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 29, 2019, compared with the periods ended June 30, 2018. The company operates through Engineered Support Structures, Utility Support Structures, Coatings, and Irrigation segments.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Change | Six months 2019 | Six months 2018 | Change |
|---|---|---|---|---|---|---|
| Net sales | $700.9 million | $682.4 million | 2.7% | $1,393.0 million | $1,381.1 million | 0.9% |
| Gross profit | $180.4 million | $175.0 million | 3.1% | $345.5 million | $344.2 million | 0.4% |
| Gross margin | 25.7% | 25.6% | +0.1 pts | 24.8% | 24.9% | -0.1 pts |
| Operating income | $63.7 million | $63.7 million | Flat | $118.8 million | $127.6 million | -6.9% |
| Operating margin | 9.1% | 9.3% | -0.2 pts | 8.5% | 9.2% | -0.7 pts |
| Net earnings attributable to Valmont | $41.4 million | $33.0 million | 25.5% | $77.9 million | $72.2 million | 7.9% |
| Diluted EPS | $1.90 | $1.46 | 30.1% | $3.56 | $3.18 | 11.9% |
Net interest expense declined to $9.1 million in the second quarter from $10.3 million, and to $18.1 million for the first half from $20.2 million, primarily due to refinancing and retiring higher-rate debt. Effective tax rates were 24.8% in the quarter and 24.9% year to date, compared with 29.3% and 26.4%, respectively.
Six-month operating cash flow was $113.4 million, versus $53.7 million in the prior-year period. Capital expenditures were $49.3 million, acquisitions used $81.8 million, and net cash used in investing activities was $115.6 million. Cash and cash equivalents were $256.9 million at June 29, 2019, down from $313.2 million at December 29, 2018.
Total interest-bearing debt was $786.7 million, including $20.4 million of notes payable to banks, $0.8 million of current long-term debt, and $765.6 million of long-term debt. The company had $556.2 million available under its revolving credit facility after letters of credit and $113.6 million available under short-term bank lines. Debt covenants were satisfied; leverage was 2.48x adjusted EBITDA and interest coverage was 7.67x.
Material changes versus the prior comparable period
- ESS sales increased 4.7% in the quarter and 5.1% year to date; operating income increased 60.0% and 67.3%, respectively, helped by pricing, acquisitions, and the absence of 2018 restructuring costs.
- Utility sales increased 6.4% in the quarter and 11.3% year to date, but operating income declined 23.4% and 7.0%, respectively, due to unfavorable mix, inspection costs, and higher selling expenses.
- Coatings sales increased 8.9% in the quarter and 5.8% year to date. Operating income rose 2.0% in the quarter but declined 5.6% year to date, partly because of approximately $3.0 million of one-time legal settlement expenses.
- Irrigation sales declined 4.7% in the quarter and 12.3% year to date. Operating income declined 22.0% and 32.3%, respectively, due to lower volumes and operating deleverage.
- 2018 restructuring expenses and the loss from the divestiture of the grinding media business did not recur in 2019. The prior-year second quarter included a $6.1 million pretax divestiture loss and $7.0 million of restructuring expenses.
- The company acquired Connect-It Wireless for $6.0 million in May 2019 and previously acquired United Galvanizing, Larson Camouflage, CSP Coatings, Walpar, Convert, and other businesses. Acquired businesses contributed $25.1 million of second-quarter sales and $66.7 million of first-half sales but, in aggregate, contributed no net earnings to 2019 results.
- The company adopted ASC 842 lease accounting in 2019, recognizing $87.6 million of operating lease right-of-use assets and $100.7 million of lease liabilities at June 29, 2019. The adoption included an after-tax retained earnings reduction of approximately $8.9 million related primarily to an impaired Australian lease asset.
Outlook, commentary, risks, and unusual items
Management expects fiscal 2019 capital spending of approximately $90 million to $100 million and believes available credit facilities and operating cash flow provide adequate liquidity. No consolidated revenue or earnings guidance was provided in the filing.
- Demand in Irrigation was affected by low commodity prices and uncertainty surrounding trade disputes with China, which delayed grower purchases.
- Steel and zinc prices were higher than in the prior-year period, requiring pricing actions and creating margin and execution risk.
- The Utility segment incurred approximately $3.0 million of inspection costs related to finalizing requirements from a 2015 commercial settlement.
- Foreign currency translation reduced second-quarter operating profit by approximately $0.7 million and first-half operating profit by approximately $1.5 million.
- The company remains exposed to cyclical markets, raw-material availability and pricing, competitive conditions, government policy, foreign exchange, acquisition integration, and potential impairment of goodwill and intangible assets. Management identified challenging wind-energy and transmission-structure pricing in Northern Europe in prior impairment testing and recorded a $14.4 million goodwill impairment in 2018.
- Foreign subsidiaries held approximately $159.3 million of the company’s $256.9 million cash balance. Repatriation may incur foreign withholding and U.S. state taxes.
- The company repurchased 236,323 shares for approximately $28.9 million during the quarter and had approximately $229.0 million remaining under its authorization.
Important facts for investors to verify
- Whether Irrigation demand and volumes recover and whether continued pricing actions offset steel, zinc, and other input costs.
- The sustainability of ESS operating improvement after the benefit from acquisitions and the absence of 2018 restructuring expenses.
- Final purchase-price allocations and integration results for recent acquisitions, including Connect-It, United, Larson, Walpar, and Convert.
- Progress toward planned $90 million to $100 million of 2019 capital expenditures and the effect on free cash flow after acquisitions and share repurchases.
- Compliance with debt covenants and the company’s ability to maintain investment-grade credit ratings while funding acquisitions, dividends, and repurchases.
- Potential effects of foreign exchange, trade disputes, cyclical end markets, legal and settlement matters, pension obligations, and goodwill or intangible-asset impairment testing.