Valmont Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Valmont manufactures engineered metal and concrete structures, coatings, agricultural irrigation equipment, and related industrial products and services. Reportable segments are Engineered Infrastructure Products, Utility Support Structures, Coatings, and Irrigation, with additional businesses reported as Other. This unaudited filing covers the thirteen weeks ended March 31, 2012, compared with the thirteen weeks ended March 26, 2011.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $717.4 million | $567.9 million | 26.3% |
| Gross profit | $186.3 million | $136.5 million | 36.5% |
| Gross margin | 26.0% | 24.0% | Up 200 bps |
| Operating income | $82.8 million | $45.3 million | 82.8% |
| Operating margin | 11.5% | 8.0% | Up 350 bps |
| Net earnings attributable to Valmont | $52.3 million | $25.6 million | 104.3% |
| Diluted EPS | $1.96 | $0.97 | 102.1% |
| Cash flow from operations | $(12.9) million | $5.7 million | Declined |
- All reportable segments grew sales and operating income. Net sales were $195.8 million in Irrigation, $189.3 million in Utility Support Structures, $185.5 million in Engineered Infrastructure Products, and $70.2 million in Coatings.
- Cash and cash equivalents were $339.6 million at March 31, 2012, compared with $362.9 million at December 31, 2011. Current assets were $1.301 billion versus current liabilities of $404.5 million.
- Receivables increased to $450.3 million and inventories to $440.6 million from $426.7 million and $393.8 million, respectively, primarily supporting higher sales.
- Total interest-bearing debt was approximately $486.6 million, including $474.0 million of long-term debt and $12.3 million of bank notes. The company had $48.6 million unused under short-term bank lines and $264.9 million available under its revolving credit facility.
- The company reported a 25.6% long-term-debt-to-invested-capital ratio, versus 26.8% at year-end 2011, and stated that it complied with all debt covenants. The last-twelve-month leverage ratio was 1.26x and the interest-earned ratio was 10.70x.
- Capital expenditures were $20.1 million, compared with $12.6 million in the prior period. The company expected approximately $100 million of capital spending for fiscal 2012.
Material changes versus the prior comparable period
- Sales growth reflected approximately $140 million of higher unit volumes and approximately $9 million from pricing and mix. The largest increases were in Utility Support Structures and Irrigation.
- Gross margin improved mainly because raw-material costs moderated, zinc costs were lower, and first-quarter LIFO expense was $7.9 million lower than in 2011.
- SG&A increased 13.5%, primarily from higher employee incentives, compensation, deferred compensation expense, and a $1.2 million Australia stamp-duty expense related to a prior-year legal restructuring. The stamp-duty expense was non-recurring.
- Operating income benefited from higher volumes and operating leverage across all reportable segments. Irrigation operating income rose to $38.4 million from $23.9 million, and Utility Support Structures operating income rose to $25.1 million from $13.5 million.
- Operating cash flow turned negative because of increased working capital and a $10.8 million Delta Pension Plan contribution made in the first quarter rather than the second quarter as in 2011.
- Net interest expense declined due mainly to refinancing of $150 million of senior subordinated debt in June 2011. Earnings attributable to noncontrolling interests also declined following the June 2011 purchase of the noncontrolling interest in the grinding media operation.
Guidance, outlook, risks and unusual items
- Management cited strong utility-structure demand, record utility backlogs at December 31, 2011, favorable agricultural conditions and farm commodity prices, and generally favorable North American weather.
- Management expected fiscal 2012 capital expenditures of approximately $100 million, focused on utility capacity expansion and additional Irrigation manufacturing investment.
- Risks include cyclical markets, raw-material availability and pricing, competitive pricing, highway funding and state-budget constraints, international economic conditions, foreign-exchange exposure, and acceptance of new products.
- Approximately $310 million of cash was held outside the United States. The company had not provided for U.S. taxes on approximately $531 million of undistributed foreign earnings because it intended to reinvest them. Repatriation of all foreign cash was estimated to create approximately $38.4 million of income taxes.
- Goodwill was not impaired in the 2011 testing, but the Webforge reporting unit had only $3.1 million of excess fair value over carrying value; management stated it would monitor economic conditions and test earlier if warranted.
- The filing reported no material changes in financial obligations, off-balance-sheet arrangements, market risk, critical accounting policies, or internal controls. Results for the quarter are not necessarily indicative of full-year performance.
Most important facts for investors to verify
- Whether strong Utility Support Structures and Irrigation demand and backlogs persisted through the remainder of fiscal 2012.
- Whether gross-margin improvement from lower raw-material and LIFO costs was sustainable.
- Conversion of earnings into operating cash flow as receivables and inventories increased.
- Progress against the approximately $100 million fiscal-year capital-spending plan and related capacity expansions.
- Availability of foreign cash for U.S. liquidity needs and the potential tax cost of repatriation.
- Compliance with debt covenants, refinancing and maturity terms, and continued availability under the revolving credit facility.
- Potential impairment exposure at the Webforge reporting unit and other goodwill or indefinite-lived trade names.