Valmont Industries, Inc. — 2016 First-Quarter Form 10-Q
Reporting period: Thirteen weeks ended March 26, 2016, compared with thirteen weeks ended March 28, 2015. The interim financial statements are unaudited. Valmont operates through Engineered Support Structures, Energy and Mining, Utility Support Structures, Coatings, and Irrigation segments.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $596.6 million | $670.4 million | (11.0%) |
| Gross profit | $161.0 million | $165.5 million | (2.7%) |
| Gross margin | 27.0% | 24.7% | +230 bps |
| Operating income | $62.4 million | $57.7 million | +8.1% |
| Operating margin | 10.5% | 8.6% | +190 bps |
| Net earnings attributable to Valmont | $33.0 million | $30.7 million | +7.5% |
| Diluted EPS | $1.45 | $1.28 | +13.3% |
| Effective tax rate | 32.3% | 35.0% | Lower |
| Dividends declared per share | $0.375 | $0.375 | Unchanged |
Net earnings attributable to Valmont represented an approximate 5.5% net margin in 2016 versus 4.6% in 2015. Interest expense was $11.1 million, broadly consistent with the prior year. Other expense was $1.7 million versus other income of $1.0 million in the prior-year period, primarily reflecting a non-cash mark-to-market loss on Delta EMD shares and weaker deferred compensation asset performance.
Segment results
- Engineered Support Structures: Sales declined 2.8% to $166.0 million, while operating income increased 49.5% to $14.2 million, aided by lower raw-material costs, restructuring benefits, and stronger Asia-Pacific telecommunications activity.
- Energy and Mining: Sales declined 19.5% to $70.8 million and operating income declined 56.8% to $1.9 million, reflecting weak mining and oil and gas markets, lower volumes, unfavorable currency effects, and project postponements associated with low oil prices.
- Utility Support Structures: Sales declined 18.1% to $144.3 million and operating income declined 3.3% to $14.8 million. Lower steel volumes, pricing, and product mix were partly offset by restructuring-related cost reductions.
- Coatings: Sales declined 4.9% to $58.8 million, while operating income increased 3.6% to $11.4 million. Results benefited from restructuring and improved Indian operations; American Galvanizing contributed following its October 2015 acquisition.
- Irrigation: Sales declined 9.3% to $156.7 million and operating income declined 4.3% to $28.9 million, primarily due to lower North American volumes, weaker farm economics, and currency effects.
Cash flow, liquidity, and debt
- Operating cash flow was $80.5 million, up from $55.5 million, due to improved working capital, no comparable pension contribution, and higher earnings.
- Capital expenditures were $14.0 million versus $16.6 million. Management expected approximately $70 million of capital spending for fiscal 2016.
- Cash and cash equivalents were $387.7 million at March 26, 2016, compared with $349.1 million at December 26, 2015. Net working capital was $888.3 million.
- Total interest-bearing debt was $760.4 million, compared with $759.0 million at year-end. Long-term debt consisted principally of three senior unsecured note tranches due in 2020, 2044, and 2054.
- No borrowings were outstanding under the revolving credit agreement. Available borrowing capacity was $584.6 million after standby letters of credit. Of $104.2 million in short-term bank lines, $102.5 million was unused.
- The company was in compliance with its debt covenants. Last-four-quarter leverage was 2.71x adjusted EBITDA, below the 3.5x limit, and adjusted EBITDA covered interest expense 6.68x, above the 2.5x requirement.
- Cash outside the United States totaled approximately $307.3 million. Management estimated potential U.S. tax costs of approximately $28 million to $100 million if all foreign cash were repatriated.
Material Changes Versus the Prior Comparable Period
- Sales decreased $73.8 million, driven by lower volumes, lower pricing and mix, unfavorable currency translation, and weaker Energy and Mining, Utility, and Irrigation markets.
- Profitability improved despite lower sales: gross margin rose to 27.0% and operating margin rose to 10.5%, primarily due to 2015 restructuring actions, lower raw-material costs, and lower SG&A.
- SG&A declined 8.5% to $98.6 million, reflecting currency effects, lower deferred compensation expense, reduced headcount, facility closures, and lower discretionary spending.
- No restructuring expense was recorded in Q1 2016, compared with $0.8 million in Q1 2015. The 2015 restructuring plan generated total pre-tax expenses of $39.9 million.
- Cash flow from operations increased substantially, while treasury-share purchases declined to $16.9 million from $72.9 million. The company repurchased 153,962 shares during the quarter and had approximately $169.0 million remaining under the program at March 26, 2016.
- Foreign currency translation produced a $2.5 million comprehensive-income benefit in Q1 2016 versus a $57.9 million loss in Q1 2015.
Outlook, Commentary, Risks, and Unusual Items
- Management expected transportation markets to improve during the latter half of 2016 following the 2015 long-term highway bill, but described European markets as subdued.
- Low oil prices continued to postpone certain energy projects, while mining investment remained weak in Australia and market conditions were weaker in China.
- Management expected U.S. net farm income to decline approximately 3% in 2016 from 2015 levels, contributing to lower irrigation demand.
- The company’s results are exposed to cyclical markets, raw-material availability and pricing, product pricing, foreign exchange, competition, government policy, customer demand, and market acceptance of products.
- Goodwill and intangible assets remain exposed to impairment risk, particularly in businesses affected by low oil prices and weak regional markets. No interim impairment test was required during Q1 2016.
- The company completed the October 2015 acquisition of American Galvanizing; the purchase price allocation was finalized in Q1 2016 and the acquisition was not material to consolidated results.
- Management stated that liquidity was adequate based on cash, available credit facilities, recent debt issuance, and historically positive operating cash flow. Forward-looking statements were expressly subject to economic, industry, operating, currency, raw-material, and regulatory risks.
- The company adopted the debt-issuance-cost presentation guidance retrospectively in Q1 2016, reclassifying approximately $7.0 million as a reduction of long-term debt.
Investor Verification Items
- Verify whether improved margins are sustainable after the benefits of restructuring and lower raw-material costs normalize.
- Monitor Energy and Mining and Utility demand, including the effects of oil prices, mining investment, project postponements, and steel pricing.
- Assess foreign-exchange sensitivity, particularly to the Australian dollar, Brazilian real, euro, and South African rand.
- Reconcile total debt, covenant calculations, maturity schedules, and available revolving-credit capacity.
- Evaluate the pace and funding of share repurchases relative to cash generation, leverage targets, and the stated investment-grade rating objective.
- Review the liquidity of foreign cash balances, pension funding restrictions, and potential tax costs of repatriation.
- Track goodwill, trade-name, and other asset impairment indicators in Energy and Mining and international Coatings operations.
- Confirm the effect of subsequent adoption of the new revenue, inventory, lease, and share-based-payment accounting standards, which were still under evaluation at the filing date.