Valmont Industries, Inc. — Q1 2017 Form 10-Q Summary
Business Context and Reporting Period
Valmont Industries, Inc. reported unaudited results for the thirteen weeks ended April 1, 2017, compared with the thirteen weeks ended March 26, 2016. The company operates through Engineered Support Structures, Energy and Mining, Utility Support Structures, Coatings, and Irrigation segments.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $637.5 million | $596.6 million | 6.9% |
| Gross profit | $164.6 million | $161.0 million | 2.2% |
| Gross margin | 25.8% | 27.0% | Down 120 bps |
| Operating income | $64.5 million | $62.4 million | 3.4% |
| Operating margin | 10.1% | 10.5% | Down 40 bps |
| Net earnings attributable to Valmont | $39.0 million | $33.0 million | 18.2% |
| Diluted EPS | $1.72 | $1.45 | 18.6% |
| Operating cash flow | $36.0 million | $80.5 million | Down $44.5 million |
| Capital expenditures | $14.2 million | $14.0 million | Increase of $0.2 million |
Cash and cash equivalents were $425.2 million at April 1, 2017, compared with $399.9 million at December 31, 2016. Total interest-bearing debt was $756.3 million, consisting primarily of long-term senior unsecured notes. Shareholders’ equity was $1.04 billion. The company declared dividends of $0.375 per share.
Material Changes Versus the Prior Comparable Period
- Sales increased in every segment except Engineered Support Structures. Utility Support Structures grew 20.9%, Energy and Mining 10.2%, Irrigation 5.6%, and Coatings 0.9%; Engineered Support Structures declined 3.4%.
- Operating income increased in Energy and Mining, Utility Support Structures, and Irrigation, but declined in Engineered Support Structures and Coatings.
- Higher steel, zinc, and other raw-material costs reduced gross margin. Management stated that pricing did not fully recover higher costs in the Engineered Support Structures and Coatings segments.
- Net earnings benefited from a lower effective tax rate of 27.8%, compared with 32.3% in the prior-year quarter. The decrease primarily reflected a non-recurring $2.0 million tax benefit related to a favorable U.K. corporate tax refund judgment.
- Operating cash flow declined primarily because of higher working-capital requirements, increased inventory and receivables, and a $25.4 million contribution to the Delta Pension Plan.
- Other comprehensive income included an $18.9 million after-tax gain, largely from foreign-currency translation.
Outlook, Liquidity, Risks, and Unusual Items
- Management expects approximately $70 million of capital expenditures for fiscal 2017.
- The company expects lower 2017 U.S. net farm income and stated that this could reduce full-year demand for North American irrigation equipment.
- Management expects the U.S. highway bill to support transportation markets during the latter half of 2017, while European markets remain subdued.
- Liquidity was supported by $425.2 million of cash, approximately $585.3 million of availability under the revolving credit facility, and approximately $111.3 million of unused short-term bank lines.
- The company was in compliance with its debt covenants. The leverage ratio was 2.29x versus a 3.5x maximum, and the interest coverage ratio was 7.78x versus a 2.5x minimum.
- Debt ratings were Baa3 from Moody’s and BBB+ from Standard & Poor’s. The company stated that maintaining investment-grade debt ratings remains a capital-structure objective.
- No shares were repurchased during the quarter. Approximately $132.2 million remained available under the repurchase authorization.
- Goodwill impairment risk remains concentrated in the offshore and other complex steel structures reporting unit, which had $13.2 million of goodwill and the least valuation cushion. Failure to build backlog for other product lines during 2017 could require an interim impairment test.
- Approximately $327.1 million of cash was held outside the United States. The company had not provided for U.S. taxes on approximately $469.5 million of undistributed foreign earnings because it intended to reinvest those earnings.
- The company is evaluating the future impact of revenue recognition, lease, cash-flow presentation, goodwill impairment, and pension-cost presentation accounting standards. Adoption of the lease standard is expected to significantly increase reported assets and liabilities.
- Forward-looking results remain exposed to cyclical markets, raw-material availability and pricing, customer demand, foreign-currency movements, competition, government policy, product acceptance, and operating execution.
Most Important Facts for Investors to Verify
- Whether higher raw-material costs continue to pressure gross margins, particularly in Engineered Support Structures and Coatings.
- Whether Utility Support Structures and Energy and Mining volumes remain strong enough to offset weakness in other markets.
- The sustainability of the lower effective tax rate after the non-recurring U.K. tax benefit.
- Progress in rebuilding backlog and valuation support for the offshore and complex steel structures reporting unit.
- Working-capital trends, pension funding requirements, and the resulting conversion of earnings to operating cash flow.
- Future irrigation demand given declining U.S. farm income and the company’s fiscal 2017 outlook.
- Foreign-cash repatriation tax exposure and the effect of future accounting-standard adoption on reported results and leverage.