Valmont Industries, Inc. — 2017 Q2 Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. designs and manufactures engineered metal and concrete structures, coatings, irrigation equipment, and related products and services. The unaudited filing covers the thirteen and twenty-six weeks ended July 1, 2017, compared with the corresponding periods ended June 25, 2016.
Reportable segments are Engineered Support Structures, Energy and Mining, Utility Support Structures, Coatings, and Irrigation.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Change | First half 2017 | First half 2016 | Change |
|---|---|---|---|---|---|---|
| Net sales | $712.7 million | $640.2 million | 11.3% | $1,350.2 million | $1,236.9 million | 9.2% |
| Gross profit | $183.3 million | $175.1 million | 4.7% | $347.9 million | $336.1 million | 3.5% |
| Gross margin | 25.7% | 27.4% | Down 170 bps | 25.8% | 27.2% | Down 140 bps |
| Operating income | $78.3 million | $71.8 million | 9.1% | $142.8 million | $134.2 million | 6.4% |
| Operating margin | 11.0% | 11.2% | Down 20 bps | 10.6% | 10.8% | Down 20 bps |
| Net earnings attributable to Valmont | $45.7 million | $42.0 million | 8.8% | $84.6 million | $75.0 million | 12.8% |
| Diluted EPS | $2.01 | $1.85 | 8.6% | $3.73 | $3.29 | 13.4% |
Product sales were $632.5 million in the quarter and $1,205.5 million year to date. Services sales were $80.2 million and $144.8 million, respectively. Net interest expense was $9.9 million in the quarter and $20.2 million year to date. Effective tax rates were 30.8% for the quarter and approximately 29.5% for the first half, compared with 30.6% and 31.3% in the prior-year periods.
Cash flow, balance sheet, debt, and liquidity
- Operating cash flow was $68.3 million in the first half of 2017, compared with $79.9 million in the prior-year period. The decline primarily reflected higher receivables and inventories associated with increased sales volumes.
- Capital expenditures were $26.2 million, compared with $26.0 million in the first half of 2016. Management expects approximately $65 million of capital spending for fiscal 2017.
- Cash and cash equivalents were $448.2 million at July 1, 2017, up from $399.9 million at December 31, 2016. Approximately $349.6 million was held outside the United States.
- Net working capital was $1,002.2 million, compared with $903.4 million at year-end 2016.
- Total interest-bearing debt was $755.7 million, slightly below $756.4 million at December 31, 2016. Long-term debt consisted primarily of three senior unsecured note tranches with face values of approximately $250 million each, bearing interest rates of 6.625%, 5.00%, and 5.25%, and maturing in 2020, 2044, and 2054.
- No borrowings were outstanding under the revolving credit agreement. Availability was $585.3 million after standby letters of credit. The company also had $112.4 million of short-term bank lines, of which $112.0 million was unused.
- The company was in compliance with its debt covenants. Reported leverage was 2.25 times adjusted EBITDA versus a 3.5-times limit, and adjusted EBITDA covered interest expense by 8.02 times versus a 2.5-times minimum.
- Dividends declared were $0.375 per share in the quarter and $0.750 per share year to date. No shares were repurchased during the first half; approximately $132.2 million remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Sales growth was driven primarily by higher volume and pricing/mix. Second-quarter volume contributed approximately $50.6 million of sales growth and pricing/mix contributed $24.6 million; currency translation reduced sales by $2.7 million.
- Utility Support Structures sales increased 21.4% in the quarter and 21.2% year to date, while operating income increased 14.8% and 34.1%, respectively, reflecting stronger North American demand and higher steel-structure volumes.
- Irrigation sales increased 23.7% in the quarter and 14.4% year to date. Operating income increased 11.9% and 8.5%, respectively, due primarily to higher North American and international volumes, productivity improvements, and favorable currency effects.
- Energy and Mining operating income increased 21.2% in the quarter and 50.0% year to date, despite a second-quarter sales decline, benefiting from lower compensation costs and restructuring benefits.
- Engineered Support Structures operating income declined 2.9% in the quarter and 11.7% year to date. Coatings operating income declined 13.6% and 15.4%, respectively. Both segments faced margin pressure from higher raw-material costs; Coatings also incurred Texas facility start-up costs and adverse sales mix.
- Consolidated gross margin declined because higher steel and other raw-material costs were not fully recovered through pricing. Lower LIFO expense partly offset the pressure.
- A favorable resolution of a U.K. tax matter provided a net non-recurring tax benefit of approximately $2.0 million in the first half of 2017.
- Comprehensive income attributable to Valmont increased to $125.2 million from $73.8 million year to date, primarily because of foreign-currency translation gains.
Guidance, outlook, risks, and unusual items
- The filing provides capital-spending guidance of approximately $65 million for fiscal 2017 but does not provide clear consolidated revenue or earnings guidance.
- Management stated that liquidity is adequate based on available credit facilities, positive operating cash flow, and the company’s investment-grade capital structure. Moody’s rating was Baa3 and Standard & Poor’s rating was BBB+.
- The businesses are cyclical and exposed to economic conditions, demand fluctuations, competition, raw-material availability and prices, product pricing, foreign-exchange movements, and government policies.
- Management identified higher steel and zinc costs, sales mix, weaker European and North American demand in certain businesses, and continued weakness in offshore oil and gas markets as operating considerations.
- The offshore and other complex steel structures reporting unit had approximately $14.2 million of goodwill and the least valuation cushion in the 2016 impairment analysis. Management continues to monitor its backlog, sales, profitability, and global economic conditions.
- Approximately $481.1 million of undistributed foreign earnings had not been provided for U.S. taxes because management intends to reinvest the earnings. Potential taxes on repatriation were not quantified because the determination was not practicable.
- The company expects to adopt the revenue-recognition standard in ASC 606 using the modified retrospective method on January 1, 2018. The company was assessing the effect on certain custom-engineered products, including possible recognition over time. The adoption was not expected to materially affect other segments.
- The company expects lease accounting changes to significantly increase reported assets and liabilities when adopted. No material changes in market risk, off-balance-sheet arrangements, financial commitments, or critical accounting policies were reported.
- Management concluded that disclosure controls and procedures were effective as of July 1, 2017, and reported no material changes in internal control over financial reporting.
Facts investors should verify
- Whether higher raw-material costs continue to compress gross margins and whether pricing actions fully recover those costs.
- Utility Support Structures and Irrigation demand, order volumes, backlog, and sustainability of their 2017 operating-income growth.
- Recovery prospects for Engineered Support Structures, Coatings, European markets, and offshore-related businesses.
- Progress and final balance-sheet and revenue-recognition effects from adoption of ASC 606 and the new lease standard.
- Foreign-cash accessibility and any tax consequences if overseas cash is repatriated.
- Compliance with leverage and interest-coverage covenants, debt maturities, and continued availability under the revolving credit facility.
- Whether goodwill valuation assumptions for the offshore and complex steel structures reporting unit remain supportable.