VALMONT INDUSTRIES, INC. Management's discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that management has made in light of experience in the industries in which the Company operates, as well as management's perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond the Company's control) and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions. Many factors could affect the Company's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include, among other things, the continuing and developing effects of COVID-19 including the effects of the outbreak on the general economy and the specific effects on the Company's business and that of its customers and suppliers, risk factors described from time to time in the Company's reports to theSecurities and Exchange Commission , as well as future economic and market circumstances, industry conditions, company performance and financial results, operating efficiencies, availability and price of raw materials, availability and market acceptance of new products, product pricing, domestic and international competitive environments, and actions and policy changes of domestic and foreign governments. This discussion should be read in conjunction with the financial statements and notes thereto, and the management's discussion and analysis included in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 . Segment net sales in the table below and elsewhere are presented net of intersegment sales. See Note 10 of our condensed consolidated financial statements for additional information on segment sales and intersegment sales. 23 --------------------------------------------------------------------------------
Results of Operations (Dollars in millions, except per share amounts)
Thirteen weeks ended
% Incr.
March 28, 2020 March 30, 2019 (Decr.)
Consolidated
Net sales $ 674.2 $ 692.1 (2.6) %
Gross profit 186.2 164.6 13.1 %
as a percent of sales 27.6 % 23.8 %
SG&A expense 119.3 110.0 8.5 %
as a percent of sales 17.7 % 15.9 %
Operating income 66.9 54.6 22.5 %
as a percent of sales 9.9 % 7.9 %
Net interest expense 9.0 9.1 (1.1) %
Effective tax rate 25.2 % 24.9 %
Net earnings $ 42.9 $ 36.1 18.8 %
Diluted earnings per share $ 1.99 $ 1.64 21.3 %
Engineered Support Structures (ESS)
Net sales $ 227.4 $ 228.0 (0.3) %
Gross profit 61.7 51.9 18.9 %
SG&A expense 45.8 39.4 16.2 %
Operating income 15.9 12.5 27.2 %
Utility Support Structures (Utility)
Net sales $ 222.9 $ 243.2 (8.3) %
Gross profit 53.5 48.7 9.9 %
SG&A expense 25.8 23.6 9.3 %
Operating income 27.7 25.1 10.4 %
Coatings
Net sales $ 68.6 $ 70.2 (2.3) %
Gross profit 21.8 20.6 5.8 %
SG&A expense 10.7 10.5 1.9 %
Operating income 11.1 10.1 9.9 %
Irrigation
Net sales $ 155.3 $ 150.7 3.1 %
Gross profit 49.2 43.4 13.4 %
SG&A expense 25.5 23.3 9.4 %
Operating income 23.7 20.1 17.9 %
Net corporate expense
SG&A $ 11.5 $ 13.2 (12.9) %
Operating loss (11.5) (13.2) 12.9 %
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Overview
On a consolidated basis, net sales were lower in the first quarter of 2020, as
compared to 2019, due to lower sales in the ESS, Utility, and Coatings segments
offset by higher sales for the Irrigation segment. The change in net sales in
the first quarter of fiscal 2020, as compared with the first fiscal quarter of
2019, is as follows:
First quarter
Total ESS Utility Coatings Irrigation
Sales - 2019 $ 692.1 $ 228.0 $ 243.2 $ 70.2 $ 150.7
Volume (6.9) 2.2 (21.3) 0.6 11.6
Pricing/mix (0.2) 1.2 1.7 (0.8) (2.3)
Acquisition/(divestiture) (0.6) 1.4 - - (2.0)
Currency translation (10.2) (5.4) (0.7) (1.4) (2.7)
Sales - 2020 $ 674.2 $ 227.4 $ 222.9 $ 68.6 $ 155.3
Volume effects are estimated based on a physical production or sales measure.
Since products we sell are not uniform in nature, pricing and mix relate to a
combination of changes in sales prices and the attributes of the product sold.
