Valmont Industries, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. reported unaudited results for the thirteen weeks ended March 28, 2020, compared with the thirteen weeks ended March 30, 2019. The company operates through Engineered Support Structures, Utility Support Structures, Coatings, and Irrigation segments. Its products and services support infrastructure, utility, communications, transportation, agriculture, and other markets.
The company classified its operations as essential critical-infrastructure businesses during the COVID-19 pandemic. Most facilities remained operational as of April 28, 2020, although facilities in several international locations were closed under government mandates.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $674.2 million | $692.1 million | Down 2.6% |
| Gross profit | $186.2 million | $164.6 million | Up 13.1% |
| Gross margin | 27.6% | 23.8% | Up 380 basis points |
| Operating income | $66.9 million | $54.6 million | Up 22.5% |
| Operating margin | 9.9% | 7.9% | Up 200 basis points |
| Net earnings attributable to Valmont | $42.9 million | $36.1 million | Up 18.8% |
| Diluted EPS | $1.99 | $1.64 | Up 21.3% |
| Effective tax rate | 25.2% | 24.9% | Up 30 basis points |
| Operating cash flow | $62.4 million | $7.9 million | Up $54.4 million |
Net interest expense was approximately $9.0 million, broadly consistent with the prior-year period. Other income and expense included a $2.3 million unrealized investment loss, compared with a $2.8 million gain in Q1 2019. The change in deferred compensation asset valuations reduced other income by approximately $5.1 million but was offset by a corresponding reduction in corporate SG&A expense.
Segment results
| Segment | Q1 2020 sales | Year-over-year sales change | Q1 2020 operating income | Operating income change |
|---|---|---|---|---|
| Engineered Support Structures | $227.4 million | Down 0.3% | $15.9 million | Up 27.2% |
| Utility Support Structures | $222.9 million | Down 8.3% | $27.7 million | Up 10.4% |
| Coatings | $68.6 million | Down 2.3% | $11.1 million | Up 9.9% |
| Irrigation | $155.3 million | Up 3.1% | $23.7 million | Up 17.9% |
Management attributed the improvement in profitability primarily to lower steel and other raw-material costs, improved pricing in infrastructure businesses, and stronger Irrigation volumes. All four operating segments reported higher operating income and gross margin.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents were $294.6 million at March 28, 2020, compared with $353.5 million at December 28, 2019. Approximately $145.9 million was held by non-U.S. subsidiaries.
- Total interest-bearing debt was $796.6 million, compared with $787.5 million at year-end 2019. Long-term debt excluding current installments was $776.1 million.
- The company had $544.6 million available under its revolving credit facility after standby letters of credit. It also maintained short-term bank lines totaling $129.2 million, of which $109.5 million was unused.
- At the beginning of Q2 2020, the company drew $75.0 million on its revolving credit facility to provide additional liquidity during COVID-19 uncertainty.
- The company was in compliance with its debt covenants. The leverage ratio was 2.37x versus a 3.5x covenant limit, and the interest coverage ratio was 8.33x versus a 2.5x minimum.
- Operating cash flow was $62.4 million; capital expenditures were $23.6 million. Investing cash outflow was $33.1 million, while financing cash outflow was approximately $79.0 million.
- The company repurchased 190,491 shares for approximately $20.5 million during the quarter, but suspended further repurchases to preserve liquidity.
- Fiscal 2020 capital-spending expectations were reduced from approximately $100 million to $125 million to approximately $75 million to $90 million.
- Debt ratings disclosed were Baa3 from Moody’s, BBB- from Fitch, and BBB+ from Standard & Poor’s.
Material changes versus the prior comparable period
- Sales declined despite higher profitability, principally because of lower volumes in Utility, ESS, and Coatings and unfavorable foreign-currency translation. Irrigation sales increased.
- Gross margin expanded substantially because of lower raw-material costs, improved infrastructure pricing, and Irrigation operating leverage.
- Operating cash flow improved significantly due primarily to working-capital management and higher customer billings in excess of costs and earnings.
- In February 2020, the company acquired the remaining 49% of AgSense for $44.3 million, including an estimated $2.5 million future payment, and acquired an additional 16% interest in Convert Italia for $11.8 million.
- The company changed certain inventory accounting from LIFO to FIFO effective December 29, 2019 and applied the change retrospectively. The change increased retained earnings by $32.9 million at December 28, 2019 and increased Q1 2019 reported cost of sales by $0.5 million on a retrospective basis. It did not affect cash flows.
- Accumulated other comprehensive loss increased to $347.9 million from $313.4 million, primarily because of a $49.4 million foreign-currency translation loss, partly offset by hedge gains.
Guidance, outlook, risks, and unusual items
Management expected positive operating cash flow for fiscal 2020 and believed available cash, credit facilities, and operating cash flows provided adequate liquidity. However, management anticipated a COVID-19-related demand slowdown and increased disruption beginning primarily in Q2 2020.
- Q2 2020 net sales were expected to be approximately $50 million below Q2 2019, with Coatings and Irrigation expected to be particularly affected.
- Q2 operating income and operating margin were expected to decline because of lower sales.
- As of April 28, 2020, facilities in Argentina, France, India, Malaysia, New Zealand, the Philippines, and South Africa were closed or affected by government mandates; management expected reopening during May for the facilities identified in its discussion.
- Management estimated that approximately $4.0 million of Q1 sales were not recognized because of COVID-19 facility closures.
- Key risks include uncertain pandemic duration, customer demand, supply-chain availability and cost, logistics disruptions, government restrictions, foreign-currency movements, cyclical markets, raw-material pricing, and potential goodwill impairment.
- The Access Systems reporting unit had approximately $42.3 million of goodwill and limited excess fair value cushion in the 2019 impairment test. Management stated that worsening forecasts or economic conditions could require an interim impairment review.
Important facts for investors to verify
- Whether COVID-19 effects produced the expected Q2 sales decline and margin pressure, particularly in Coatings and Irrigation.
- Whether facility closures, supply-chain constraints, and customer demand changes affected cash flow and available revolver capacity.
- Progress against the reduced $75 million to $90 million fiscal 2020 capital-spending plan and the suspension of share repurchases.
- Compliance with the 3.5x leverage and 2.5x interest-coverage covenants as EBITDA and operating results change.
- Potential goodwill or indefinite-lived intangible-asset impairment, especially for the Access Systems reporting unit.
- The ongoing effects of foreign-currency translation and hedging activity on comprehensive income and shareholders’ equity.
- The retrospective LIFO-to-FIFO adjustment when comparing Q1 2020 with previously reported 2019 figures.