VALMONT INDUSTRIES INC quarterly report, Q3 FY2017

Valmont Industries, Inc. — 2017 Third-Quarter Form 10-Q Summary

Business Context and Reporting Period

Valmont Industries, Inc. manufactures engineered metal and concrete structures, coatings, irrigation equipment, access systems, grinding media, and energy-related structures through five reportable segments: Engineered Support Structures, Energy and Mining, Utility Support Structures, Coatings, and Irrigation. The unaudited results cover the thirteen and thirty-nine weeks ended September 30, 2017, compared with the corresponding periods ended September 24, 2016.

Financial Performance and Key Metrics

Metric	Q3 2017	Q3 2016	First 39 Weeks 2017	First 39 Weeks 2016
Net sales	$680.8 million	$610.2 million	$2,031.0 million	$1,847.1 million
Gross profit	$163.6 million	$155.0 million	$511.5 million	$491.1 million
Gross margin	24.0%	25.4%	25.2%	26.6%
Operating income	$59.9 million	$53.2 million	$202.7 million	$187.4 million
Operating margin	8.8%	8.7%	10.0%	10.1%
Net earnings attributable to Valmont	$35.2 million	$28.2 million	$119.9 million	$103.2 million
Diluted EPS	$1.55	$1.24	$5.28	$4.54
Operating cash flow	Not separately provided	Not separately provided	$134.4 million	$127.3 million

Q3 net sales increased 11.6%, operating income increased 12.6%, net earnings attributable to Valmont increased 24.8%, and diluted EPS increased 25.0%. For the first nine months, sales increased 10.0%, operating income increased 8.2%, net earnings increased 16.2%, and diluted EPS increased 16.3%.

The effective tax rate was 27.5% in Q3 and 28.9% year to date, compared with 32.6% and 31.7%, respectively, in the prior-year periods. The Q3 rate benefited from a $1.9 million reversal of a valuation allowance on certain foreign net operating loss carryforwards.

Segments and Material Changes

Engineered Support Structures: Q3 sales increased 8.6% to $209.8 million, but operating income declined 19.7% to $16.3 million. Higher raw-material costs, unfavorable mix, and pricing that did not fully recover costs reduced margins.
Energy and Mining: Q3 sales declined 1.8% to $79.7 million and operating income declined 64.1% to $1.4 million, primarily because pricing did not fully offset higher material costs and volumes were lower.
Utility Support Structures: Q3 sales increased 18.7% to $178.5 million and operating income increased 36.4% to $22.1 million, reflecting higher volumes, improved pricing, and favorable mix.
Coatings: Q3 sales increased 12.8% to $67.7 million and operating income increased 23.9% to $14.5 million, supported by pricing to recover higher zinc costs and benefits from prior restructuring actions.
Irrigation: Q3 sales increased 15.6% to $145.1 million and operating income increased 18.2% to $18.2 million, driven by international and North American volume growth, productivity improvements, and favorable currency effects.

Consolidated gross margin declined because of higher steel, zinc, and other raw-material costs. Management stated that selling prices are expected to increase over time to offset higher steel costs, but the filing does not provide a quantified margin or earnings outlook.

Cash Flow, Liquidity, Debt, and Capital Allocation

Cash and cash equivalents were $493.5 million at September 30, 2017, compared with $399.9 million at December 31, 2016. Approximately $370.5 million was held outside the United States.
Net working capital was $1,034.7 million, up from $903.4 million at year-end 2016, primarily because of higher receivables, inventory, and cash.
First-nine-month operating cash flow was $134.4 million. Capital expenditures were $39.9 million, and management expected full-year 2017 capital spending of approximately $60 million.
Total interest-bearing debt was $755.3 million at September 30, 2017, slightly below $756.4 million at December 31, 2016. Long-term debt consisted primarily of three senior unsecured note tranches with face values of approximately $250 million each, bearing interest rates of 6.625%, 5.00%, and 5.25%, due in 2020, 2044, and 2054.
No borrowings were outstanding under the revolving credit facility. Availability was $585.2 million after standby letters of credit, and short-term bank lines totaled $113.0 million, of which $112.8 million was unused.
The company was in compliance with its debt covenants. The leverage ratio was 2.19x versus a 3.5x limit, and the interest coverage ratio was 7.78x versus a 2.5x minimum.
On October 18, 2017, after quarter-end, the revolving credit facility was amended and extended to October 2022, with commitments of $600 million and potential expansion of up to $200 million.
Cash dividends declared were $0.375 per share for the quarter and $1.125 per share year to date. No shares were repurchased during the first nine months; approximately $132.2 million remained available under the repurchase authorization.

Guidance, Outlook, Risks, and Unusual Items

Management expects approximately $60 million of fiscal 2017 capital expenditures but provides no specific consolidated revenue, earnings, or margin guidance in the filing.
Raw-material inflation, especially steel and zinc, remains a principal margin risk. The company may not be able to fully pass higher costs through to customers or may experience timing delays.
Two U.S. hurricanes disrupted production and deliveries at ten facilities during the quarter, affecting the Engineered Support Structures, Coatings, and Utility segments.
On July 31, 2017, Valmont acquired Aircon Guardrails Private Limited in India for $5.4 million net of cash acquired. The acquisition added approximately $3.3 million of goodwill and $2.1 million of customer-related and other intangible assets and was not material to consolidated results.
The company announced its intention to divest its grinding media business. Regulatory approval in Australia was pending at the filing date. Related foreign-currency hedges had notional amounts of $27.0 million and $18.5 million and an unrealized loss of $0.7 million at quarter-end.
The annual goodwill impairment test identified no impairment. The offshore and other complex steel structures reporting unit had the smallest valuation cushion; future demand for wind structures and changes in oil and natural-gas prices could require further testing.
The company has approximately $437.8 million of undistributed foreign earnings for which U.S. income taxes have not been provided because management intends to reinvest the earnings. The tax cost of repatriation was not practicably determinable.
The company expects to adopt the new revenue recognition standard on January 1, 2018, using the modified retrospective approach. The filing indicates potential changes to the timing of revenue recognition for certain customized products but does not expect a material effect on other segments.
The company expects the new lease standard, effective after December 15, 2018, to significantly increase reported assets and liabilities.
The filing identifies cyclical markets, economic conditions, competition, foreign exchange, raw-material availability and pricing, customer demand, government policy, and execution of restructuring and acquisitions as material risks. Management reported effective disclosure controls and no material changes in internal control over financial reporting.

Most Important Facts for Investors to Verify

Whether higher steel and zinc costs continue to pressure gross margin despite pricing actions.
Whether Utility and Irrigation growth offsets weaker profitability in Engineered Support Structures and Energy and Mining.
The final purchase-price allocation and performance of the Aircon acquisition.
The timing and terms of the proposed grinding media divestiture and related hedge accounting.
The effect of the January 2018 revenue-recognition adoption on customized-product sales and reported results.
The geographic availability of cash, potential repatriation taxes, and continued compliance with debt covenants.
Progress toward the $60 million capital-spending expectation and the use of the remaining share-repurchase authorization.