Accordingly, pricing and mix changes do not necessarily result in operating
income changes.
Average steel prices for both hot rolled coil and plate were lower in
The Company acquired the following businesses:
•Larson Camouflage ("Larson") in the first quarter of 2019, an industry leading
provider of architectural and camouflage concealment solutions for the wireless
telecommunication market (ESS).
•United Galvanizing ("United") in the first quarter of 2019, a domestic coatings
provider (Coatings).
•Connect-It Wireless, Inc. ("Connect-It") in the second quarter of 2019, a
domestic communication components business (ESS).
•In the first quarter of 2020, we acquired the remaining 49% of AgSense that the
Company did not own (Irrigation).
•In the first quarter of 2020, we acquired 16% of the remaining 25% of Convert
Italia that the Company did not own (Utility).
COVID-19 Impact on Financial Results and Liquidity
We are considered an essential business because of the products and services that serve critical infrastructure sectors as defined by many governments around the world. Our manufacturing facilities inArgentina ,France ,India ,Malaysia ,New Zealand ,Philippines , andSouth Africa are closed as ofApril 28, 2020 due to government mandates but are expected to re-open duringMay 2020 . All others facilities remain open and fully operational. To protect the safety, health and well-being of employees, customers, suppliers and communities,CDC and WHO guidelines are being followed to ensure employee safety in all facilities. We estimate approximately$4.0 million of net sales were not recognized during first quarter of 2020 due to the impacts of facility closures from COVID-19. We generated positive cash flows from operating activities during the first quarter of 2020 and expect positive cash flows from operating activities for the full fiscal 2020 year. Our main focus is to maintain liquidity to support the working capital needs of our operations and maintain our investment grade credit rating. •Our capital spending for the 2020 fiscal year has been reduced from the previously announced approximately$100 million to$125 million to approximately$75 to$90 million . •We have suspended repurchase of shares to preserve financial liquidity until the COVID-19 impact is clearer. As a result of the evolving impact of COVID-19 on the global economy, we anticipate and are planning for slowdown in customer demand and increased business disruption, primarily beginning in the second quarter. As a result, we expect second quarter net sales in 2020 to be lower than 2019 by approximately$50 million ; the primary reportable segments 25 -------------------------------------------------------------------------------- expected to see a decrease are Coatings and Irrigation. Operating income and specifically operating margin, is expected to be lower than the same period of 2019 as a result of the lower sales. The ultimate magnitude of COVID-19, including the extent of its impact on the Company's financial and operational results, cash balances and available borrowings on our line of credit, will be determined by the length of time the pandemic continues, its effect on the demand for the Company's products and services and supply chain, as well as the effect of governmental regulations imposed in response to the pandemic.
Currency Translation
In the first quarter of 2020, we realized a decrease in operating profit, as
compared with 2019, due in part to currency translation effects associated with
a stronger U.S. dollar against most foreign currencies. The breakdown of this
effect by segment was as follows:
Total ESS Utility Coatings Irrigation Corporate
First quarter $ (0.7) $ (0.3) $ - $ (0.2) $ (0.3) $ 0.1 Gross Profit, SG&A, and Operating Income
At a consolidated level, gross margin (gross profit as a percent of sales)
was higher in the first quarter of 2020, as compared with the same period in
2019, due to lower raw material costs across the Company, improved selling
prices across our infrastructure businesses, and improved volumes for the
Irrigation segment and associated operating leverage of fixed costs. Gross
margin improved for all operating segments.
SG&A expenses increased in the first quarter of 2020, as compared to the
same period in 2019. The increase was due to higher compensation related costs,
including sales commissions for the North American infrastructure businesses,
higher incentives due to improved operations, and salary merit increases. These
increases were partially offset by lower SG&A deferred compensation expense
(offset by an increase of the same amount in other expense).
