Valmont Industries, Inc. — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended September 28, 2019, compared with the corresponding periods ended September 29, 2018. Financial statements are unaudited. Valmont operates through Engineered Support Structures, Utility Support Structures, Coatings, and Irrigation segments.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $690.3 million | $678.7 million | $2,083.4 million | $2,059.8 million |
| Gross profit | $176.1 million | $164.3 million | $521.6 million | $508.6 million |
| Gross margin | 25.5% | 24.2% | 25.0% | 24.7% |
| Operating income | $63.9 million | $38.4 million | $182.7 million | $166.0 million |
| Operating margin | 9.3% | 5.7% | 8.8% | 8.1% |
| Net earnings attributable to Valmont | $40.1 million | $4.4 million | $118.0 million | $76.7 million |
| Diluted EPS | $1.85 | $0.20 | $5.41 | $3.40 |
Operating cash flow for the first 39 weeks was $239.2 million, versus $68.1 million in the prior-year period. Capital expenditures were $72.0 million, acquisitions used $81.8 million, and ending cash was $327.2 million. Net working capital was $857.5 million, compared with $931.6 million at December 29, 2018.
Total interest-bearing debt was approximately $784.6 million, including $764.5 million of long-term debt and $19.3 million of bank notes. The company reported $28.4 million outstanding under its revolving credit agreement, with $557.0 million available after standby letters of credit. Additional short-term bank lines totaled $131.3 million, of which $112.0 million was unused. The company was in compliance with its debt covenants; leverage was 2.40x adjusted EBITDA and interest coverage was 8.10x.
Material changes versus the prior comparable period
- Q3 net sales increased 1.7%; year-to-date sales increased 1.1%.
- Gross margin improved due primarily to lower raw-material costs and improved selling prices.
- Operating income benefited from the absence of the $15.8 million goodwill and intangible-asset impairment and $6.2 million of restructuring costs recorded in Q3 2018.
- Net interest expense declined following the 2018 refinancing, which replaced higher-rate debt with 5.00% notes due 2044 and 5.25% notes due 2054.
- ESS sales increased 7.3% in Q3 and operating income increased 32.7%; Utility sales declined 6.3%, but operating income increased substantially to $20.4 million from $2.1 million.
- Coatings sales increased 3.2%, while operating income declined 3.5% due to lower volumes and approximately $3.0 million of one-time legal-settlement expenses during the first three quarters.
- Irrigation sales increased 3.6% in Q3 but declined 7.8% year to date; year-to-date operating income fell 27.7% because of lower volumes and fixed-cost deleverage.
- Acquisitions contributed to growth, including Larson Camouflage, United Galvanizing, and Connect-It Wireless. The acquired businesses contributed $95.0 million of year-to-date sales but no net earnings to consolidated 2019 results in aggregate.
Outlook, commentary, risks, and unusual items
- Management expected fiscal 2019 capital spending of approximately $90 million to $100 million.
- Management stated that available cash, credit facilities, recent debt issuance, and operating cash flows provided adequate liquidity.
- Management cited cyclical markets, raw-material availability and pricing, product pricing, competition, foreign currency, economic conditions, government actions, and customer demand as risks.
- Irrigation demand was affected by low commodity prices and uncertainty regarding trade disputes with China, although technology-related products and services continued to grow.
- ESS results included an approximately $7 million loss on certain access-systems projects in Q3.
- Utility results included approximately $3.0 million of inspection costs in Q2 related to finalizing requirements from a 2015 commercial settlement.
- Foreign currency translation reduced operating profit by approximately $0.7 million in Q3 and $2.2 million year to date.
- The company adopted the new lease standard in 2019, recognizing $93.4 million of operating lease liabilities. Adoption included an after-tax retained-earnings reduction of approximately $8.4 million related primarily to a $12.1 million impairment of an Australian right-of-use asset.
- The annual goodwill impairment test resulted in no impairment in 2019. The Access Systems reporting unit had limited excess fair value over carrying value and remains sensitive to sales growth and discount-rate assumptions.
- The company repurchased 126,734 shares for approximately $16.8 million during Q3. Approximately $212.2 million remained available under the repurchase authorization at September 28, 2019.
Important facts for investors to verify
- Whether improved gross margins and operating performance are sustainable after the favorable comparison with 2018 impairment and restructuring charges.
- Progress in stabilizing the Irrigation segment and the effect of agricultural conditions and trade uncertainty on future demand.
- Performance of acquired businesses and completion of the remaining preliminary purchase-price allocations.
- Operating results and cash generation relative to the company’s $90 million to $100 million capital-spending expectation.
- Potential impairment risk for the Access Systems reporting unit and other goodwill or indefinite-lived intangible assets.
- Compliance with leverage and interest-coverage covenants as debt, acquisitions, dividends, and share repurchases continue.
- Foreign-currency exposure, including approximately $139.0 million of cash held by non-U.S. subsidiaries and approximately $312.3 million of unremitted foreign earnings.