Valmont Industries, Inc. — Form 10-Q Summary
Reporting period: Thirteen and twenty-six weeks ended June 30, 2018, compared with the corresponding periods ended July 1, 2017. Financial statements are unaudited. Valmont manufactures engineered structures, provides coatings services, and produces irrigation and water-management equipment.
Financial Performance and Position
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net sales | $682.4 million | $712.7 million | $1,381.1 million | $1,350.2 million |
| Gross profit | $175.0 million | $183.3 million | $344.2 million | $347.9 million |
| Gross margin | 25.6% | 25.7% | 24.9% | 25.8% |
| Operating income | $63.7 million | $78.5 million | $127.6 million | $143.1 million |
| Operating margin | 9.3% | 11.0% | 9.2% | 10.6% |
| Net earnings attributable to Valmont | $33.0 million | $45.7 million | $72.2 million | $84.6 million |
| Diluted EPS | $1.46 | $2.01 | $3.18 | $3.73 |
- Q2 sales declined 4.3%, operating income declined 18.9%, and diluted EPS declined 27.4%. First-half sales increased 2.3%, while operating income declined 10.8% and diluted EPS declined 14.7%.
- Net interest expense was $10.3 million in Q2 and $20.2 million for the first half. Effective tax rates were 29.3% and 26.4%, respectively, versus 30.8% and 29.4% in the comparable periods, reflecting the 2017 Tax Act.
- First-half operating cash flow was $53.7 million versus $55.7 million in 2017. Capital expenditures were $31.8 million versus $26.2 million; management expects approximately $70 million of capital spending for fiscal 2018.
- Cash and cash equivalents were $722.6 million at June 30, 2018, compared with $492.8 million at December 30, 2017. Net working capital was $1,108.5 million, compared with $1,069.6 million at year-end.
- Total interest-bearing debt was approximately $989.7 million at quarter-end, including $250.2 million of 6.625% notes due 2020, $450 million of 5.00% notes due 2044, and $305 million of 5.25% notes due 2054. The company had no borrowings under its $600 million revolving facility and approximately $585.3 million of availability after letters of credit.
- Leverage was 2.84 times adjusted EBITDA and interest coverage was 7.67 times. The company stated that it was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Segment performance: Q2 ESS sales increased 6.4% to $246.0 million, but operating income fell 36.0% to $13.0 million. Utility sales declined 6.3% to $196.5 million and operating income fell 6.7% to $20.9 million. Coatings sales increased 15.3% to $74.5 million and operating income increased 22.3% to $14.8 million. Irrigation sales declined 13.7% to $160.7 million and operating income declined 20.2% to $27.7 million.
- Lower volumes, especially in Utility and Irrigation, higher steel and other raw-material costs, higher LIFO expense, and restructuring charges reduced profitability. Pricing increases partially offset material-cost inflation.
- Valmont adopted ASC 606 using the modified retrospective method. The change increased first-half reported sales by approximately $22 million and operating income by approximately $2 million, primarily in Utility, compared with amounts under the prior revenue model.
- The company incurred restructuring expenses of $7.0 million in Q2 and $11.4 million in the first half, primarily in ESS and Utility. Management expects total 2018 restructuring costs of approximately $20 million, including approximately $5 million of asset impairments.
- On April 30, 2018, Valmont sold its Donhad grinding-media business for approximately $62.5 million of U.S.-dollar proceeds and recorded a pre-tax loss of $6.1 million, including accumulated currency-translation and hedge losses.
- Valmont issued $255 million of long-term notes in June 2018. After quarter-end, on July 9, 2018, it redeemed the $250.2 million of notes due 2020 at an estimated redemption price of approximately $266 million plus accrued interest. Approximately $14.8 million of redemption-related expense was expected in Q3 2018.
- Valmont acquired 60% of Torrent Engineering and Equipment for $4.8 million and acquired the remaining 10% interest in Valmont Industria e Commercio Ltda. for $5.5 million. It also repurchased 203,869 shares for $29.2 million during Q2 and had approximately $88.2 million remaining under its repurchase authorization.
Outlook, Commentary, Risks, and Unusual Items
- No specific full-year revenue or earnings guidance is provided in the filing. Management expects approximately $70 million of 2018 capital spending and believes available cash, credit facilities, recent debt issuance, and operating cash flow provide adequate liquidity.
- Management expects selling prices to increase over time to offset higher steel costs, but profitability remains exposed to raw-material prices, volumes, product mix, and operating leverage.
- Irrigation demand was affected by weak farm income, project delays, lower international project activity, proposed tariffs, and a truckers’ strike in Brazil. ESS faced weaker Chinese demand for lighting, traffic, and wireless communication products.
- The company is exposed to cyclical markets, foreign-currency movements, commodity prices, competitive conditions, government policies, and the availability and market acceptance of products. Forward-looking statements are not guarantees of performance.
- Approximately $368.2 million of the $722.6 million cash balance was held in non-U.S. subsidiaries. The company recorded deferred taxes for potential foreign withholding and U.S. state taxes related to foreign earnings; estimates may change as tax guidance and planning develop.
- Accumulated other comprehensive loss increased to $311.2 million from $279.0 million at year-end, primarily reflecting foreign-currency translation losses and hedge activity.
- The company expects adoption of the new lease standard in 2019 to significantly increase reported assets and liabilities, although the filing does not quantify the effect.
Investor Verification Checklist
- Verify the effect of ASC 606 on revenue timing, contract assets, earnings, and comparability with future periods.
- Track restructuring spending against the approximately $20 million 2018 plan and assess whether expected savings offset the charges.
- Assess the effect of steel, zinc, and other input-cost inflation and the company’s ability to recover those costs through pricing.
- Review the Q3 impact of the July 2020-note redemption, including the approximately $14.8 million estimated redemption-related expense and resulting interest savings.
- Monitor Irrigation and ESS volumes, including farm economics, tariffs, project delays, and Chinese demand.
- Evaluate leverage, covenant compliance, debt maturities, and liquidity after the refinancing and redemption transactions.
- Reassess tax exposures related to foreign cash and unremitted foreign earnings as the 2017 Tax Act accounting estimates are finalized.