In the first quarter of 2020, as compared to the same periods in 2019,
operating income was higher in all reporting segments. The overall increase in
operating income in the first quarter can be attributed to lower raw material
costs, improved sales pricing for the infrastructure businesses, and improved
sales volumes in the Irrigation segment.
Net Interest Expense and Debt
Net interest expense in the first quarter of 2020 was consistent with the
first quarter of 2019. Interest income was higher in the first quarter of 2020,
as compared to 2019, due to having more cash on hand to invest.
Other Income/Expenses
The change in other income/expenses in the first quarter of 2020, as
compared to 2019, was due to the change in valuation of deferred compensation
assets which resulted in less other income of $5.1 million . The change related
to deferred compensation assets are offset by an opposite change of the same
amount in SG&A expense. The remaining change was due to fluctuations in foreign
currency transaction gains/losses.
Income Tax Expense
The Company's income tax rate in the first quarter of 2020 was consistent
with the same period in 2019. Our effective income tax rate in the first quarter
of 2020 was 25.2%, compared to 24.9% in the first quarter of 2019.
Earnings attributable to noncontrolling interests was lower in the first
quarter of 2020, as compared to 2019. The decrease can be attributed to the
acquisition of the remaining noncontrolling interests of AgSense and partial
acquisition of the noncontrolling interest of Convert in the first quarter of
2020.
26
--------------------------------------------------------------------------------Cash Flows from Operations
Our cash flows provided by operations was $62.4 million in the first quarter
of fiscal 2020, as compared with $7.9 million provided by operations in the
first quarter of 2019. The increase in operating cash flow in the first quarter
of 2020, as compared with 2019, was due to improved working capital management.
The lower working capital is primarily attributed to a larger contract liability
for customer billings in excess of costs and earnings.
ESS segment
Net sales were consistent in the first quarter 2020 and 2019. Lighting, traffic, and highway sales improved due to increased volumes, which were offset by lower sales volumes for access systems and communication products and unfavorable foreign currency translation effects.
Global lighting and traffic, and highway safety product sales in the first
quarter of 2020 was higher by $14.8 million , as compared to the same period in
fiscal 2019. Sales volumes improved in North America across commercial and
transportation markets, in addition to some improvements in pricing. Lower sales
volumes due to the ceasing of operations in Morocco , the plant shutdown in
France due to COVID-19, and unfavorable foreign currency translation effects
contributed to lower sales in Europe. Highway safety product sales volumes
decreased in the first quarter of 2020, as compared to 2019, due primarily to
fewer projects in India .
Communication product line sales were lower by $4.7 million in the first quarter
of 2020, as compared with 2019. In North America , component and structure sales
volumes decreased in the first quarter of 2020 due to lower demand from the
network expansion by providers. The decrease in volumes was partially offset by
the acquisition of Connect-It. In Asia-Pacific , sales volumes decreased
approximately $2 million due to government mandated plant closures in China due
to COVID-19.
Access Systems product line net sales decreased in the first quarter of 2020, as
compared to 2019, by $9.7 million . Sales volumes declined due to fewer large
projects and unfavorable foreign currency translation for the Australia
business.
Gross profit, as a percentage of sales, and operating income for the segment
were higher in the first quarter of 2020, as compared to 2019, due to lower raw
material pricing across the segment and sales volume improvements in the U.S.
lighting and traffic businesses. SG&A spending was higher in the first quarter
of 2020 due to higher sales commissions and incentives due to improved
operations in North America . Operating income improved due to lower raw material
pricing for all businesses and sales volume improvements in North America .
Utility segment
In the Utility segment, sales decreased in the first quarter of 2020, as
compared with 2019, due to lower volumes in our engineered solar tracker
solutions (Solar) and Offshore and other complex steel structures (Offshore)
business. Sales volumes for steel and concrete structures in North America were
higher in the first quarter of 2020, while sales pricing slightly increased. A
number of our sales contracts in North America contain provisions that tie the
sales price to published steel index pricing at the time our customer issues
their purchase order.
