Valmont Industries, Inc. — Fiscal 2016 Third-Quarter Form 10-Q
Business context and reporting period
Valmont Industries, Inc. reported unaudited results for the thirteen and thirty-nine weeks ended September 24, 2016, compared with the corresponding periods ended September 26, 2015. The company operates through Engineered Support Structures, Energy and Mining, Utility Support Structures, Coatings, and Irrigation segments.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Year-to-date 2016 | Year-to-date 2015 |
|---|---|---|---|---|
| Net sales | $610.2 million | $632.6 million | $1,847.1 million | $1,985.1 million |
| Gross profit | $155.0 million | $156.8 million | $491.1 million | $491.8 million |
| Gross margin | 25.4% | 24.8% | 26.6% | 24.8% |
| Operating income | $53.2 million | $37.0 million | $187.4 million | $148.7 million |
| Operating margin | 8.7% | 5.8% | 10.1% | 7.5% |
| Net earnings attributable to Valmont | $28.2 million | $12.1 million | $103.2 million | $70.7 million |
| Diluted EPS | $1.24 | $0.52 | $4.54 | $3.00 |
Third-quarter sales decreased 3.5%, while operating income increased 43.8% and diluted EPS increased 138.5%. Year-to-date sales decreased 7.0%, but operating income increased 26.0% and diluted EPS increased 51.3%. Net interest expense was $10.3 million in the quarter and $31.0 million year-to-date. Effective tax rates were 32.6% and 31.7%, compared with 47.0% and 36.5% in the respective 2015 periods.
Cash provided by operating activities was $127.3 million year-to-date, compared with $182.8 million in 2015. Capital expenditures were $42.2 million, versus $34.4 million. Management expected approximately $65 million of fiscal 2016 capital spending.
At September 24, 2016, cash and cash equivalents were $349.4 million, current assets were $1.274 billion, and current liabilities were $359.9 million. Total interest-bearing debt was $757.3 million, including $755.6 million of long-term debt. Net working capital was $914.3 million. No borrowings were outstanding under the revolving credit facility; $584.6 million was available after letters of credit, and $115.1 million of $118.1 million in short-term bank lines was unused.
Material changes versus the prior comparable period
- Sales declined across all reportable segments year-to-date. The largest declines were in Utility Support Structures, Irrigation, and Energy and Mining.
- Operating performance improved primarily because 2015 restructuring costs and goodwill and intangible-asset impairments did not recur, SG&A was lower, and raw-material costs were generally more favorable.
- The third quarter included $2.1 million of expenses under a new Australia/New Zealand restructuring plan. The company expects approximately $4.8 million of total pretax costs under this plan.
- Third-quarter 2016 also included approximately $3.2 million of restructuring expenses related to the prior 2015 plan; year-to-date restructuring expense was $4.4 million.
- Coatings operating income benefited from the absence of the $10.2 million of 2015 APAC goodwill and trade-name impairments, a $2.6 million reduction in contingent consideration, and the American Galvanizing acquisition. American Galvanizing contributed approximately $2.0 million of third-quarter sales and $5.9 million year-to-date.
- Share repurchases were $46.6 million year-to-date, compared with $148.2 million in 2015. Approximately 4.53 million shares had been repurchased for $610.6 million as of September 24, 2016.
Guidance, outlook, risks and unusual items
Management described the businesses as cyclical but geographically and end-market diversified and stated that available liquidity and positive operating cash flow were adequate for expected needs. No specific earnings or sales guidance was provided.
- Energy and Mining remained exposed to low oil prices, postponed oil and gas projects, and weakness in the Australian mining sector.
- Irrigation demand was pressured by an expected 11.5% decline in U.S. net farm income and lower North American demand.
- Steel prices strengthened during the second quarter but weakened in August and September; changes in steel prices affect sales prices and costs at different times.
- The offshore and other complex steel structures reporting unit had the least valuation cushion in the annual goodwill test. Failure to build backlog during 2017 could require an interim impairment test.
- Approximately $296.0 million of cash was held outside the United States. Repatriation of all foreign cash could result in estimated taxes of approximately $3 million to $104 million, and $66.8 million held by Delta Ltd. is subject to pension-funding considerations.
- The company had approximately $409.3 million of undistributed foreign earnings for which no U.S. income-tax provision had been recorded because management intended to reinvest the earnings.
- Debt covenants were satisfied. The leverage ratio was 2.63x versus a 3.5x maximum, and adjusted EBITDA covered interest expense by 6.47x versus a 2.5x minimum.
- Annual goodwill testing identified no impairment in 2016. The filing notes that results are not necessarily indicative of full-year performance and that forward-looking statements are subject to market, raw-material, currency, competitive, regulatory, and operational risks.
Investor verification points
- Verify whether sales volumes and backlog improve in Utility, Irrigation, Energy and Mining, and offshore-related businesses.
- Assess the sustainability of margin gains after the nonrecurrence of 2015 impairments and restructuring charges.
- Track operating cash flow, inventory growth, working capital, and capital spending against the approximately $65 million full-year expectation.
- Review the execution and total cost of the Australia/New Zealand restructuring plan.
- Monitor the offshore reporting unit’s backlog and impairment-test cushion.
- Confirm foreign-cash accessibility, pension funding requirements, and potential tax costs of repatriation.
- Review debt maturities, covenant headroom, share repurchase activity, and the company’s stated objective of maintaining investment-grade ratings.