Valmont Industries, Inc. Form 10-Q Summary
Business context and reporting period
Valmont Industries is a global manufacturer and service provider serving engineered support structures, utility support structures, coatings, and irrigation markets. This unaudited filing covers the thirteen and twenty-six weeks ended June 27, 2020, compared with the periods ended June 29, 2019.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $688.8 million | $700.9 million | $1,363.0 million | $1,393.0 million |
| Gross profit | $183.9 million | $178.2 million | $370.2 million | $342.8 million |
| Gross margin | 26.7% | 25.4% | 27.2% | 24.6% |
| Operating income | $43.4 million | $61.5 million | $110.3 million | $116.1 million |
| Operating margin | 6.3% | 8.8% | 8.1% | 8.3% |
| Net earnings attributable to Valmont | $22.6 million | $39.7 million | $65.5 million | $75.8 million |
| Diluted EPS | $1.06 | $1.82 | $3.05 | $3.46 |
| Operating cash flow | Not separately provided | Not separately provided | $150.7 million | $113.4 million |
First-half net sales declined 2.2%, while gross profit increased 8.0%. Operating income decreased 5.0%, and net earnings attributable to Valmont decreased 13.6%. The effective tax rate increased to 35.4% in the quarter and 29.1% year to date, compared with 24.8% and 24.9%, respectively, primarily because the Access Systems impairment was not fully tax deductible.
At June 27, 2020, cash and cash equivalents were $353.3 million, compared with $353.5 million at December 28, 2019. Total interest-bearing debt was $795.4 million, versus $787.5 million at year-end. The company reported $544.5 million of borrowing availability under its revolving credit facility after letters of credit and $117.8 million of unused short-term bank lines. Net working capital was $875.0 million.
Capital expenditures were $48.2 million in the first half, compared with $49.3 million in the prior-year period. The company paid $17.7 million of dividends, $55.9 million to purchase noncontrolling interests, and $20.5 million for treasury shares during the first half.
Material changes versus the prior comparable period
- ESS revenue declined 1.9% year to date, and operating income declined 37.8%, primarily reflecting the $16.6 million Access Systems goodwill and tradename impairment, lower Access Systems volumes, and higher selling, general and administrative expense.
- Utility revenue was approximately flat year to date, while operating income increased 20.2% because of improved mix and volumes, lower steel costs, and the absence of approximately $3.0 million of prior-year inspection costs.
- Coatings revenue declined 13.2% year to date and operating income declined 15.9%, primarily because of COVID-19-related volume reductions in North America and Asia, lower pricing, and operating deleverage.
- Irrigation revenue was essentially flat year to date and operating income increased 10.3%, supported by higher volumes, lower raw material costs, and international growth.
- Gross margin expanded because of lower raw material costs, improved selling prices in infrastructure businesses, and improved Irrigation volumes. These benefits were more than offset at the operating-income level by higher SG&A, impairment charges, restructuring costs, and weaker Coatings volumes.
- The company changed certain inventory accounting from LIFO to FIFO effective December 29, 2019 and retrospectively adjusted prior periods. The change increased year-end 2019 retained earnings by $32.9 million and did not affect historical cash flows.
Guidance, outlook, risks, and unusual items
- Management expects positive operating cash flow for full-year 2020 and reduced planned capital spending from approximately $100 million to $125 million to approximately $80 million to $90 million.
- Share repurchases were suspended after the first quarter to preserve liquidity. Approximately $184.0 million remained available under the authorization at June 27, 2020.
- Management expects third-quarter 2020 consolidated operating income and operating margin to be below the prior-year period, primarily because of lower expected demand in Coatings and Irrigation.
- COVID-19 temporarily closed several international facilities late in the first quarter; all facilities were reported open and fully operational as of July 28, 2020. Management continues to monitor infection rates, supply chains, customer demand, and government restrictions.
- The company recorded $16.6 million of goodwill and intangible-asset impairment, including a $12.6 million Access Systems goodwill charge and approximately $3.9 million of tradename impairment. It also recorded $5.6 million of second-quarter restructuring costs and $2.3 million of property, plant, and equipment impairment.
- On May 29, 2020, Valmont acquired 55% of Solbras, a Brazilian solar-energy solutions provider, for $4.3 million, with approximately $0.6 million contingent on seller representations and warranties.
- Debt covenants were satisfied at quarter-end. The leverage ratio was 2.34 times against a 3.5-times limit, and the interest coverage ratio was 8.44 times against a 2.5-times minimum. The company reported investment-grade ratings of Baa3, BBB-, and BBB+ from Moody’s, Fitch, and S&P, respectively.
- Key risks include the continuing effects of COVID-19, cyclical demand, raw-material availability and pricing, foreign currency movements, customer and supplier conditions, competitive pressures, and the accuracy of forecasts used in impairment testing.
Important facts for investors to verify
- Whether COVID-19 causes further demand declines, plant disruptions, or supply-chain constraints, especially in Coatings and Irrigation.
- Whether the Access Systems impairment and restructuring actions adequately reflect future operating performance and whether additional impairment charges could arise.
- Progress against the reduced $80 million to $90 million capital-spending plan and management’s expectation of positive full-year operating cash flow.
- Debt maturities, revolver availability, covenant compliance, and the effect of foreign-held cash on liquidity.
- Whether gross-margin improvement is sustainable after steel-price changes, mix effects, and potential volume-related operating deleverage.
- The final purchase-price allocation for Solbras and the financial contribution of the AgSense, Convert Italia, and Solbras transactions.