Valmont Industries, Inc. — Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2018, consisting of 52 weeks. Valmont is a diversified global manufacturer of engineered metal products and services across Engineered Support Structures, Utility Support Structures, Coatings, and Irrigation. Approximately 34% of sales were sold in markets or produced by facilities outside North America.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $2,757.1 million | $2,746.0 million | 0.4% |
| Gross profit | $658.3 million | $681.8 million | (3.4)% |
| Gross margin | 23.9% | 24.8% | (90) bps |
| Operating income | $202.3 million | $267.1 million | (24.3)% |
| Operating margin | 7.3% | 9.7% | (240) bps |
| Net earnings attributable to Valmont | $94.4 million | $116.2 million | (18.8)% |
| Diluted EPS | $4.20 | $5.11 | (17.8)% |
| Operating cash flow | $153.0 million | $133.1 million | 14.9% |
| Adjusted EBITDA | $336.2 million | $352.0 million | (4.5)% |
- Segment sales and operating income: ESS sales were $967.4 million and operating income was $34.8 million; Utility sales were $855.2 million and operating income was $64.8 million; Coatings sales were $286.7 million and operating income was $55.3 million; Irrigation sales were $624.8 million and operating income was $97.7 million.
- Balance sheet: Cash and cash equivalents were $313.2 million, total assets were $2.53 billion, shareholders’ equity was $1.14 billion, and total interest-bearing debt was $753.3 million.
- Liquidity: The company had $579.7 million available under its $600 million revolving credit facility and $127.0 million of unused short-term bank lines. Leverage was 2.24x adjusted EBITDA versus a principal covenant limit of 3.50x, and the interest coverage ratio was 7.60x versus a minimum of 2.50x. The company reported compliance with all debt covenants.
- Cash deployment: Capital expenditures were $72.0 million, acquisitions used $143.0 million, dividends paid were $33.7 million, and treasury-share purchases were $114.8 million. The annual dividend declared remained $1.50 per share.
Material changes versus the prior comparable period
- Sales were broadly flat as higher ESS and Coatings sales offset lower Irrigation, Utility, and Other sales. Coatings was the only reportable segment with higher operating income.
- Profitability declined primarily because of higher steel and other raw-material costs, restructuring charges, goodwill and intangible-asset impairments, and higher selling, general and administrative expenses.
- Valmont recorded $34.0 million of pre-tax restructuring expense, including activities to close or consolidate seven facilities and exit certain local markets. Additional asset impairments related to those exits totaled approximately $7.9 million.
- The company recorded $15.8 million of goodwill and intangible-asset impairment related to the Offshore and other complex steel structures business.
- Debt was refinanced: Valmont issued $200 million of 5.00% senior notes due 2044 and $55 million of 5.25% senior notes due 2054, and redeemed $250.2 million of 2020 notes. Refinancing costs were $14.8 million pre-tax and $11.1 million after tax.
- Valmont completed acquisitions including Walpar, Convert Italia, Derit, Torrent, and CSP Coatings, with approximately $34.0 million of 2018 sales and $1.6 million of net earnings attributed to the acquired businesses. It also sold Donhad, recording a $6.1 million pre-tax loss.
- Adoption of ASC 606 increased reported 2018 sales by $36.4 million and operating income by $6.2 million, primarily in Utility, compared with results under the prior revenue-recognition method.
- Operating cash flow improved despite lower earnings, primarily because 2018 contributions to the Delta pension plan were substantially lower than in 2017.
Guidance, outlook, commentary, and risks
- Management expected fiscal 2019 capital expenditures of approximately $90.0 million and stated that available liquidity and positive operating cash flow were adequate for fiscal 2019 and beyond.
- Backlog was $644.7 million at year-end 2018, down from $670.0 million at year-end 2017. Management expected most of the 2018 backlog to be fulfilled in fiscal 2019.
- Management cited long-term opportunities in utility-grid investment, wireless-network densification and 5G, renewable energy and solar tracking, coatings, precision agriculture, and water-management technology.
- Key operating risks include cyclical infrastructure, utility, wireless, construction, mining, and agricultural markets; lower farm income; project delays; government infrastructure spending; volatile steel, aluminum, zinc, natural-gas, and fuel costs; tariffs and trade disputes; foreign-exchange movements; and intense competition.
- The Delta U.K. defined-benefit pension plan was underfunded by approximately $143.9 million at year-end. Scheduled annual funding was approximately $14.1 million, and a new funding plan was expected to be developed in 2019.
- Approximately $203.6 million of cash was held by non-U.S. subsidiaries, creating potential restrictions and tax costs if funds are repatriated. The company also disclosed a $11.6 million estimated contingent consideration liability related to Convert Italia.
- The filing identifies potential exposure from product warranties, complex utility contracts, guardrail-related litigation, environmental obligations, cybersecurity incidents, foreign operations, acquisitions, and debt covenant restrictions. No material legal proceedings were reported, and management did not expect known claims or environmental matters to have a material adverse effect.
Important facts for investors to verify
- Assess the sustainability of operating margins after excluding the $34.0 million restructuring charge, $15.8 million impairment, and other unusual items.
- Review the effect of ASC 606 on Utility revenue, contract assets, inventory, and future reported earnings.
- Monitor steel and other commodity prices, the company’s ability to recover cost increases through pricing, and the effect of tariffs.
- Evaluate backlog conversion, Utility and ESS demand, and the recovery of Irrigation sales in international markets.
- Track integration and performance of Walpar, Convert Italia, Derit, Torrent, and CSP Coatings, including final purchase-price allocations and contingent consideration.
- Review debt maturities, fixed-rate refinancing costs, covenant headroom, and the balance between acquisitions, dividends, share repurchases, and liquidity.
- Confirm the 2019 Delta pension funding plan and the potential effect of pension, foreign withholding, state-tax, and repatriation obligations.
- Consider the concentration of cash outside the United States and the effects of currency translation on earnings, cash, and equity.