Offshore and Solar sales decreased in the first quarter of 2020, as compared
to 2019, due to lower volumes and unfavorable currency translation effects. The
decrease for both businesses can be attributed to large projects in the prior
year that did not recur.
Gross profit increased in the first quarter of 2020, as compared to 2019,
due to lower costs of steel and higher volumes and associated operating leverage
of fixed costs for the North America businesses. SG&A expense was higher in the
first quarter of 2020, as compared with 2019, due to higher sales commissions
and incentives due to improved operating results. Operating income increased due
to improved sales volumes and operations in North America and lower raw material
costs, partially offset by a slower start to the year for the Offshore and Solar
businesses .
Coatings segment
Coatings segment sales decreased in the first quarter of 2020, as compared
to the same period in 2019, due to unfavorable currency translation effect and
slightly lower average sales pricing in Asia Pacific , attributed to the lower
cost of zinc. Sales volumes increased modestly in North America in the first
quarter of 2020, as compared to 2019. In Asia-Pacific
27
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region, sales volumes improved in
SG&A expense was consistent in the first quarter of 2020, as compared to
2019. Operating income was higher in the first quarter 2020, compared to the
same period in 2019, due to sales volume increases in North America and
Australia and lower raw material pricing. The increase was partially offset by
lower volumes and associated operating deleverage of fixed costs for the India
businesses.
Irrigation segment
The increase in Irrigation segment net sales in the first quarter of 2020,
as compared to 2019, is primarily due to sales volume increases in international
markets. Brazil and the Middle East drove the sales volume improvements that
were partially offset by unfavorable currency translation effects from a weaker
Brazil real and South African rand. Sales volumes increased in North America ,
primarily due to increased service part sales that were lower in 2019 due to the
floods. Sales of technology-related products and services continue to grow, as
growers are increasing adoption of technology to reduce costs and enhance
profitability.
SG&A was higher in the first quarter of 2020, as compared to 2019, due to
higher product development expenses. Operating income for the segment increased
in the first quarter of 2020 over the same period in 2019, as a result of lower
raw material costs and higher sales volumes in international markets.
Net corporate expense
Corporate SG&A expense was lower in the first quarter of 2020, as compared to
the first quarter of 2019, due to a change in valuation of deferred compensation
assets which resulted in lower expense of $5.1 million . The change in deferred
compensation plan assets is offset by the same amount in other income/expenses.
Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows-Net working capital was $853.2 million
at March 28, 2020 , as compared to $918.4 million at December 28, 2019 . The
decrease in net working capital in 2020 is attributed to an increase in contract
liability for customer billings in excess of costs and earnings of $33.1
million . Cash flow provided by operations was $62.4 million in the first quarter
of 2020, as compared with $7.9 million in first quarter of 2019. The increase in
operating cash flows in the first quarter of 2020, as compared to 2019, was
primarily the result of improved working capital management.
Investing Cash Flows-Capital spending in the first quarter of fiscal 2020 was
$23.6 million , as compared to $21.1 million for the same period in 2019. The
decrease in investing cash outflows in the first quarter of 2020, as compared to
2019, can be attributed to a reduction in cash paid for acquisitions.
Financing Cash Flows-Our total interest-bearing debt was $796.6 million at
March 28, 2020 and $787.5 million at December 28, 2019 . Financing cash flows
changed from an outflow of $32.0 million in the first quarter of 2019 to an
outflow of $80.9 million for the first quarter of 2020. The increase in
financing cash outflows in the first quarter of 2020, as compared to 2019, was
due to the higher purchase price of noncontrolling interests and repurchases of
company shares.
Guarantor Summarized Financial Information
We are providing the following information in compliance with Rule 3-10 and Rule
13-01 of Regulation S-X with respect to our two tranches of senior unsecured
notes. All of the senior notes are guaranteed, jointly, severally, fully and
unconditionally (subject to certain customary release provisions, including sale
of the subsidiary guarantor, or sale of all or substantially all of its assets)
by certain of the Company's current and future direct and indirect domestic and
foreign subsidiaries (collectively the "Guarantors"). The Parent is the Issuer
of the notes and consolidates all Guarantors.
