Valmont Industries, Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
Valmont Industries is a global manufacturer and services provider operating through Engineered Infrastructure Products, Utility Support Structures, Coatings, Irrigation, and Other businesses. The filing covers the unaudited thirteen weeks ended March 28, 2015, compared with the thirteen weeks ended March 29, 2014. Results are not necessarily indicative of the full year.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $670.4 million | $751.7 million | Down 10.8% |
| Gross profit | $165.5 million | $207.0 million | Down 20.0% |
| Gross margin | 24.7% | 27.5% | Down 280 basis points |
| Operating income | $57.7 million | $98.9 million | Down 41.7% |
| Operating margin | 8.6% | 13.2% | Down 460 basis points |
| Net earnings attributable to Valmont | $30.7 million | $56.0 million | Down 45.2% |
| Diluted EPS | $1.28 | $2.08 | Down 38.5% |
| Operating cash flow | $55.5 million | $21.9 million | Up $33.6 million |
| Capital expenditures | $16.6 million | $23.5 million | Down $6.9 million |
Interest expense increased to $11.1 million from $8.2 million, while net interest expense increased 58.5% to $10.3 million. The effective tax rate was 35.0%, compared with 34.7%. SG&A declined slightly to $107.8 million, but increased to 16.1% of sales from 14.4%.
Cash and cash equivalents were $318.4 million at March 28, 2015, compared with $371.6 million at December 27, 2014. Total current assets were $1.303 billion and current liabilities were $383.6 million. Total interest-bearing debt was $781.3 million, compared with $781.8 million at year-end. Long-term debt was $765.8 million, and shareholders’ equity was $1.144 billion.
Material changes versus the prior comparable period
- Sales declined primarily because of lower volume, unfavorable pricing and mix, and approximately $31.3 million of unfavorable currency translation. Acquisitions contributed approximately $32.6 million of sales.
- Engineered Infrastructure Products sales increased 10.7% to $231.3 million, but operating income declined 12.4% to $12.0 million.
- Utility Support Structures sales decreased 17.8% to $176.1 million and operating income decreased 53.0% to $15.4 million, reflecting lower volumes, pricing, mix, and reduced fixed-cost leverage.
- Coatings sales decreased 8.0% to $61.8 million and operating income decreased 20.9% to $11.0 million.
- Irrigation sales decreased 27.4% to $154.5 million and operating income decreased 43.6% to $24.3 million, driven by lower North American and international demand.
- Operating cash flow improved despite lower earnings because of improved working capital. Cash used in financing increased to $82.4 million, primarily due to $72.9 million of treasury-stock purchases.
- Comprehensive income attributable to Valmont changed from income of $68.2 million to a loss of $25.0 million, mainly because of a $58.2 million after-tax foreign-currency translation loss.
- The company declared a quarterly dividend of $0.375 per share, compared with $0.250 in the prior-year quarter. Weighted-average diluted shares declined to 24.0 million from 27.0 million due primarily to share repurchases.
Guidance, outlook, commentary, risks and unusual items
- Management expected fiscal 2015 capital spending of approximately $70 million.
- In April 2015, the Board authorized a restructuring plan of up to $60 million in response to market conditions. Initial actions were expected to generate approximately $19 million of pre-tax cash severance, relocation, and site-closure costs and approximately $11 million of asset impairments over the remainder of 2015. Broader actions could result in up to $25 million of asset impairments and $5 million of cash charges.
- The restructuring includes Asia Pacific consolidation and actions affecting the Utility, Engineered Infrastructure Products, and Coatings segments. Approximately $16 million of APAC Coatings goodwill is subject to potential interim impairment testing if profitability does not improve.
- Management cited weaker utility and irrigation demand, lower farm income, lower commodity prices, reduced mining investment, customer-specific wireless spending reductions, foreign-exchange volatility, raw-material pricing, competitive conditions, and government policy as material operating risks.
- As of March 28, 2015, the company had no borrowings under its revolving credit facility, approximately $581.4 million of available capacity after letters of credit, and $92.3 million of unused short-term bank lines.
- Debt covenants required interest-bearing debt not to exceed 3.5 times prior-four-quarter EBITDA and EBITDA to be at least 2.5 times interest expense. The company reported a 2.06 leverage ratio and an 8.98 interest coverage ratio and was in compliance.
- The company had acquired approximately 3.3 million shares for $467.9 million under its repurchase program by March 28, 2015, and the Board had authorized an additional $250 million without a stated expiration date.
- Approximately $289.4 million of cash was held outside the United States. The company estimated approximately $28.2 million of tax would be payable if all foreign cash were repatriated. About $104.2 million was held by Delta Ltd., whose pension funding requirements may restrict repatriation.
- The company had not provided U.S. income taxes on approximately $608.9 million of undistributed foreign earnings intended to be reinvested.
- The company was evaluating the impact of the new revenue-recognition standard, ASU 2014-09; the filing did not provide an estimated financial impact.
Important facts for investors to verify
- Whether the restructuring plan produces the expected savings and whether additional impairment charges, particularly for APAC Coatings goodwill, are required.
- Whether weakness in Utility and Irrigation volumes, farm income, commodity prices, mining activity, and international markets persists.
- The sustainability of gross-margin and operating-margin recovery following the substantial Q1 deterioration.
- The pace and funding of share repurchases relative to cash generation, debt levels, dividends, and investment-grade rating objectives.
- Foreign-exchange exposure, the location and repatriability of cash, and potential taxes on foreign cash repatriation.
- Acquisition performance and the completion of the preliminary purchase-price allocation for Shakespeare.
- Future adoption effects of ASU 2014-09 and any interim goodwill impairment testing triggered by operating performance.