Valmont Industries, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. reported unaudited results for the thirteen and thirty-nine weeks ended September 26, 2015, compared with the periods ended September 27, 2014. The company operates through Engineered Infrastructure Products, Utility Support Structures, Coatings, Irrigation, and Other businesses.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | YTD 2015 | YTD 2014 |
|---|---|---|---|---|
| Net sales | $632.6 million | $765.7 million | $1,985.1 million | $2,360.0 million |
| Gross profit | $156.8 million | $199.5 million | $491.8 million | $627.0 million |
| Gross margin | 24.8% | 26.1% | 24.8% | 26.6% |
| Operating income | $37.0 million | $87.8 million | $148.7 million | $291.4 million |
| Operating margin | 5.8% | 11.5% | 7.5% | 12.3% |
| Net earnings attributable to Valmont | $12.1 million | $23.6 million | $70.7 million | $143.5 million |
| Diluted EPS | $0.52 | $0.92 | $3.00 | $5.43 |
Net interest expense was $10.2 million in the quarter and $31.1 million year to date, compared with $7.2 million and $20.4 million, respectively, in the prior-year periods. The 2014 comparison included $38.7 million of debt-refinancing costs; no comparable charge was recorded in 2015. Effective tax rates were 47.0% in Q3 and 36.5% year to date, versus 36.0% and 34.6% in the prior-year periods.
Operating cash flow was $182.8 million year to date, compared with $82.7 million in 2014. Capital expenditures were $34.4 million, compared with $63.4 million, and management expected approximately $50 million of full-year 2015 capital spending.
At September 26, 2015, cash and cash equivalents were $312.9 million, compared with $371.6 million at December 27, 2014. Total interest-bearing debt was approximately $767.4 million, compared with $781.8 million at year-end. Long-term debt, excluding current installments, was $764.8 million. Net working capital was $906.6 million.
Material changes versus the prior comparable period
- Q3 net sales declined 17.4% and year-to-date sales declined 15.9%. Sales decreased in every reportable segment.
- Lower volumes, pricing and mix, foreign-currency translation, and weaker market conditions reduced revenue. Acquisitions partially offset the decline.
- Gross margin declined by 130 basis points in Q3 and 180 basis points year to date, reflecting lower pricing, unfavorable mix, reduced volumes, and restructuring charges.
- Operating income decreased 57.9% in Q3 and 49.0% year to date. All reportable segments reported lower operating income.
- Irrigation sales declined 35.6% in Q3 and 30.7% year to date, primarily because of lower agricultural demand and international volumes.
- Utility Support Structures sales declined 9.0% in Q3 and 17.1% year to date, reflecting lower volumes, lower steel pricing, and an unfavorable project mix.
- Engineered Infrastructure Products sales declined 11.0% in Q3 and 4.9% year to date, while Coatings sales declined 12.0% and 9.8%, respectively.
- Foreign-currency translation reduced Q3 sales by approximately $57.6 million and year-to-date sales by approximately $143.8 million.
Guidance, outlook, risks, contingencies, and unusual items
- In April 2015, the board authorized a restructuring plan of up to $60 million. The company recorded $8.8 million of pre-tax restructuring expense in Q3 and $23.8 million year to date. Management expected initial-phase charges of approximately $17 million in cash expenses and $14 million of asset impairments, and was evaluating additional potential charges of approximately $5 million in cash expenses and $8 million of asset impairments.
- The company recorded $15.2 million of goodwill and intangible-asset impairment charges in Q3, including a preliminary $9.1 million goodwill impairment for the APAC Coatings reporting unit, a $5.0 million Webforge trade-name impairment, and a $1.1 million Industrial Galvanizing trade-name impairment.
- The APAC Coatings goodwill impairment analysis was not complete; step two was expected to be completed in Q4 2015. The Access Systems reporting unit, with approximately $70 million of goodwill, had the smallest excess of estimated fair value over carrying value. Further sales declines or inadequate profitability improvement could require an interim impairment test in 2016.
- Management identified weak oil and gas, mining, Australian, European, Brazilian, and other international markets; lower U.S. farm income; competitive pricing; steel-price volatility; and delayed wind-energy projects as significant operating pressures.
- The company expected adequate liquidity based on operating cash flow, cash balances, and available credit. It had no borrowings under its revolving credit facility, approximately $581.7 million of available capacity after standby letters of credit, and $95.5 million of unused short-term bank lines.
- Debt covenants required interest-bearing debt of no more than 3.5 times EBITDA and EBITDA of at least 2.5 times interest expense. The company reported a 2.46 leverage ratio and a 6.91 interest-coverage ratio and stated that it was in compliance with all covenants.
- The company repurchased 1.24 million shares for approximately $148.2 million during the first three quarters and had acquired approximately 3.95 million shares for $543.3 million under its programs as of September 26, 2015. Approximately $206.7 million remained authorized.
- A subsequent event occurred on September 30, 2015: the company acquired American Galvanizing for $13.2 million in cash, net of assumed liabilities. The business had annual sales of approximately $8.5 million and was to be included in Coatings.
- Approximately $287.6 million of cash was held outside the United States. Management estimated that repatriating all foreign cash would result in approximately $22.4 million of income taxes, subject to the amount and jurisdiction of repatriation.
- Management stated that forward-looking results remain subject to economic and market conditions, raw-material availability and pricing, customer demand, competition, foreign exchange, government policy, and other risks disclosed in SEC filings.
Most important facts for investors to verify
- Whether the sales and margin declines stabilize, particularly in Irrigation, Utility Support Structures, Coatings, and international markets.
- The final step-two assessment and any additional impairment charges for APAC Coatings, as well as the future impairment risk for Access Systems.
- The timing, total cost, and expected savings from the restructuring plan and any additional restructuring actions.
- Debt covenant compliance, refinancing or maturity exposure, interest expense, and the continued availability of revolving-credit capacity.
- The sustainability of operating cash flow after share repurchases, dividends, pension contributions, capital spending, and the American Galvanizing acquisition.
- Foreign-currency exposure, overseas cash accessibility, potential repatriation taxes, and pension-funding constraints at Delta Ltd.
- The effect of lower steel prices, commodity volatility, agricultural conditions, oil and gas investment, and infrastructure spending on future demand and pricing.