Valmont Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Valmont Industries manufactures engineered metal and concrete structures, coatings, agricultural irrigation equipment, and related products and services. Reportable segments are Engineered Infrastructure Products, Utility Support Structures, Coatings, and Irrigation, with additional businesses reported as Other.
The filing covers the thirteen and twenty-six weeks ended June 29, 2013, compared with the corresponding periods ended June 30, 2012. The interim financial statements are unaudited. Fiscal 2012 segment information was reclassified for certain intercompany utility-structure sales; consolidated sales and operating income were unchanged.
Financial performance and key metrics
| Metric | Second quarter 2013 | Second quarter 2012 | Year-to-date 2013 | Year-to-date 2012 |
|---|---|---|---|---|
| Net sales | $878.7 million | $767.3 million | $1,698.3 million | $1,484.7 million |
| Gross profit | $261.5 million | $199.4 million | $496.8 million | $385.7 million |
| Gross margin | 29.8% | 26.0% | 29.3% | 26.0% |
| Operating income | $144.3 million | $97.4 million | $262.5 million | $180.2 million |
| Operating margin | 16.4% | 12.7% | 15.5% | 12.1% |
| Net earnings attributable to Valmont | $89.6 million | $60.0 million | $167.1 million | $112.3 million |
| Diluted EPS | $3.33 | $2.24 | $6.22 | $4.20 |
- Second-quarter sales increased 14.5%, operating income increased 48.2%, net earnings increased 49.3%, and diluted EPS increased 48.7% year over year.
- Year-to-date sales increased 14.4%, operating income increased 45.7%, net earnings increased 48.8%, and diluted EPS increased 48.1%.
- SG&A increased 14.9% in the quarter and 14.1% year to date, but remained 13.3% and 13.8% of sales, respectively.
- Net interest expense was $6.2 million in the quarter and $13.0 million year to date, up from $5.5 million and $11.2 million, respectively, primarily because of lower interest income and higher international working-capital borrowing costs.
- The effective tax rate was 34.1% in the quarter and 32.7% year to date, compared with 34.3% and 34.7% in the comparable 2012 periods.
Segment results
| Segment | Q2 2013 sales | Q2 sales change | Q2 operating income | Year-to-date sales change |
|---|---|---|---|---|
| Engineered Infrastructure Products | $228.5 million | 8.2% | $22.6 million | 6.6% |
| Utility Support Structures | $227.9 million | 7.7% | $42.1 million | 16.5% |
| Coatings | $79.4 million | 10.9% | $23.6 million | 8.8% |
| Irrigation | $270.2 million | 38.9% | $64.2 million | 31.9% |
| Other | $72.7 million | (7.3%) | $13.0 million | (10.2%) |
Irrigation was the largest growth contributor, supported by higher North American and international volumes, favorable agricultural conditions, and prior price increases. Utility benefited from stronger U.S. demand, improved pricing and mix, fixed-cost leverage, and the absence of approximately $5.8 million of second-quarter 2012 production and rework costs. EIP benefited from the Locker acquisition and improved North American communications demand. Coatings benefited from the PMG acquisition and a $4.6 million gain on the sale of an Australian galvanizing operation.
Cash flow, liquidity, debt, and balance sheet
- Operating cash flow was $175.6 million in the first half of 2013, compared with cash used in operations of $3.5 million in the first half of 2012.
- Capital expenditures were $54.3 million, compared with $39.2 million in the prior-year period. Management expected approximately $110 million of full-year 2013 capital spending, primarily for Utility and Irrigation capacity expansion.
- Cash paid for the Locker acquisition was $53.2 million. Asset-sale proceeds were $39.1 million, including proceeds from the sale of the manganese investment and an Australian galvanizing operation.
- Cash and cash equivalents were $490.5 million at June 29, 2013, compared with $414.1 million at December 29, 2012. Approximately $352.0 million was held outside the United States.
- Total interest-bearing debt was $488.1 million, compared with $486.2 million at year-end 2012. Long-term debt was $471.7 million, and bank notes payable were $16.0 million.
- The company had $106.6 million of short-term bank lines, of which $90.6 million was unused, and $384.5 million available under its $400 million revolving credit facility after standby letters of credit.
- Long-term debt to invested capital was 22.8%, down from 23.9% at December 29, 2012. Management intended to maintain the ratio below its 40% long-term objective.
- The company was in compliance with its debt covenants. Reported leverage was 0.89 times last-four-quarter EBITDA, and EBITDA was 16.73 times interest expense, against covenant limits of 3.5 times and a minimum of 2.5 times, respectively.
- Current assets were $1.52 billion versus current liabilities of $416.8 million. Shareholders’ equity was $1.50 billion.
Material changes, unusual items, and outlook
- On February 5, 2013, Valmont acquired Locker Group Holdings Pty. Ltd. for $53.2 million, with potential additional consideration of up to $7.9 million. Locker contributed $29.9 million of year-to-date sales and $0.5 million of net earnings through June 29, 2013. The purchase-price allocation remained preliminary.
- The company acquired Pure Metal Galvanizing in December 2012; its results were included in Coatings.
- Valmont sold its 49% investment in Manganese Materials Company Pty. Ltd. for approximately $29.3 million. The transaction generated approximately $3.2 million of non-cash tax benefits and resulted in recognition of $5.2 million of accumulated currency translation losses, with no significant sale gain or loss.
- Gross-margin improvement reflected better pricing and mix, stronger volumes, and lower raw-material costs. Currency translation reduced operating profit by approximately $0.5 million in the quarter and $1.2 million year to date.
- SG&A included higher employee incentives, compensation, and acquisition-related expenses. Comparisons were affected by the $4.6 million Australian facility-sale gain in 2013 and $1.4 million of insurance proceeds recorded in 2012.
- Management described the businesses as cyclical but geographically, product, and customer diversified, and stated that available cash, credit facilities, and operating cash flow provided adequate liquidity.
- No material changes were reported in financial obligations, off-balance-sheet arrangements, market risk, or critical accounting policies. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
- Key risks include economic and industry conditions, cyclical demand, raw-material availability and pricing, product pricing, foreign-currency movements, international operations, competition, government policies, acquisition integration, and potential goodwill or intangible-asset impairment. Management noted weak European roadway spending, challenging U.S. transportation markets, weak Australian coatings demand, and international receivable risk, including a $1.2 million second-quarter bad-debt provision.
Important facts for investors to verify
- Whether Irrigation and Utility demand, backlog, pricing, and margins remain strong after the unusually favorable 2013 comparisons.
- Locker and PMG integration, acquisition-related costs, final Locker purchase accounting, and any additional contingent consideration.
- The sustainability of gross-margin gains from pricing, mix, lower raw-material costs, and the nonrecurrence of 2012 Utility production and rework costs.
- Foreign-exchange exposure and the impact of approximately $352.0 million of cash held outside the United States; full repatriation could generate estimated tax of approximately $42.4 million.
- Capital spending against the approximately $110 million 2013 expectation and the resulting effect on free cash flow.
- Debt covenant compliance, revolving-credit availability, and the maturity and 6.625% interest cost of the $450 million senior unsecured notes due in 2020.
- Potential effects of cyclical markets, weak regional demand, international collections, pension obligations, and goodwill or indefinite-lived intangible-asset impairment.