The financial information of Issuer and Guarantors is presented on a combined
basis with intercompany balances and transactions between Issuer and Guarantors
eliminated. The Issuer's or Guarantors' amounts due from, amounts due to, and
transactions with non-guarantor subsidiaries are separately disclosed.
28
--------------------------------------------------------------------------------Combined financial information is as follows:
Supplemental Combined Parent and Guarantors Financial Information
For the Thirteen weeks endedMarch 28, 2020 and Thirteen weeks ended March 30, 2019 Thirteen weeks ended Dollars in thousands March 28,2020 March 30, 2019 Net sales$ 467,680 $ 434,007 Gross Profit 135,235 109,570 Operating income 59,134 44,614 Net earnings 36,325 28,873 Net earnings attributable to Valmont Industries, Inc. 36,325 28,873 Supplemental Combined Parent and Guarantors Financial Information March 28, 2020 and December 28, 2019 Dollars in thousands March 28,2020 December 28, 2019 Current assets$ 775,428 $ 728,457 Noncurrent assets 358,663 354,173 Current liabilities 356,658 312,984 Noncurrent liabilities 1,070,925 1,076,491 Noncontrolling interest in consolidated subsidiaries 1,600 - Included in noncurrent assets is a due from non-guarantor subsidiaries receivable of$59,462 and$54,915 atMarch 28, 2020 andDecember 28, 2019 . Included in noncurrent liabilities is a due to non-guarantor subsidiaries payable of$227,340 and$249,056 atMarch 28, 2020 andDecember 28, 2019 . Financing and Capital The Board of Directors authorized the purchase of$250 million of the Company's shares without an expiration date inOctober 2018 . The share purchases will be funded from available working capital and short-term borrowings and will be made subject to market and economic conditions. We are not obligated to make any share repurchases under the share repurchase program and we may discontinue the share repurchase program at any time. We acquired 190,491 treasury shares for approximately$20.5 million under our share repurchase program during the first quarter of 2020. As ofMarch 28, 2020 , we have approximately$184.0 million open under this authorization to repurchase shares in the future. We have suspended repurchase of shares to preserve financial liquidity until the COVID-19 impact is clearer. Our capital allocation philosophy announcement included our intention to manage our capital structure to maintain our investment grade debt rating. Our most recent ratings were Baa3 byMoody's Investors Services, Inc. , BBB- rating by Fitch Rating Services, and BBB+ rating byStandard and Poor's Rating Services . We expect to maintain a leverage ratio which will support our current investment grade debt rating. 29 -------------------------------------------------------------------------------- Our debt financing atMarch 28, 2020 is primarily long-term debt consisting of: •$450 million face value ($436.4 million carrying value) of senior unsecured notes that bear interest at 5.00% per annum and are due inOctober 2044 . •$305 million face value ($297.6 million carrying value) of unsecured notes that bear interest at 5.25% per annum and are due inOctober 2054 . •We are allowed to repurchase the notes at specified prepayment premiums. Both tranches of these notes are guaranteed by certain of our subsidiaries. AtMarch 28, 2020 andDecember 28, 2019 , we had$40.1 million and$29.0 million outstanding borrowings under our revolving credit agreement, respectively. The revolving credit agreement contains certain financial covenants that may limit our additional borrowing capability under the agreement. AtMarch 28, 2020 , we had the ability to borrow$544.6 million under this facility, after consideration of standby letters of credit of$15.3 million associated with certain insurance obligations and international sales commitments. We also maintain certain short-term bank lines of credit totaling$129.2 million ,$109.5 million of which was unused atMarch 28, 2020 . At the beginning of the second quarter of 2020, the Company drew down$75.0 million on its revolving credit facility to ensure sufficient liquidity related to COVID-19 uncertainty. Our senior unsecured notes and revolving credit agreement each contain cross-default