Valmont Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. reported unaudited results for the thirteen and twenty-six weeks ended June 25, 2016, compared with the periods ended June 27, 2015. The company operates through five reportable segments: Engineered Support Structures, Energy and Mining, Utility Support Structures, Coatings, and Irrigation.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $640.2 million | $682.1 million | $1,236.9 million | $1,352.5 million |
| Gross profit | $175.1 million | $169.5 million | $336.1 million | $335.0 million |
| Gross margin | 27.4% | 24.8% | 27.2% | 24.8% |
| Operating income | $71.8 million | $54.0 million | $134.2 million | $111.7 million |
| Operating margin | 11.2% | 7.9% | 10.8% | 8.3% |
| Net earnings attributable to Valmont | $42.0 million | $27.9 million | $75.0 million | $58.6 million |
| Diluted EPS | $1.85 | $1.19 | $3.29 | $2.47 |
Net sales declined 6.1% in the quarter and 8.5% year to date. Operating income increased 33.0% and 20.1%, respectively, while diluted EPS increased 55.5% and 33.2%. Management attributed the margin improvement principally to 2015 restructuring benefits, lower raw-material costs, reduced SG&A, and improved performance in Engineered Support Structures, Utility Support Structures, and Coatings.
- Net interest expense was $10.4 million in the quarter and $20.7 million year to date, broadly consistent with the prior year.
- Effective tax rates were 30.6% for the quarter and 31.3% year to date, compared with 32.1% and 33.6% in the prior-year periods.
- Cash dividends declared were $0.375 per share for the quarter and $0.750 per share year to date.
- Cash flow from operations was $79.9 million year to date, versus $118.3 million in 2015. Capital expenditures were $26.0 million, versus $24.8 million.
- Cash and cash equivalents were $344.3 million at June 25, 2016, compared with $349.1 million at December 26, 2015.
- Interest-bearing debt was $761.2 million, compared with $759.0 million at year-end 2015. The company had no borrowings under its revolving credit agreement and reported $584.6 million of availability after letters of credit.
- Net working capital was $909.3 million at June 25, 2016, compared with $860.3 million at December 26, 2015.
Material changes versus the prior comparable period
- Engineered Support Structures sales decreased 1.5% year to date, but operating income increased 37.0% to $35.2 million.
- Energy and Mining sales declined 13.9% year to date and operating income declined 26.8% to $5.2 million, reflecting weak oil, gas, and mining conditions, lower pricing, and currency effects.
- Utility Support Structures sales declined 12.8%, while operating income increased 25.7% to $32.3 million, supported by restructuring savings and lower SG&A.
- Coatings sales declined 2.8%, but operating income increased 34.4% to $25.4 million. The American Galvanizing acquisition contributed $3.9 million of first-half sales.
- Irrigation sales declined 10.8% and operating income declined 8.5% to $56.6 million, primarily because of lower North American volumes and unfavorable currency translation.
- The prior-year periods included substantial restructuring charges: $14.3 million in the second quarter and $15.1 million in the first half. The first half of 2016 included $0.4 million of utility restructuring expense.
- Share repurchases were $28.6 million in the first half of 2016, compared with $121.0 million in the prior-year period. As of June 25, 2016, the company had repurchased approximately 4.4 million shares for $592.6 million, with approximately $157.4 million remaining under the program.
- The share count declined, with diluted weighted-average shares of 22.8 million year to date versus 23.7 million in the prior-year period, supporting EPS growth.
Guidance, outlook, risks, and unusual items
- Management expected fiscal 2016 capital expenditures of approximately $70 million. The filing does not provide consolidated earnings or revenue guidance.
- In July 2016, after the reporting date, the company identified an Australia/New Zealand restructuring plan involving location closures and consolidation. It estimated approximately $4.7 million of pre-tax costs during the remainder of 2016, primarily in Energy and Mining and Coatings.
- Management noted continued weakness in oil and gas, mining, Australian markets, and U.S. agricultural demand. Lower farm income was expected to pressure irrigation demand.
- Key risks include cyclical end markets, raw-material prices, pricing and product mix, foreign-currency movements, competition, customer demand, government policy, and potential impairment of goodwill or intangible assets.
- The company held approximately $277.7 million of cash outside the United States, including $105.1 million at Delta Ltd. Repatriation of foreign cash could require estimated taxes of approximately $23 million to $100 million, depending on timing and source.
- The company was in compliance with debt covenants. Its leverage ratio was 2.65x against a 3.5x maximum, and its interest coverage ratio was 6.84x against a 2.5x minimum.
- The company early adopted ASU 2016-09 in the second quarter, producing an income tax benefit of approximately $0.3 million.
- A one-year foreign-currency forward contract was entered into as a net investment hedge for British-pound investments. The unrealized gain at June 25, 2016 was $2.9 million.
Important facts for investors to verify
- Whether restructuring savings can offset ongoing weakness in Energy and Mining and Irrigation.
- The timing and final cost of the Australia/New Zealand restructuring plan.
- Whether operating cash flow recovers from the first-half decline and supports expected capital spending, dividends, and repurchases.
- Exposure to foreign-currency movements, particularly the Australian dollar, Brazilian real, euro, South African rand, and British pound.
- The availability and restrictions on foreign cash, including Delta Ltd. pension-funding requirements and potential repatriation taxes.
- Future goodwill, trade-name, and other asset impairment risk if oil, mining, agricultural, or regional market conditions deteriorate.
- Debt covenant compliance and the company’s stated intention to maintain investment-grade credit ratings.