Valmont Industries, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. reported unaudited results for the thirteen and thirty-nine weeks ended September 29, 2018, compared with the periods ended September 30, 2017. The company operates through Engineered Support Structures, Utility Support Structures, Coatings, Irrigation and other activities.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | First 39 weeks 2018 | First 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $678.7 million | $680.8 million | $2,059.8 million | $2,031.0 million |
| Gross profit | $164.3 million | $163.6 million | $508.6 million | $511.5 million |
| Gross margin | 24.2% | 24.0% | 24.7% | 25.2% |
| Operating income | $38.4 million | $60.1 million | $166.0 million | $203.2 million |
| Operating margin | 5.7% | 8.8% | 8.1% | 10.0% |
| Net earnings attributable to Valmont | $4.4 million | $35.2 million | $76.7 million | $119.9 million |
| Diluted EPS | $0.20 | $1.55 | $3.40 | $5.28 |
Reported SG&A was $110.2 million in the quarter and $326.8 million year to date. Including the $15.8 million goodwill and intangible-asset impairment presented separately in the earnings statement, SG&A-related expenses were $126.0 million and $342.6 million, respectively. Net interest expense was approximately $10.0 million in the quarter and $30.1 million year to date.
Cash flow from operations was $68.1 million for the first 39 weeks, compared with $121.8 million in the prior-year period. Capital expenditures were $48.9 million; acquisitions used $125.3 million, while proceeds from asset sales were $64.8 million. Financing activities used $136.7 million, including $86.9 million for share repurchases and $25.4 million for dividends.
Cash and cash equivalents were $295.6 million at September 29, 2018, down from $492.8 million at December 30, 2017. Total interest-bearing debt was approximately $740.3 million, including $450.0 million of 5.00% notes due 2044 and $305.0 million of 5.25% notes due 2054. The company had no borrowings under its $600 million revolving credit facility and approximately $585.4 million of available capacity after letters of credit. It also had $120.3 million available under short-term bank lines. Management reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Third-quarter sales declined 0.3%, while year-to-date sales increased 1.4%. Pricing and mix increases largely offset lower volumes and unfavorable currency translation.
- Quarterly operating income declined 36.1% and year-to-date operating income declined 18.3%, primarily because of restructuring expenses, the offshore business impairment, higher corporate and acquisition-related costs, and the divestiture of the grinding media business.
- Coatings sales increased 10.0% in the quarter and 13.5% year to date; Irrigation sales declined 5.0% and 2.5%, respectively. ESS sales increased 1.5% and 6.2%, while Utility sales increased 7.1% and 1.8%.
- The company adopted ASC 606 using the modified retrospective method. For the first 39 weeks, reported sales and operating income were approximately $34.9 million and $4.7 million higher, respectively, than they would have been under the prior revenue model. The adoption increased contract assets and changed the timing of revenue recognition, particularly in Utility.
- The company issued $255.0 million of long-term notes in June 2018 and redeemed the $250.2 million of 2020 bonds in July. Refinancing costs were $14.8 million, including approximately $15.8 million of cash prepayment expenses.
Outlook, management commentary, risks and unusual items
- Management expects 2018 capital spending of approximately $70 million. No specific revenue or earnings guidance was provided in the filing.
- Management expects higher selling prices over time to offset higher steel costs. Higher steel and zinc prices reduced gross-profit performance, while tariffs and weak farm income contributed to uncertainty and delayed Irrigation purchases.
- The 2018 restructuring plan is expected to produce $27.0 million of pretax expenses, including approximately $8.0 million of asset impairments. The company recognized $17.7 million through the first 39 weeks, including $6.2 million in the third quarter.
- The company recorded a $14.4 million goodwill impairment and a $1.4 million trade-name impairment for the offshore and complex steel structures reporting unit. Management cited challenging Northern European wind markets, lack of protective tariffs, competitive pricing and lower projected cash flows.
- Donhad, the Australian grinding media business, was sold in April 2018. The company recorded a $6.1 million pretax loss, including the release of foreign-currency translation and hedge losses. A working-capital settlement with the buyer remained subject to finalization before year-end.
- The company acquired Walpar, Convert Italia and Derit in the third quarter and Torrent earlier in the year. These acquisitions required approximately $120.8 million of disclosed cash consideration, excluding contingent consideration and other transaction effects. Convert included an estimated $18.8 million contingent consideration liability.
- Goodwill and acquisition accounting remained subject to final purchase-price-allocation reviews. The company also acquired CSP Coating Systems of New Zealand on October 18, 2018, funded with cash on hand.
- Effective tax rates were 56.5% in the quarter and 30.5% year to date, compared with 27.5% and 28.9%. The quarterly increase primarily reflected the nondeductible offshore impairment. Tax estimates related to the 2017 Tax Cuts and Jobs Act remained provisional.
- Approximately $259.5 million of the company’s $295.6 million cash balance was held by non-U.S. subsidiaries. Repatriation could result in foreign withholding and U.S. state taxes. Currency translation losses reduced other comprehensive income by $50.8 million year to date.
- Management believes liquidity is adequate based on available credit facilities, recent debt issuance and positive operating cash flow. The company’s stated risks include cyclical markets, raw-material prices and availability, foreign exchange, tariffs, competition, customer demand, project delays, acquisition integration and estimates used for long-term contracts.
Important facts for investors to verify
- Assess underlying operating performance excluding the $17.7 million year-to-date restructuring charge, $15.8 million impairment, $14.8 million refinancing cost, acquisition costs and $6.1 million divestiture loss.
- Reconcile ASC 606’s effect on contract assets, revenue timing, earnings and future cash conversion, particularly in Utility.
- Review the decline in operating cash flow, the $125.3 million acquisition spending, $86.9 million share repurchases and reduced cash balance.
- Monitor leverage, covenant headroom, refinancing costs and the maturity profile of the new long-dated notes.
- Evaluate the offshore reporting unit’s continuing performance and the risk of further impairments, as well as restructuring execution and expected savings.
- Verify final purchase-price allocations, contingent consideration for Convert, the remaining Walpar purchase and the post-closing working-capital settlement for Donhad.
- Review provisional Tax Cuts and Jobs Act amounts, foreign cash concentration and potential repatriation taxes.