Valmont Industries, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
Valmont is a diversified global manufacturer of engineered metal products and services across four reportable segments: Engineered Support Structures (ESS), Utility Support Structures, Coatings, and Irrigation. Products serve lighting, traffic, wireless communications, electric utilities, renewable energy, agriculture, infrastructure, and industrial markets. The fiscal year ended December 28, 2019, consisted of 52 weeks. Approximately 31% of net sales were sold in markets or produced by facilities outside North America, and the company operated more than 80 manufacturing plants in over 100 countries.
| 2019 segment | Net sales | Operating income | Change in sales | Change in operating income |
|---|---|---|---|---|
| Engineered Support Structures | $1,002.1 million | $65.6 million | +3.6% | +88.5% |
| Utility Support Structures | $885.6 million | $87.8 million | +3.6% | +35.5% |
| Coatings | $300.6 million | $51.0 million | +4.8% | -7.8% |
| Irrigation | $578.7 million | $71.7 million | -7.4% | -26.6% |
Financial performance and liquidity
- Net sales: $2.767 billion, up 0.4% from $2.757 billion in 2018.
- Gross profit: $692.5 million, up 5.2%; gross margin increased to 25.0% from 23.9%.
- Operating income: $237.7 million, up 17.5%; operating margin increased to 8.6% from 7.3%.
- Net earnings attributable to Valmont: $153.8 million, up 62.9% from $94.4 million.
- Diluted EPS: $7.06, up from $4.20. The company declared $1.50 per share of dividends.
- Adjusted EBITDA: $326.4 million, compared with $336.2 million in 2018; the reported 2018 figure included significant adjustments.
- Cash flow: Operating cash flow was $307.6 million, versus $153.0 million in 2018. Capital expenditures were $97.4 million, up from $72.0 million.
- Cash and working capital: Cash and cash equivalents were $353.5 million; working capital was $874.6 million, compared with $931.6 million at the prior year-end.
- Debt: Total interest-bearing debt was $787.5 million, compared with $753.3 million in 2018. The leverage ratio was 2.41x, below the 3.50x covenant threshold, and the interest coverage ratio was 8.13x versus a 2.50x minimum.
- Available liquidity: The company had $556.6 million of borrowing capacity under its revolving credit facility and $109.6 million of unused short-term bank lines. Management stated that liquidity was adequate for fiscal 2020 and beyond.
Material changes versus the prior comparable period
- Profitability improved primarily because 2018 included $34.0 million of restructuring costs, $15.8 million of goodwill and intangible-asset impairment, and $14.8 million of debt-refinancing costs. Lower steel costs, improved pricing, and cost reductions also supported margins in 2019.
- ESS benefited from acquisitions, stronger North American communications demand, improved pricing, and lower restructuring costs. However, access-systems profitability weakened during the second half of the year and included an approximately $7 million project loss.
- Utility sales and margins improved through pricing, acquisitions, and lower restructuring costs, although North American steel-structure volumes declined.
- Coatings sales increased from acquisitions and pricing, but operating income declined because of lower volumes, acquisition costs, and an approximately $3 million legal settlement.
- Irrigation sales and operating income declined because of lower farm income, trade uncertainty, delayed international projects, lower volumes, and unfavorable foreign exchange. Technology sales increased to $56.7 million from $45.3 million.
- Backlog increased to $924.1 million from $644.7 million, driven principally by Utility backlog of $615.0 million versus $325.9 million. Management anticipated filling most of the 2019 backlog during fiscal 2020.
- The company acquired Larson Camouflage, United Galvanizing, and Connect-It Wireless during 2019 and acquired the remaining interests in Valmont SM and Walpar. Acquisitions contributed $117.3 million of 2019 sales but, in aggregate, did not contribute net earnings.
- Share repurchases totaled approximately $62.9 million in cash during 2019. Approximately 5.9 million shares had been repurchased for $795.5 million under the program through year-end, with $204.5 million remaining authorized.
Guidance, outlook, risks, contingencies, and unusual items
- Capital spending: Management expected fiscal 2020 capital expenditures of approximately $120 million.
- Outlook: The filing does not provide a specific fiscal 2020 revenue or earnings forecast. Management cited backlog, infrastructure investment, utility-grid upgrades, wireless-network expansion, solar tracking, and water-efficiency trends as growth opportunities.
- Commodity exposure: Steel, aluminum, zinc, natural gas, and fuel costs are volatile. Steel represents approximately 50% of Utility segment sales on average; a hypothetical 20% steel-price change would have affected Utility sales by approximately $63 million based on 2019 mix.
- Cyclicality: Demand depends on utility and infrastructure spending, construction activity, wireless-carrier capital plans, farm income, commodity prices, weather, government programs, interest rates, and access to customer financing.
- International and currency risk: Approximately 32% of fiscal 2019 sales were in markets outside the United States. Tariffs, trade disputes, political instability, public-health events, and foreign-exchange movements may affect sales, costs, and reported earnings.
- Pension obligation: The U.K. defined-benefit plan was underfunded by approximately $140.0 million at year-end. Contractual 2020 funding obligations were approximately $18.3 million, and the filing identifies potential for higher future contributions if assumptions or plan conditions change.
- Debt and commitments: Contractual cash obligations totaled $2.287 billion, including $794.7 million of debt principal, $1.116 billion of interest, $182.7 million of pension contributions, $123.1 million of operating leases, and $69.9 million of purchase commitments.
- Goodwill and contingencies: Goodwill totaled $428.9 million. No goodwill impairment was recorded in 2019, but the Access Systems reporting unit had limited valuation cushion and could require interim testing if architectural-systems sales do not increase. The company also faces ordinary-course litigation, environmental obligations, warranty exposure, guardrail-related litigation risk, cyber risk, and acquisition-integration risk.
- Accounting and audit: The company adopted the lease standard in 2019, recording operating lease liabilities of $101.0 million and an approximately $12.1 million impairment of an Australian right-of-use asset. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the unusually large $924.1 million backlog converts to revenue and cash flow as expected during 2020, particularly the Utility backlog.
- Whether ESS and Utility margin improvements are sustainable without the benefit of 2018 restructuring comparisons and lower steel prices.
- Whether Irrigation demand recovers amid farm-income pressure, trade disputes, project delays, and currency weakness.
- The future cash requirements and actuarial sensitivity of the $140.0 million underfunded U.K. pension plan.
- Compliance with debt covenants as debt increased and the company continues acquisitions, capital spending, dividends, and share repurchases.
- The valuation assumptions supporting $428.9 million of goodwill, especially the Access Systems reporting unit.
- The impact of steel, zinc, natural-gas prices, tariffs, foreign exchange, warranty claims, legal settlements, and environmental matters on future margins and cash flow.