provisions which permit the acceleration of our indebtedness to them if we default on other indebtedness that results in, or permits, the acceleration of such other indebtedness. The debt agreements contain covenants that require us to maintain certain coverage ratios and may limit us with respect to certain business activities, including capital expenditures. The debt agreements allow us to add estimated EBITDA from acquired businesses for periods we did not own the acquired business. The debt agreements also provide for an adjustment to EBITDA, subject to certain limitations, for non-cash charges or gains that are non-recurring in nature. Our key debt covenants are as follows: •Leverage ratio - Interest-bearing debt is not to exceed 3.5X Adjusted EBITDA (or 3.75X Adjusted EBITDA after certain material acquisitions) of the prior four quarters; and •Interest earned ratio - Adjusted EBITDA over the prior four quarters must be at least 2.5X our interest expense over the same period. AtMarch 28, 2020 , we were in compliance with all covenants related to the debt agreements. The key covenant calculations atMarch 28, 2020 were as follows (in 000's): Interest-bearing debt$ 796,615 Adjusted EBITDA-last four quarters 335,625 Leverage ratio 2.37 Adjusted EBITDA-last four quarters$ 335,625 Interest expense-last four quarters 40,289 Interest earned ratio 8.33 30 -------------------------------------------------------------------------------- The calculation of Adjusted EBITDA-last four quarters (March 31, 2019 throughMarch 28, 2020 ) is as follows. The last four quarters information endedMarch 28, 2020 is calculated by taking the full fiscal year endedDecember 28, 2019 , subtracting the first quarter endedMarch 30, 2019 , and adding the first quarter endedMarch 28, 2020 . Net cash flows from operations$ 362,053 Interest expense 40,289 Income tax expense 52,390 Gain on investment 227 Deferred income tax benefit (2,455) Noncontrolling interest (4,515) Stock-based compensation (11,242) Pension plan expense 2,144 Contribution to pension plan 21,557 Changes in assets and liabilities (126,836) Other 2,013 EBITDA 335,625 Adjustments - Adjusted EBITDA$ 335,625
Net earnings attributable to
40,289
Income tax expense 52,390
Depreciation and amortization expense 82,353
EBITDA 335,625
Adjustments -
Adjusted EBITDA $ 335,625
Our businesses are cyclical, but we have diversity in our markets from a
product, customer and a geographical standpoint. We have demonstrated the
ability to effectively manage through business cycles and maintain liquidity. We
have consistently generated operating cash flows in excess of our capital
expenditures. Based on our available credit facilities, recent issuance of
senior unsecured notes and our history of positive operational cash flows, we
believe that we have adequate liquidity to meet our needs.
We have cash balances of $294.6 million at March 28, 2020 , approximately
$145.9 million is held in our non-U.S. subsidiaries. If we distributed our
foreign cash balances certain taxes would be applicable. At March 28, 2020 , we
have a liability for foreign withholding taxes and U.S. state income taxes of
$3.4 million and $0.6 million , respectively.
Financial Obligations and Financial Commitments
There have been no material changes to our financial obligations and
financial commitments as described on page 34-35 in our Form 10-K for the fiscal
year ended December 28, 2019 .
Off Balance Sheet Arrangements
There have been no material changes in our off balance sheet arrangements as
described on page 35 in our Form 10-K for the fiscal year ended December 28,
2019 .
31
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Critical Accounting Policies
There were no changes in our critical accounting policies as described on pages
37-40 in our Form 10-K for the fiscal year ended December 28, 2019 during the
three months ended March 28, 2020 , with the exception of the change in method of
accounting for certain inventory, previously accounted for on the LIFO basis, so
that now all inventory is valued on the FIFO basis.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in the company's market risk during the
quarter ended
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