Valmont Industries, Inc. — Fiscal 2012 Form 10-K Summary
Business context and reporting period
Valmont Industries is a diversified global manufacturer of engineered metal structures, utility support structures, coatings services, mechanized irrigation equipment and other industrial products. Approximately 40% of fiscal 2012 sales were sold in or produced outside North America. The filing covers the 52-week fiscal year ended December 29, 2012; fiscal 2011 contained 53 weeks.
Reportable segments were Engineered Infrastructure Products, Utility Support Structures, Coatings and Irrigation. The company completed the acquisition of Pure Metal Galvanizing in December 2012 for $45.7 million in cash, expanding its Canadian galvanizing operations.
Financial performance and position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $3.030 billion | $2.661 billion | 13.8% |
| Gross profit | $802.5 million | $666.8 million | 20.4% |
| Gross margin | 26.5% | 25.1% | +140 bps |
| Operating income | $382.3 million | $263.3 million | 45.2% |
| Operating margin | 12.6% | 9.9% | +270 bps |
| Net earnings attributable to Valmont | $234.1 million | $228.3 million | 2.5% |
| Diluted EPS | $8.75 | $8.60 | 1.7% |
| Net cash from operating activities | $197.1 million | $149.7 million | 31.7% |
| Capital expenditures | $97.1 million | $83.1 million | 16.9% |
Fiscal 2012 earnings were affected by a 35.2% effective tax rate, compared with 2.0% in 2011. The prior-year rate benefited from a nonrecurring $66.0 million tax benefit related to a Delta legal-entity restructuring. Excluding that benefit, management indicated that the comparable 2011 effective tax rate would have been approximately 33%.
At year-end, cash and cash equivalents were $414.1 million, working capital was $1.014 billion, total assets were $2.569 billion and total shareholders’ equity was $1.407 billion. Total interest-bearing debt was approximately $486.2 million. Long-term debt represented 23.9% of invested capital, down from 26.8% in 2011.
The company had $384.9 million of availability under its $400 million revolving credit facility, after letters of credit. It had no borrowings under that facility and was in compliance with all debt covenants. The principal debt instrument was $450 million of 6.625% senior unsecured notes due in April 2020.
Material changes versus the prior comparable period
- Sales growth was driven primarily by approximately $353 million of higher unit volumes and approximately $50 million from pricing and mix. The extra week in 2011 benefited that year by an estimated $50 million of sales and $3 million of net earnings.
- Gross margin improved because of favorable pricing and mix, moderating steel and zinc costs, and approximately $10.7 million of lower LIFO expense.
- SG&A increased 4.1%, but declined to 13.9% of sales from 15.2% because of operating leverage.
- Utility Support Structures sales increased 40.1% and operating income increased 82.7%, supported by higher North American grid investment, improved pricing and volume leverage. Certain large orders generated $12.9 million of additional rework and other unanticipated costs.
- Irrigation sales increased 12.7% and operating income increased 33.3%, reflecting strong global agricultural conditions, favorable pricing and drought-related demand in the United States.
- Engineered Infrastructure Products sales increased 5.1% and operating income increased 32.4%, despite approximately $14.3 million of unfavorable factory productivity and start-up costs.
- Coatings sales were essentially flat, while operating income increased 22.2%, helped by productivity, operating leverage and approximately $5.7 million of lower zinc costs.
- Backlog increased to $902.5 million from $703.0 million. Utility backlog was $434.0 million and Irrigation backlog was $230.6 million at year-end.
- Cash increased by $51.2 million during the year despite $136.7 million of investing cash outflows, including capital spending and the Pure Metal Galvanizing acquisition.
Guidance, outlook, commentary and risks
- Management expected the 2013 effective tax rate to approximate 34%, subject to the geographic mix of earnings and enacted tax rates.
- Planned 2013 capital spending was approximately $110 million, principally for additional Irrigation and Utility Support Structures capacity; approximately 50% had been approved at filing.
- Management stated that available credit facilities and expected operating cash flow should provide adequate liquidity for fiscal 2013 and beyond.
- Management expected most of the year-end 2012 backlog to be filled during fiscal 2013.
- Key operating risks include volatility and availability of steel, aluminum, zinc, natural gas and other inputs; the ability to recover cost increases through pricing; cyclical infrastructure, utility, wireless and agricultural markets; government infrastructure spending; foreign exchange movements; and economic weakness in Europe, Australia and other international markets.
- The Delta U.K. defined-benefit pension plan was underfunded by approximately £69.5 million, or $112.0 million, at year-end. A new funding plan was being negotiated with trustees and was expected by June 30, 2013.
- Contractual cash obligations totaled approximately $1.046 billion, including $460.1 million of long-term debt, $254.2 million of interest, $177.4 million of estimated Delta pension contributions, $118.6 million of operating leases and $36.0 million of purchase commitments.
- Approximately $365.9 million of cash was held outside the United States. Repatriation of all foreign cash was estimated to create approximately $44.2 million of income taxes. The company had not provided U.S. tax on approximately $586.2 million of undistributed foreign earnings intended to remain reinvested.
- Product warranty accruals were $15.3 million. Goodwill and trade names were tested in 2012 and were not impaired.
- Subsequent to year-end, the company acquired Locker Group Holdings for $54.9 million in cash plus up to $7.9 million of contingent consideration and sold its investment in Manganese Materials Company for approximately $30 million.
Important facts for investors to verify
- Tax comparability: Separate recurring operating improvement from the $66.0 million nonrecurring tax benefit recorded in 2011.
- Backlog conversion: Verify the timing, margins and customer concentration associated with the $902.5 million backlog.
- Execution costs: Monitor whether the EIP productivity issues and Utility rework costs recur or improve.
- Commodity exposure: Assess steel, zinc, aluminum, energy pricing and the company’s ability to pass through cost increases.
- Pension funding: Follow the U.K. pension funding agreement and potential contributions beyond the amounts estimated at filing.
- Liquidity and leverage: Reconcile debt, foreign cash availability, covenant headroom and the company’s planned $110 million of 2013 capital spending.
- Acquisition integration: Evaluate the financial contribution and integration risks of Pure Metal Galvanizing and Locker Group.
- International exposure: Track currency effects, particularly in Australia, Europe, China and other foreign markets.