Valmont Industries, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Valmont Industries designs and manufactures engineered metal and composite structures, utility support structures, coatings services, agricultural irrigation equipment, and related products and services. Reportable segments are Engineered Support Structures, Utility Support Structures, Coatings, and Irrigation; other activities primarily included the grinding media business pending divestiture. The unaudited results cover the thirteen weeks ended March 31, 2018, compared with the thirteen weeks ended April 1, 2017.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $698.7 million | $637.5 million | 9.6% |
| Gross profit | $169.2 million | $164.6 million | 2.8% |
| Gross margin | 24.2% | 25.8% | Down 160 bps |
| Operating income | $64.0 million | $64.7 million | Down 1.1% |
| Operating margin | 9.2% | 10.1% | Down 90 bps |
| Net earnings attributable to Valmont | $39.3 million | $39.0 million | Up 0.8% |
| Diluted EPS | $1.72 | $1.72 | Unchanged |
| Operating cash flow | $33.0 million | $23.4 million | Up $9.6 million |
Interest expense was $11.1 million, compared with $11.3 million in the prior-year quarter. The effective tax rate declined to 23.6% from 27.8%, primarily reflecting the 2017 Tax Act and the lower U.S. federal statutory rate. The quarterly dividend declared was $0.375 per share.
At March 31, 2018, cash and cash equivalents were $479.7 million, including approximately $403.7 million held by non-U.S. subsidiaries. Total interest-bearing debt was approximately $755.0 million, consisting primarily of senior unsecured notes. Long-term debt, excluding current installments, was $753.6 million. The company had no borrowings under its revolving credit facility and reported $585.3 million of available borrowing capacity after standby letters of credit. Approximately $112.9 million of $113.1 million in short-term bank lines was unused.
Adjusted EBITDA for the last four quarters was $354.0 million. The leverage ratio was 2.13x and the interest coverage ratio was 7.97x, versus covenant limits of 3.5x and 2.5x, respectively. Management stated that all debt covenants were satisfied.
Material changes versus the prior comparable period
- Sales increased across all reportable segments except Other. Segment net sales increased 11.8% in ESS, 4.9% in Utility, 15.5% in Coatings, and 12.5% in Irrigation.
- Sales growth reflected higher pricing and mix, volume increases, acquisitions, and favorable currency translation. Utility sales also benefited from the adoption of ASC 606.
- Raw material costs, including steel and zinc, increased and pressured gross margin. Management expects selling prices to increase over time to offset higher steel costs.
- Operating income was pressured by $4.4 million of restructuring costs, including $3.6 million in ESS and $0.8 million in Utility. The 2018 restructuring plan is expected to total approximately $10 million of pretax costs, including approximately $2 million of asset impairments.
- ESS operating income declined 27.4% despite higher sales, while Utility operating income declined 3.7%. Coatings operating income increased 26.6% and Irrigation operating income increased 11.9%.
- ASC 606 was adopted using the modified retrospective method. The company recorded a $9.8 million increase to opening retained earnings. For Q1 2018, adoption increased reported sales by approximately $27.8 million and operating income by approximately $5.1 million, primarily in Utility, as certain revenue began to be recognized over time.
- Operating cash flow improved primarily because pension contributions were substantially lower than in Q1 2017. Cash flow was partly offset by working-capital changes and increased contract assets.
- The company acquired 60% of Torrent Engineering and Equipment for $4.8 million and acquired the remaining 10% of Valmont Industria e Commercio Ltda. for $5.5 million.
- The company repurchased 101,387 shares for $14.8 million. Approximately $117.4 million remained available under the repurchase authorization at quarter-end.
Guidance, outlook, commentary, and risks
- Management expected fiscal 2018 capital spending of approximately $70 million.
- Management characterized the businesses as cyclical but stated that product, customer, and geographic diversity, available credit facilities, and positive operating cash flow provide adequate liquidity.
- The company expects the sale of Donhad, its Australian grinding media business, to close in Q2 2018 following regulatory approval. The business was classified as held for sale and generated a Q1 2018 pretax loss of $0.6 million versus pretax income of $2.1 million in Q1 2017.
- Key risks include cyclical demand, steel and other raw-material prices, pricing recovery, foreign-exchange movements, competition, market acceptance of new products, operating execution, and government policy changes.
- The company’s 2017 Tax Act estimates remain provisional. Future guidance or tax-planning actions could change the recorded transition-tax and foreign withholding or state-tax amounts.
- The company identified a wind-energy-related reporting unit with less substantial goodwill valuation headroom. A significant decline in wind-structure demand or adverse commodity-market developments could require an interim impairment test.
- The company expects the future adoption of the lease standard to significantly increase reported assets and liabilities, although the filing does not quantify the impact.
Important facts for investors to verify
- Separate the underlying sales and earnings trend from the approximately $27.8 million ASC 606 sales benefit and $5.1 million operating-income benefit.
- Assess whether higher steel and zinc costs are being recovered through pricing and whether gross-margin pressure persists.
- Track completion and total cost of the approximately $10 million restructuring plan.
- Verify the timing and proceeds of the Donhad divestiture and its effect on reported results and cash.
- Monitor the concentration of cash in foreign subsidiaries and the related tax consequences of repatriation.
- Review covenant compliance, debt maturities, refinancing needs, and continued share repurchases relative to operating cash flow.
- Evaluate goodwill exposure in the offshore and complex steel structures reporting unit and developments in European wind-energy demand.