Valmont Industries, Inc. — Fiscal 2016 Form 10-K Summary
Business context and reporting period
Valmont is a diversified global manufacturer of engineered metal, concrete, aluminum and composite structures, irrigation equipment, access systems, grinding media and industrial coatings. Reportable segments are Engineered Support Structures, Utility Support Structures, Energy and Mining, Coatings and Irrigation. Approximately 37% of 2016 sales were sold in markets or produced by facilities outside North America.
The filing covers the 53-week fiscal year ended December 31, 2016; fiscal 2015 had 52 weeks. Management estimated that the extra week contributed approximately $50 million of sales and $3 million of net earnings.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $2.522 billion | $2.619 billion | (3.7%) |
| Gross profit / margin | $656.2 million / 26.0% | $621.0 million / 23.7% | Margin +230 bps |
| Operating income / margin | $243.5 million / 9.7% | $131.7 million / 5.0% | +84.9% |
| Net earnings attributable to Valmont | $173.2 million | $40.1 million | +331.9% |
| Diluted EPS | $7.63 | $1.71 | +346.2% |
| Operating cash flow | $219.2 million | $272.3 million | (19.5%) |
| Capital expenditures | $57.9 million | $45.5 million | +$12.5 million |
| Adjusted EBITDA | $326.6 million | $285.1 million | +14.6% |
At December 31, 2016, cash and cash equivalents were $399.9 million, working capital was $903.4 million, total interest-bearing debt was $756.4 million, and shareholders’ equity was $982.6 million. Approximately $329.5 million of cash was held outside the United States. The leverage ratio was 2.32x versus a 3.50x covenant limit, and the interest coverage ratio was 7.36x versus a 2.50x minimum.
The company had $584.6 million available under its $600 million revolving credit facility after letters of credit, no outstanding revolver borrowings, and $109.4 million of unused short-term bank lines. Dividends declared were $1.50 per share. Fiscal 2017 capital spending was expected to be approximately $70 million.
Material changes versus the prior comparable period
- Sales declined $97.2 million, primarily from lower pricing and mix, volume declines in Energy and Mining, Utility, Coatings and Irrigation, and unfavorable foreign-currency translation. ESS sales increased 2.2%.
- Operating performance improved across every reportable segment. 2016 operating income benefited from cost reductions, restructuring benefits and the absence of 2015 impairment charges and a $17 million Utility commercial settlement reserve.
- 2016 included $12.4 million of pre-tax restructuring expense, compared with $39.9 million in 2015. The 2016 restructuring focused on facility closures and consolidation in Australia/New Zealand and Canada and was substantially completed by year-end.
- 2015 included $42.0 million of goodwill and intangible-asset impairments and $39.9 million of restructuring expense; neither the goodwill nor intangible impairments recurred in 2016.
- The effective tax rate fell to 19.1% from 51.0%. Fiscal 2016 included a $30.6 million deferred tax benefit, a $9.9 million valuation allowance against a tax credit asset and a nontaxable $16.6 million reversal of a Delta acquisition-related contingent liability. Excluding these items, management reported an adjusted effective tax rate of 30.8%.
- Operating cash flow decreased despite higher earnings because of less favorable working-capital changes, lower accrued liabilities and the reversal of the Delta contingent liability.
- Backlog increased to $602.9 million from $590.4 million, with most of the 2016 backlog expected to be fulfilled during 2017.
Outlook, commentary, risks and unusual items
Management expected the 2015 U.S. federal highway bill to support transportation demand beginning in 2017 and believed the company had adequate liquidity for fiscal 2017 and beyond. The filing does not provide formal consolidated revenue or earnings guidance.
- Demand remains cyclical and is exposed to utility and infrastructure spending, commercial construction, wireless-carrier capital plans, farm income, commodity prices and mining, oil and gas and wind-energy investment.
- U.S. net farm income was estimated by the USDA at $66.9 billion for 2016, down 17% from 2015, contributing to weaker North American irrigation demand.
- Steel, aluminum, zinc, natural gas and fuel costs can materially affect margins. Steel represents approximately 50% of Utility segment sales costs; a hypothetical 20% steel-price change would have affected Utility sales by approximately $54 million in 2016, assuming a similar mix.
- Foreign-exchange translation reduced 2016 operating profit by $1.6 million. The company operates more than 80 manufacturing plants on six continents and sells in more than 100 countries.
- The U.K. Delta defined-benefit pension plan was underfunded by approximately $209.5 million at year-end. Contractual annual funding was approximately $12.3 million for the funding shortfall plus $1.4 million of administrative expenses, and the company disclosed approximately $149.3 million of scheduled pension contributions in its contractual-obligations table.
- Product warranty accruals were $26.5 million. The filing states that a 50% change in the warranty estimate would affect operating income by approximately $13.3 million.
- Approximately $9 million of delinquent receivables from Chinese municipal entities was subject to specific allowances; total doubtful-account allowances were $19.0 million.
- The 2016 annual goodwill and trade-name impairment tests identified no impairment, but the offshore and complex steel structures reporting unit had the least valuation cushion. A 1% change in its discount rate would change estimated fair value by approximately $10 million.
- The company reported no material legal proceedings and stated that known environmental and other contingencies were not expected to have a material adverse effect, while noting that additional liabilities could arise.
Important facts for investors to verify
- Reconcile reported 2016 earnings and EPS with the $30.6 million tax benefit, $16.6 million contingent-liability reversal, $9.9 million tax-credit valuation allowance and $12.4 million restructuring expense.
- Assess whether improved segment operating income is sustainable after excluding 2015 impairments, restructuring charges and the Utility commercial settlement.
- Monitor backlog conversion, Utility and ESS infrastructure demand, and the effect of lower farm income on Irrigation sales.
- Review debt maturities, covenant headroom, fixed-rate interest obligations and the $250.2 million of senior notes due in 2020.
- Evaluate the funding requirements and sensitivity of the underfunded U.K. pension plan, including currency and interest-rate effects.
- Track steel, zinc, natural gas and currency movements, as well as warranty claims and Chinese municipal receivable collections.
- Confirm the impact of the planned fiscal 2017 capital spending of approximately $70 million and continued share repurchases on liquidity and leverage.