Valmont Industries, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. reported unaudited results for the thirteen weeks ended March 30, 2019, compared with the thirteen weeks ended March 31, 2018. The company operates through Engineered Support Structures, Utility Support Structures, Coatings, and Irrigation segments. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $692.1 million | $698.7 million | (0.9%) |
| Gross profit | $165.1 million | $169.2 million | (2.4%) |
| Gross margin | 23.9% | 24.2% | (30 bps) |
| SG&A expense | $110.0 million | $105.3 million | 4.5% |
| Operating income | $55.1 million | $64.0 million | (13.9%) |
| Operating margin | 8.0% | 9.2% | (120 bps) |
| Net earnings attributable to Valmont | $36.5 million | $39.3 million | (7.1%) |
| Diluted EPS | $1.66 | $1.72 | (3.5%) |
| Effective tax rate | 24.9% | 23.6% | 130 bps |
Segment net sales and operating income were: Engineered Support Structures, $228.0 million and $12.5 million; Utility Support Structures, $243.2 million and $25.1 million; Coatings, $70.2 million and $10.1 million; and Irrigation, $150.7 million and $20.1 million. The Other segment had no sales following the 2018 divestiture of the grinding media business.
Operating cash flow was $7.9 million, compared with $33.0 million in the prior-year quarter. Capital expenditures were $21.1 million, acquisitions used $57.1 million, and net investing cash outflow was $79.5 million. Financing cash outflow was $32.0 million, including $23.1 million to purchase a noncontrolling interest and $9.4 million for treasury shares. Cash declined to $211.2 million from $313.2 million at December 29, 2018.
At March 30, 2019, total interest-bearing debt was $762.2 million, including $741.6 million of long-term debt and $19.8 million of bank notes. The company reported $585.4 million of available capacity under its revolving credit facility and $118.8 million of unused short-term bank lines. The leverage ratio was 2.33 times adjusted EBITDA and the interest coverage ratio was 7.60 times; the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales declined modestly as lower Irrigation and discontinued Other sales offset growth in Utility, ESS, and Coatings.
- Irrigation sales fell 19.0% and operating income fell 40.7%, primarily because of lower international project volumes, weaker North American demand, tariff uncertainty, and fixed-cost deleverage.
- ESS sales increased 5.6% and operating income increased 81.2%, helped by pricing, acquisitions, restructuring benefits, and higher communications demand.
- Utility sales increased 15.9% and operating income increased 7.7%, supported by acquisitions, pricing actions related to steel costs, and improved mix.
- Coatings sales increased 2.5%, but operating income declined 15.1% because of lower volumes, weather-related disruption, acquisition-related costs, and a nonrecurring legal settlement.
- Higher SG&A included expenses from acquired businesses and higher deferred compensation expense. The deferred compensation increase was substantially offset by additional other income.
- Net interest expense decreased 7.1% following the retirement of $250.2 million of 6.625% notes due 2020 and issuance of lower-rate 2044 and 2054 notes in 2018.
- The company adopted ASC 842 lease accounting in fiscal 2019, recognizing $93.9 million of operating lease right-of-use assets and $103.6 million of lease liabilities. Adoption reduced retained earnings by approximately $8.9 million, including a $12.1 million impairment of a Melbourne, Australia lease asset.
Guidance, outlook, commentary, and risks
- Management expected fiscal 2019 capital spending of approximately $90 million.
- Management stated that available credit facilities, recent debt issuance, and positive operating cash flows provided adequate liquidity.
- Management expects to maintain leverage consistent with its investment-grade debt ratings: Moody’s Baa3, Fitch BBB-, and Standard & Poor’s BBB+.
- Key operating risks include cyclical demand, lower agricultural and international project activity, raw-material availability and pricing, steel and zinc costs, tariffs, foreign currency movements, weather disruptions, competitive pricing, and market acceptance of new products.
- The company identified challenging wind-energy and energy-transmission markets in Northern Europe as a prior impairment risk. In 2018, it recorded $14.4 million of goodwill impairment for the offshore and complex steel structures reporting unit.
- Approximately $144.0 million of the company’s $211.2 million cash balance was held by non-U.S. subsidiaries. Repatriation may create foreign withholding tax and U.S. state income tax costs.
- Acquisition purchase price allocations remained preliminary for United Galvanizing, Larson Camouflage, CSP Coatings, Walpar, and Convert, creating potential future changes to goodwill, intangible assets, and liabilities.
Most important facts for investors to verify
- Whether Irrigation demand, particularly international project activity and North American farmer purchases, recovers during the remainder of 2019.
- Whether ESS and Utility acquisition-related growth and restructuring benefits offset continued pressure on Coatings and agricultural markets.
- Progress toward the approximately $90 million capital-spending expectation and improvement in operating cash conversion.
- Debt covenant compliance, leverage, refinancing requirements, and available revolver capacity.
- Final purchase price allocations and operating performance of recent acquisitions, including United and Larson.
- Potential effects of tariffs, steel and zinc prices, foreign exchange, weather disruptions, and the company’s Northern European wind-energy exposure.
- Future impairment testing for goodwill, trade names, and lease assets, particularly in challenged businesses.
- Use of the remaining $257.9 million share-repurchase authorization and its effect on liquidity and share count.