Valmont Industries, Inc. — Form 10-Q Summary
Reporting period: Thirteen and twenty-six weeks ended June 27, 2015, compared with the corresponding periods ended June 28, 2014. The interim financial statements are unaudited. Valmont operates through Engineered Infrastructure Products, Utility Support Structures, Coatings, Irrigation, and Other businesses.
Financial Performance and Position
| Metric | Q2 2015 | Q2 2014 | YTD 2015 | YTD 2014 |
|---|---|---|---|---|
| Net sales | $682.1 million | $842.6 million | $1,352.5 million | $1,594.3 million |
| Gross profit | $169.5 million | $220.5 million | $335.0 million | $427.5 million |
| Gross margin | 24.8% | 26.2% | 24.8% | 26.8% |
| Operating income | $54.0 million | $104.8 million | $111.7 million | $203.6 million |
| Operating margin | 7.9% | 12.4% | 8.3% | 12.8% |
| Net earnings attributable to Valmont | $27.9 million | $64.0 million | $58.6 million | $120.0 million |
| Diluted EPS | $1.19 | $2.38 | $2.47 | $4.46 |
| Operating cash flow | Not separately provided | Not separately provided | $118.3 million | $91.9 million |
- Segment sales: YTD net sales declined across all segments: EIP $488.3 million, Utility $338.7 million, Coatings $125.7 million, Irrigation $308.3 million, and Other $91.5 million.
- Liquidity: Cash and cash equivalents were $317.5 million at June 27, 2015, down from $371.6 million at December 27, 2014. Net working capital was $920.5 million versus $995.7 million at year-end.
- Debt: Total interest-bearing debt was $774.3 million, compared with $781.8 million at December 27, 2014. Long-term debt excluding current installments was $765.3 million. The company had no borrowings under its revolving credit facility and approximately $581.4 million of available capacity after standby letters of credit.
- Debt covenants: The leverage ratio was 2.39x against a 3.5x maximum, and the interest coverage ratio was 7.19x against a 2.5x minimum. The company was in compliance with its debt covenants.
- Capital allocation: YTD financing cash outflow was $146.8 million, including $121.0 million for treasury shares and $18.0 million of dividends paid. The company had repurchased approximately 3.7 million shares for $516.1 million as of June 27, 2015, with approximately $233.9 million remaining under the program.
- Capital expenditures: YTD capital spending was $24.8 million; management expected approximately $60 million for fiscal 2015.
Material Changes Versus the Prior Comparable Period
- Q2 net sales decreased 19.0% and YTD sales decreased 15.2%. Management attributed the decline primarily to lower volumes, unfavorable pricing and mix, foreign currency translation, and weaker market conditions.
- Q2 operating income fell 48.5% and YTD operating income fell 45.1%. Operating margin declined 450 basis points in Q2 and 450 basis points YTD.
- Q2 diluted EPS declined 50.0%; YTD diluted EPS declined 44.6%. Lower earnings were partly offset by a materially lower share count following repurchases.
- Foreign currency translation reduced Q2 sales by approximately $54.9 million and YTD sales by approximately $86.2 million. It reduced operating profit by approximately $5.4 million in Q2 and $7.7 million YTD.
- Acquisitions contributed approximately $21.1 million of Q2 sales and $53.7 million of YTD sales, primarily from Valmont SM, Shakespeare, and AgSense, but did not offset volume and currency declines.
- Operating performance weakened in every reportable segment. The largest YTD sales decline was in Irrigation, down 28.7%, followed by Utility Support Structures, down 20.5%.
- Net interest expense increased 58.3% YTD to $20.9 million, primarily due to additional long-term debt raised in 2014 and lower cash balances.
- Operating cash flow increased despite lower earnings, mainly because of improved working capital, including collections and income-tax-related cash flows.
Guidance, Outlook, Risks, and Unusual Items
- Restructuring: The board authorized a restructuring plan of up to $60 million. Management expected approximately $17 million of cash expenses and $13 million of asset impairments over the remainder of 2015. Q2 restructuring expense was $14.3 million, including $8.0 million in cost of sales and $6.3 million in SG&A.
- The company was evaluating additional restructuring actions that could produce up to $25 million of asset impairments and $5 million of cash expenses. Approximately $16 million of goodwill in the APAC Coatings reporting unit was subject to impairment risk if profitability did not improve.
- Management cited weak utility capital spending, competitive pricing, lower agricultural income and irrigation demand, reduced mining and oil-and-gas investment, postponed wind and oil-and-gas projects, and weaker international markets.
- Fiscal 2015 U.S. net farm income was expected by management to decline 32% from 2014 levels, contributing to lower irrigation demand.
- Steel-price volatility remains material; a hypothetical 20% change in steel prices would have affected Utility Support Structures YTD sales by approximately $30 million, assuming a similar sales mix.
- Management expected adequate liquidity based on cash, available credit facilities, positive operating cash flow, and recent debt issuance. The company intended to maintain an investment-grade debt rating, currently stated as Baa2 from Moody’s and BBB+ from Standard & Poor’s.
- Approximately $299.1 million of cash was held outside the United States, including $108.9 million at Delta Ltd., where pension-funding requirements may limit repatriation. The estimated tax cost of repatriating all foreign cash was approximately $21.9 million.
- The company reported a $1.7 million goodwill impairment related to a small EIP business being divested and a $5.0 million special dividend from Delta EMD, partly offset by a $4.6 million noncash trading-security loss.
- The filing identifies forward-looking risks involving market conditions, raw-material availability and pricing, product acceptance, competition, foreign exchange, government policies, operating efficiency, and cyclical demand. The filing does not provide formal full-year EPS or revenue guidance.
Important Facts for Investors to Verify
- Whether the restructuring program produces the expected cost savings and whether additional impairments, particularly in APAC Coatings, are recorded.
- Whether Utility, Irrigation, and EIP volumes recover, including the timing of utility transmission projects, agricultural demand, wind projects, and oil-and-gas orders.
- The sustainability of gross and operating margins after restructuring charges, currency effects, pricing pressure, and lower volumes.
- Progress and remaining authorization under the $750 million aggregate share-repurchase programs, along with the impact on leverage and liquidity.
- Foreign-currency exposure, overseas cash availability, pension-funding requirements, and potential tax costs of repatriation.
- Compliance with debt covenants and the company’s ability to maintain investment-grade ratings while funding buybacks, dividends, capital expenditures, and potential acquisitions.
- The eventual effect of newly issued revenue-recognition and inventory-accounting standards; the filing states that their financial impact had not yet been determined.