settling these restructuring liabilities within the next 12 months. The net restructuring charges included as a component of selling, general and administrative expenses in the Company's condensed consolidated statements of operations were as follows:

11. COMMITMENTS AND CONTINGENCIES

    

The Company has obligations related to commitments to purchase certain goods. As of June 30, 2017 , such obligations were $104,371 for the rest of fiscal year 2017 , $13,448 for fiscal year 2018 and $674 thereafter. These amounts represent open purchase orders for materials used in production.

    

Legal Contingencies — The Company is a defendant in a number of pending legal proceedings, some of which were inherited from its former parent, Tyco International Ltd. ("Tyco"), including certain product liability claims. Several lawsuits have been filed against the Company and the Company has also received other claim demand letters alleging that the Company's anti-microbial coated steel sprinkler pipe ("ABF"), which the Company has not manufactured or sold for several years, is incompatible with chlorinated polyvinyl chloride ("CPVC") and caused stress cracking in such pipe manufactured by third parties when installed together in the same sprinkler system, which the Company refers to collectively as the " Special Products Claims ." After an analysis of claims experience, the Company reserved its best estimate of the probable and reasonably estimable losses related to these matters. The Company's total product liability reserves for Special Products Claims and other product liability matters were $6,079 and $4,950 as of June 30, 2017 and September 30, 2016 , respectively. As of June 30, 2017 , the Company believes that the range of probable losses for Special Products Claims and other product liabilities is between $3,000 and $10,000 .

At this time, the Company does not expect the outcome of the Special Products Claims proceedings, either individually or in the aggregate, to have a material adverse effect on its business, financial condition, results of operations or cash flows , and the Company believes that its reserves are adequate for all claims, including for Special Products Claims contingencies. However, it is possible that additional reserves could be required in the future that could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows . This additional loss or range of losses cannot be recorded at this time, as it is not reasonably estimable.

    

During the nine months ended June 30, 2017 , the U.S. Department of Commerce ruled on a scope request in relation to an Antidumping Duty Order for Malleable Iron Pipe Fittings from China. The ruling subjects certain of the Company's imports of conduit fittings within the Atkore Steel Components Inc. business (acquired in November 2014) to antidumping duties, which are incremental to the duties previously paid upon importation. The Company is appealing the scope decision and has established an accrual of $7,501 for the related contingent liability during the three months ended March 31, 2017 with the related expense recorded in selling, general and administrative in the Company's condensed consolidated statements of operations which covers the post-acquisition period through the date of the scope ruling.

In addition to the matters discussed above, from time to time, the Company is subject to a number of disputes, administrative proceedings and other claims arising out of the ordinary conduct of the Company's business. These matters generally relate to disputes arising out of the use or installation of the Company's products, product liability litigation, contract disputes, patent infringement accusations, employment matters and similar matters. On the basis of information currently available to the Company, it does not believe that existing proceedings and claims will have a material adverse effect on its business, financial condition, results of operations or cash flows . However, litigation is unpredictable, and the Company could incur judgments or enter into settlements for current or future claims that could adversely affect its business, financial condition, results of operations or cash flows .

12. GUARANTEES

The Company has outstanding letters of credit totaling $8,560 supporting workers' compensation and general liability insurance policies as of June 30, 2017 . The Company also has surety bonds primarily related to performance guarantees on supply agreements and construction contracts, and payment of duties and taxes totaling $30,176 as of June 30, 2017 .

As of September 30, 2016 , the Company had outstanding letters of credit totaling $9,121 as collateral for advance payments it received pursuant to the sale of its minority ownership share in Abahsain-Cope Saudi Arabia Ltd. The bank guarantees were canceled during the second quarter of fiscal 2017 when the transfer of ownership was completed.

 

    

In disposing of assets or businesses, the Company often provides representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. The Company does not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, the Company has no reason to believe that these uncertainties would have a material adverse effect on the Company's business, financial condition, results of operations or cash flows .

    

In the normal course of business, the Company is liable for product performance and contract completion. In the opinion of management, such obligations will not have a material adverse effect on the Company's business, financial condition, results of operations or cash flows .

13. ASSETS HELD FOR SALE

    

In May 2012, the Company entered into a share purchase agreement pursuant to which the Company would sell its minority ownership share in Abahsain-Cope Saudi Arabia Ltd. for cash consideration of $9,087 . The total carrying value of the investment was $3,313 . During the second quarter of fiscal 2017, the Company recognized a pre-tax gain of $5,774 ( $3,102 , net of tax) on the sale when transfer of ownership was completed.

During the first quarter of fiscal 2017, the Company sold a parcel of land and a building related to the exit of a manufacturing facility in Philadelphia, PA at a loss of $329 . The assets were previously classified as held for sale and had a carrying value of $3,367 .

15. FAIR VALUE MEASUREMENTS

Certain assets and liabilities are required to be recorded at fair value on a recurring basis.

The Company uses forward currency contracts to hedge the effects of foreign exchange relating to certain of the Company’s intercompany receivables denominated in a foreign currency. These derivative instruments are not formally designated as hedges by the Company and the terms of these instruments range from 6 months to 5 years. Short-term forward currency contracts are recorded in other current liabilities and long-term forward currency contracts are recorded in other long-term liabilities in the condensed consolidated balance sheet. The fair value gains and losses are included in other expense (income), net within the condensed consolidated statements of operations . See Note 14, ''Other Expense (Income), Net'' for further detail.

The total notional amount of undesignated forward currency contracts were £ 14.7 million and £ 0 million  as of  June 30, 2017  and  September 30, 2016 , respectively. Cash flows associated with derivative financial instruments are recognized in the operating section of the condensed consolidated statements of cash flows . The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

The following table presents the Company's assets and liabilities measured at fair value:

The Company's remaining financial instruments consist primarily of cash, accounts receivable and accounts payable whose carrying value approximate their fair value due to their short-term nature.

The estimated fair value of financial instruments not carried at fair value in the condensed consolidated balance sheets were as follows: