Valmont Industries, Inc. — Fiscal 2017 Form 10-K Summary
Business context and reporting period
Valmont is a diversified global manufacturer of engineered metal and composite products serving infrastructure, utility, agricultural irrigation, coatings, wireless communications, transportation, and industrial markets. Reportable segments are Engineered Support Structures, Utility Support Structures, Coatings, and Irrigation, plus Other operations. Approximately 36% of 2017 sales were sold in markets or produced at facilities outside North America.
The filing covers the 52-week fiscal year ended December 30, 2017. The comparable fiscal 2016 period contained 53 weeks, which management estimated added approximately $50 million of sales and $3 million of net earnings. The filing was signed February 28, 2018.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $2,746.0 million | $2,521.7 million | 8.9% |
| Gross profit | $681.8 million | $656.2 million | 3.9% |
| Gross margin | 24.8% | 26.0% | Down 120 basis points |
| Operating income | $266.4 million | $243.5 million | 9.4% |
| Operating margin | 9.7% | 9.7% | Flat |
| Net earnings attributable to Valmont | $116.2 million | $173.2 million | Down 32.9% |
| Diluted EPS | $5.11 | $7.63 | Down 33.0% |
| Operating cash flow | $145.7 million | $219.2 million | Down 33.5% |
| Capital expenditures | $55.3 million | $57.9 million | Down 4.6% |
| Adjusted EBITDA | $352.0 million | $326.6 million | 7.8% |
Segment net sales and operating income were: ESS sales of $912.2 million and operating income of $63.0 million; Utility sales of $856.3 million and operating income of $97.8 million; Coatings sales of $256.8 million and operating income of $50.2 million; and Irrigation sales of $644.4 million and operating income of $101.5 million. Utility and Irrigation delivered the strongest operating-income growth, while ESS declined and Other operations weakened.
Cash and cash equivalents were $492.8 million at year-end versus $399.9 million in 2016. Working capital increased to $1.07 billion from $903.4 million, primarily due to higher cash, receivables, and inventory. Total interest-bearing debt was $755.0 million, broadly unchanged from $756.4 million. The leverage ratio was 2.15x, compared with a 3.50x covenant limit, and the interest coverage ratio was 7.88x versus a 2.50x minimum.
The company had no borrowings under its $600 million revolving credit facility and approximately $585.2 million of available capacity after standby letters of credit. It also had $113.3 million of unused short-term bank lines. Cash generation exceeded capital expenditures, but operating cash flow was reduced by working-capital investment and a $40.2 million contribution to the Delta U.K. pension plan.
Material changes versus the prior comparable period
- Sales increased across all reportable segments, driven by higher volumes, pricing and mix, favorable currency translation, and the Aircon acquisition.
- Utility sales and operating income improved substantially due to stronger North American demand, higher steel-linked pricing, favorable mix, and better factory performance.
- Irrigation benefited from higher domestic and international volumes, stronger service-parts sales, and favorable currency translation.
- ESS operating income declined because higher steel costs were not fully recovered through pricing and because of unfavorable mix, despite higher sales.
- Consolidated gross margin declined as steel, zinc, and other raw-material costs increased. LIFO expense increased to $5.7 million from $3.0 million.
- 2017 net earnings and EPS were reduced by approximately $41.9 million, or $1.85 per share, of provisional tax expense related to the 2017 Tax Cuts and Jobs Act. Excluding that charge, the effective tax rate was 28.1% versus a reported 46.5%.
- Fiscal 2016 benefited from a $30.6 million deferred tax benefit and a $16.6 million reversal of a non-taxable contingent liability, making reported 2016 earnings unusually high.
- The company acquired Aircon Guardrails Private Limited in India for $5.4 million net of cash acquired, adding highway safety and solar-structure products to ESS.
- Management changed segment reporting in the fourth quarter: access systems moved to ESS, offshore and other complex structures moved to Utility, and grinding media moved to Other pending a planned divestiture subject to regulatory approval.
- No shares were repurchased in 2017. The company had acquired approximately 4.6 million shares for $617.8 million under its repurchase programs through year-end.
Guidance, outlook, commentary and risks
Management expected approximately $70 million of fiscal 2018 capital expenditures and stated that available cash, credit facilities, recent debt financing, and expected operating cash flows provided adequate liquidity. The year-end backlog was $670.0 million, up from $602.9 million, and management expected most of it to be fulfilled in fiscal 2018.
Management cited growth opportunities in utility-grid investment, renewable energy, wireless communications, roadway safety, water-efficiency solutions, international irrigation, and engineered products. It also stated that higher selling prices would be pursued to offset rising steel costs.
- Demand remains cyclical and depends on utility, infrastructure, construction, wireless, agricultural, oil and gas, and mining capital spending.
- Steel, aluminum, zinc, natural gas, fuel prices, tariffs, and supply-chain conditions can pressure margins, particularly where contracts are fixed price or have long production lead times.
- Farm income, commodity prices, weather, water restrictions, government agricultural programs, and interest rates affect Irrigation demand.
- International exposure creates foreign-exchange, political, economic, regulatory, anti-corruption, tariff, and repatriation risks. Approximately 82% of consolidated cash was held outside the United States.
- The Delta U.K. defined benefit pension plan remained underfunded by approximately $189.6 million for accounting purposes, with scheduled annual funding of approximately $15.0 million, including administrative costs.
- Product warranties, highly engineered utility contracts, potential quality claims, environmental obligations, litigation, cybersecurity, skilled-labor availability, and acquisition integration remain material risks.
- The 2017 Tax Act accounting was provisional for certain transition-tax and foreign-tax items; future guidance or tax-planning actions could change the recorded amounts.
The company adopted a new segment structure and planned to adopt the new revenue-recognition standard using the modified retrospective method at the start of fiscal 2018. Management estimated an approximately $9.8 million credit to retained earnings on adoption. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether Utility and Irrigation volume and pricing gains continue while steel and other commodity costs remain elevated.
- The conversion of the $670.0 million backlog into 2018 revenue and operating cash flow.
- The effect of the 2017 Tax Act, including final transition-tax calculations, foreign withholding taxes, and future effective tax rates.
- Operating cash-flow recovery after higher receivables, inventory, and pension contributions in 2017.
- Availability of cash held by foreign subsidiaries and the tax or legal costs of repatriation.
- Progress and final regulatory approval for the grinding-media divestiture.
- Funding requirements and actuarial changes affecting the Delta pension plan.
- Compliance with debt covenants and the April 2020 maturity of the $250.2 million principal amount of 6.625% senior notes.
- Margin sensitivity to steel prices, fixed-price contracts, warranty claims, and potential impairment of the offshore and complex-steel reporting unit.