Valmont Industries, Inc. — Fiscal 2014 Form 10-K Summary
Business context and reporting period
Valmont is a diversified global manufacturer of engineered metal and composite structures, utility support structures, irrigation equipment, and metal-coating services. Reportable segments are Engineered Infrastructure Products, Utility Support Structures, Coatings, and Irrigation, with additional operations reported as Other. The filing covers the 52-week fiscal year ended December 27, 2014; the comparable prior year ended December 28, 2013.
Approximately 41% of 2014 sales were sold in markets or produced by facilities outside North America. The company operated more than 100 manufacturing plants on six continents and employed 11,321 people at year-end.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $3,123.1 million | $3,304.2 million | (5.5%) |
| Gross profit | $808.1 million | $945.2 million | (14.5%) |
| Gross margin | 25.9% | 28.6% | Down 270 bps |
| Operating income | $357.7 million | $473.1 million | (24.4%) |
| Operating margin | 11.5% | 14.3% | Down 280 bps |
| Net earnings attributable to Valmont | $184.0 million | $278.5 million | (33.9%) |
| Diluted EPS | $7.09 | $10.35 | (31.5%) |
| Cash flow from operations | $174.1 million | $396.4 million | (56.1%) |
| Capital expenditures | $73.0 million | $106.8 million | (31.6%) |
| EBITDA | $413.7 million | $546.2 million | (24.3%) |
Year-end cash and cash equivalents were $371.6 million versus $613.7 million in 2013. Working capital was $995.7 million versus $1,161.3 million. Total interest-bearing debt increased to $781.8 million from $490.1 million, while total assets were $2.73 billion and Valmont shareholders’ equity was $1.20 billion.
The company declared dividends of $1.375 per share in 2014 versus $0.975 in 2013. It repurchased 2.7 million shares for approximately $395.0 million during the year.
Fourth-quarter results
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Net sales | $763.1 million | $827.9 million |
| Gross profit | $181.2 million | $222.8 million |
| Net earnings | $40.5 million | $54.9 million |
| Diluted EPS | $1.66 | $2.04 |
Fourth-quarter 2014 results included no comparable 2013 EMD deconsolidation or impairment charges, but reported quarterly earnings were affected by the broader 2014 earnings decline. The filing identifies 2014 refinancing costs primarily in the third quarter.
Material changes versus the prior comparable period
- Engineered Infrastructure Products sales increased 18.4% and operating income increased 17.8%, primarily reflecting acquisitions of Valmont SM, Armorflex, and Shakespeare, plus improved lighting, traffic, communication, and highway-safety activity.
- Utility Support Structures sales declined 14.3% and operating income declined 45.6% because of lower volumes, a less favorable mix of large transmission projects, increased price competition, lower fixed-cost leverage, and higher depreciation from recently added capacity.
- Coatings sales declined 7.5% and operating income declined 18.6%, driven by lower volumes, currency effects, and the absence of a $4.6 million gain from an Australian facility sale recorded in 2013. Results benefited from approximately $3.0 million of business-interruption insurance proceeds.
- Irrigation sales declined 13.9% and operating income declined 29.4%, mainly due to lower North American demand associated with reduced farm income, lower commodity prices, and a lower beginning backlog. International volumes improved in several markets.
- Consolidated sales were reduced by approximately $49.7 million by currency translation, including an estimated $30 million reduction in Australian sales translated into U.S. dollars.
- SG&A declined 4.6%, aided by lower incentive compensation, lower doubtful-account provisions, lower Delta pension expenses, and the 2013 deconsolidation of EMD.
- The company acquired Valmont SM, a 51% interest in AgSense, and Shakespeare Composite Structures. These acquisitions contributed approximately $243.1 million of 2014 sales and $17.9 million of net earnings, including prior-period pro forma acquisitions.
Debt, liquidity, outlook, and unusual items
- Valmont issued $500 million of senior notes in September 2014: $250 million of 5.00% notes due 2044 and $250 million of 5.25% notes due 2054. It repurchased $199.8 million of 6.625% notes due 2020.
- Debt-refinancing costs were $38.7 million pre-tax, or approximately $24.2 million after tax and $0.93 per diluted share.
- The amended revolving credit facility was increased to $600 million and extended to October 2019. No borrowings were outstanding at year-end, and $582.4 million was available after standby letters of credit.
- The company was in compliance with all debt covenants. Its leverage ratio was 1.89x versus a 3.50x maximum, and its interest coverage ratio was 11.24x versus a 2.50x minimum.
- Management stated that available credit facilities, recent debt issuance, and expected operating cash flows provide adequate liquidity for fiscal 2015 and beyond. Planned 2015 capital expenditures were approximately $80 million.
- Backlog declined to $553.8 million from $666.6 million, with most 2014 backlog expected to ship during fiscal 2015.
- The Delta U.K. defined-benefit pension plan was underfunded by approximately $150.1 million at year-end. Contractual pension contributions and administrative payments were approximately $17.3 million for 2015.
- Approximately $297.5 million of cash was held outside the United States. Repatriating all foreign cash was estimated to create approximately $28.7 million of income taxes, while undistributed foreign earnings of approximately $668.4 million had not been provisioned for U.S. taxes because management intended to reinvest them.
Principal risks and contingencies
- Volatility in steel, aluminum, zinc, natural gas, and fuel costs may pressure margins, particularly under fixed-price contracts where price increases cannot be passed through promptly.
- Demand is cyclical and depends on utility, infrastructure, construction, wireless communications, mining, and agricultural capital spending.
- Foreign operations expose the company to currency movements, political and economic instability, trade restrictions, anti-corruption compliance, and difficulties managing international operations.
- Large engineered utility contracts may generate substantial warranty, rework, delay-penalty, or consequential-damage costs.
- Environmental liabilities, product warranties, pension assumptions, tax matters, and goodwill valuations require significant estimates. The warranty accrual was $19.8 million; a 50% change in the estimate would affect operating income by approximately $9.9 million.
- Approximately $43.8 million of long-term liabilities related to income taxes, environmental matters, and other items were excluded from the contractual-obligations table because payment timing could not be estimated reliably.
- The filing reports no material legal proceedings and states that known claims, environmental costs, commitments, and contingencies are not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Utility and Irrigation demand, volumes, pricing, and backlog recover after the 2014 declines.
- The sustainability of the 2014 margin reduction and the effect of raw-material prices, currency movements, and competitive bidding.
- Cash conversion and working-capital requirements following the sharp decline in operating cash flow.
- Debt-service capacity, covenant headroom, refinancing needs, and the effect of the 2014 share repurchases on leverage and liquidity.
- Funding requirements and actuarial changes for the underfunded Delta pension plan.
- Integration and performance of Valmont SM, AgSense, and Shakespeare, including final purchase-price accounting for Shakespeare.
- Potential collection losses on approximately $12 million of delinquent receivables from Chinese governmental entities.
- Management’s expected 2015 capital expenditures of approximately $80 million and any additional guidance, which the filing text does not provide as a consolidated earnings forecast.