Valmont Industries, Inc. — Fiscal 2015 Form 10-K Summary
Business context and reporting period
Valmont is a diversified global manufacturer of fabricated metal products and services, including engineered support structures, utility support structures, energy and mining products, coatings, and mechanized irrigation equipment. Approximately 37% of 2015 sales were sold in markets or produced at facilities outside North America. The fiscal year ended December 26, 2015 and consisted of 52 weeks.
The Company changed its reportable segment structure in 2015, creating Energy and Mining as a separate segment and moving certain businesses and tubing operations among segments. Prior-period segment information was recast for comparability.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $2.619 billion | $3.123 billion | Down 16.1% |
| Gross profit | $621.0 million | $808.1 million | Down 23.2% |
| Gross margin | 23.7% | 25.9% | Down 220 bps |
| Operating income | $131.7 million | $357.7 million | Down 63.2% |
| Operating margin | 5.0% | 11.5% | Down 650 bps |
| Net earnings attributable to Valmont | $40.1 million | $184.0 million | Down 78.2% |
| Diluted EPS | $1.71 | $7.09 | Down 75.9% |
| Operating cash flow | $272.3 million | $174.1 million | Up $98.2 million |
| Capital expenditures | $45.5 million | $73.0 million | Down $27.6 million |
| Adjusted EBITDA | $285.1 million | $413.7 million | Down 31.1% |
The implied operating cash flow less capital expenditures was approximately $226.8 million. Cash and cash equivalents were $349.1 million at year-end, compared with $371.6 million in 2014. Working capital was $860.3 million, versus $995.7 million.
Total interest-bearing debt was $766.0 million, compared with $781.8 million in 2014. The leverage ratio was 2.69x adjusted EBITDA, below the 3.50x covenant limit, and the Company reported compliance with all debt covenants. The revolving credit facility provided $581.7 million of remaining borrowing capacity after letters of credit; no borrowings were outstanding under the facility.
Cash dividends declared increased to $1.50 per share from $1.375. The Company repurchased approximately 1.4 million shares for $169.0 million during 2015 and had repurchased approximately 4.1 million shares for $564.0 million under the program by year-end.
Segment performance and material changes
- Engineered Support Structures: Net sales increased 1.8% to $748.4 million, but operating income declined 9.7% to $59.6 million because of restructuring charges, currency effects, and weaker lighting and transportation activity. Communication sales improved overall, although one North American customer reduced its 4G network build-out.
- Energy and Mining: Net sales fell 24.9% to $333.2 million and the segment recorded an $18.7 million operating loss, compared with $41.3 million of operating income in 2014. Results reflected lower mining, oil and gas, and offshore activity, unfavorable currency translation, restructuring charges, and $24.6 million of goodwill and trade-name impairments.
- Utility Support Structures: Net sales declined 18.1% to $673.3 million and operating income fell 60.3% to $37.8 million. Lower volumes, pricing pressure, unfavorable mix, reduced fixed-cost absorption, and a $17.0 million fourth-quarter reserve for a customer settlement materially reduced profitability.
- Coatings: Net sales declined 8.2% to $255.5 million and operating income fell 55.1% to $27.4 million. Weak Australian manufacturing conditions, currency effects, restructuring expenses, and $17.3 million of APAC Coatings goodwill and trade-name impairments affected results. American Galvanizing was acquired for $12.8 million in cash.
- Irrigation: Net sales declined 27.9% to $605.8 million and operating income fell 44.2% to $84.5 million. Lower U.S. farm income, reduced international volumes, currency effects, and increased provisions for delinquent international receivables were the principal factors. A specific allowance related to Chinese municipal receivables contributed to the increase in bad-debt expense.
Year-end backlog was $590.4 million, down from $658.8 million in 2014. Utility Support Structures represented $244.6 million, Engineered Support Structures $148.2 million, Energy and Mining $110.6 million, Irrigation $86.7 million, and Coatings $0.3 million. Most of the backlog was expected to be filled in fiscal 2016.
Guidance, outlook, risks, contingencies, and unusual items
- Management did not provide consolidated earnings guidance in the filing. Planned 2016 capital expenditures were approximately $75 million.
- The Company authorized a restructuring plan of up to $60 million and recorded $39.9 million of pre-tax restructuring expense in 2015, including $21.7 million in cost of sales and $18.2 million in SG&A. Management expected the full effect of certain Utility restructuring initiatives to be realized in 2016.
- Fiscal 2015 included $42.0 million of goodwill and intangible-asset impairments, including impairments related to APAC Coatings and Access Systems. The fourth quarter also included significant restructuring costs, a $17.0 million customer-settlement reserve, and increased allowances for international receivables.
- The effective tax rate was 51.0%, compared with 33.4% in 2014, primarily because goodwill impairments were not tax deductible and a U.K. tax-rate reduction generated a $7.1 million deferred-tax expense.
- The Company faces cyclical demand and pricing pressure in utility infrastructure, construction, wireless communications, agriculture, mining, oil and gas, and wind-energy markets. U.S. farm income was estimated by the USDA to have declined 38% in 2015, negatively affecting irrigation demand.
- Steel, aluminum, zinc, natural gas, and fuel prices remain material risks. Steel represented approximately 50% of Utility segment sales on average; the filing estimates that a hypothetical 20% change in steel prices would have affected Utility segment sales by approximately $58 million based on 2015 conditions.
- Foreign exchange was a significant headwind: currency translation reduced 2015 operating profit by approximately $17.3 million and reduced Australian sales translated into U.S. dollars by approximately $68 million.
- The Delta U.K. defined-benefit pension plan was underfunded by approximately £120.2 million, or $179.3 million, at year-end. Scheduled 2016 contributions were approximately $16.6 million, and future funding could increase depending on actuarial assumptions and regulatory requirements.
- Approximately 80% of consolidated cash was held outside the United States, while most debt was borrowed by U.S. entities. The Company estimated potential tax costs of $22.8 million to $99.1 million if all foreign cash were repatriated.
- Contractual cash obligations totaled approximately $2.036 billion, including $765.0 million of debt, $951.2 million of interest, $165.6 million of Delta pension contributions, $101.6 million of operating leases, and $48.8 million of unconditional purchase commitments.
- Product warranty accruals increased to $36.7 million from $19.8 million, including the large Utility customer settlement. Approximately $10 million of delinquent receivables were associated with Chinese municipal entities, and the total allowance for doubtful receivables increased to $21.0 million from $9.9 million.
Investor verification priorities
- Verify whether the restructuring program produces the expected 2016 cost savings and whether additional charges are required.
- Monitor Utility segment quality claims, the $17.0 million settlement reserve, warranty accrual adequacy, and ongoing customer quality monitoring.
- Assess recovery prospects for the Energy and Mining and Coatings businesses following goodwill impairments and continued oil, gas, mining, and Australian-market weakness.
- Track Utility and Irrigation backlog conversion, pricing, volumes, and customer receivable collections.
- Evaluate liquidity after share repurchases, dividends, pension contributions, acquisitions, and planned 2016 capital expenditures.
- Review leverage and covenant headroom, foreign-cash accessibility and repatriation taxes, and the long-term Delta pension funding exposure.
- Separate recurring operating performance from the 2015 restructuring, impairment, tax-rate, bad-debt, warranty, and currency-related items when assessing normalized earnings.