Valmont Industries, Inc. — Fiscal 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The fiscal year contained 53 weeks; fiscal 2010 contained 52 weeks. The filing is an annual report rather than a standalone quarterly filing, although fourth-quarter data is presented.
Business context
Valmont is a diversified global manufacturer and service provider focused on engineered infrastructure products, utility support structures, coatings, irrigation equipment and other industrial products. Approximately 44% of 2011 sales were sold in markets or produced at facilities outside North America. The company operated more than 90 manufacturing plants on six continents and sold products in more than 100 countries.
Reportable segments were Engineered Infrastructure Products, Utility Support Structures, Coatings and Irrigation. The company also reported grinding media, tubing, manganese dioxide and industrial fasteners in Other.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $2,661.5 million | $1,975.5 million | 34.7% |
| Gross profit | $666.8 million | $519.6 million | 28.3% |
| Gross margin | 25.1% | 26.3% | Down 120 bps |
| Operating income | $263.3 million | $178.4 million | 47.6% |
| Operating margin | 9.9% | 9.0% | Up 90 bps |
| Net earnings attributable to Valmont | $228.3 million | $94.4 million | 141.8% |
| Diluted EPS | $8.60 | $3.57 | 140.9% |
| EBITDA | $343.6 million | $240.0 million | 43.2% |
| Operating cash flow | $149.7 million | $152.2 million | Down $2.5 million |
| Capital expenditures | $83.1 million | $36.1 million | Up $47.0 million |
Fourth-quarter 2011 net sales were $752.7 million, gross profit was $194.9 million, net earnings were $114.7 million and diluted EPS was $4.33. Fourth-quarter earnings included a $66.0 million, or $2.49 per share, income tax benefit.
Segment results
| Segment | 2011 sales | Sales change | 2011 operating income | Operating income change |
|---|---|---|---|---|
| Engineered Infrastructure Products | $792.6 million | 18.4% | $40.8 million | Down 21.8% |
| Utility Support Structures | $620.8 million | 31.3% | $70.6 million | Up 36.6% |
| Coatings | $280.8 million | 34.7% | $58.6 million | Up 37.6% |
| Irrigation | $665.9 million | 50.2% | $107.8 million | Up 73.9% |
| Other | $301.4 million | 65.8% | $45.7 million | Up 60.4% |
Liquidity, capital structure and cash flow
- Cash and cash equivalents were $362.9 million at year-end, compared with $346.9 million in 2010.
- Working capital was $844.9 million, compared with $747.3 million in 2010. The increase primarily reflected higher inventories supporting Utility and Irrigation growth.
- Total interest-bearing debt was approximately $486.1 million, compared with $477.7 million at the prior year-end. Long-term debt, including current installments, was $474.7 million.
- The company had no borrowings under its $280 million revolving credit facility and approximately $260.9 million of available capacity. It also had $46.8 million of unused short-term bank lines.
- Long-term debt represented 26.8% of invested capital, compared with 29.7% in 2010. The company’s internal objective is to maintain this ratio at or below 40%.
- Debt covenants were satisfied at year-end. The leverage ratio was 1.41x EBITDA, versus a 3.75x limit; the senior debt ratio was 1.41x, versus a 2.50x limit; and EBITDA coverage of interest was 9.50x, versus a 2.50x minimum.
- Fiscal 2011 financing activity included issuing $150 million of 6.625% senior unsecured notes and redeeming $150 million of senior subordinated notes due in 2014.
Material changes versus the prior comparable period
- Sales growth reflected higher unit volumes, the full-year inclusion of Delta plc, favorable foreign-currency translation and the extra fiscal week. Management estimated the extra week contributed approximately $50 million of sales and $3 million of net earnings.
- Delta plc, acquired in May 2010, contributed approximately $211.1 million of incremental 2011 sales and $12.2 million of incremental operating income from the full-year effect.
- Gross margin declined because steel and zinc costs increased faster than selling prices could be adjusted, particularly in Engineered Infrastructure Products and Utility Support Structures.
- Irrigation benefited from favorable farm commodity prices, strong farm income, dry North American conditions and increased unit volumes.
- Utility Support Structures benefited from increased North American utility spending and operating leverage, although pricing remained competitive.
- Engineered Infrastructure Products experienced weak lighting demand, competitive pricing and higher material costs, causing operating income to decline despite higher sales.
- Capital expenditures more than doubled, including spending on an India plant, Utility capacity expansions and Australian galvanizing operations.
- Valmont acquired the remaining 40% of Donhad Pty. Ltd. for approximately $25.3 million and acquired a 60% interest in an irrigation monitoring services company for $1.5 million.
Guidance, outlook, risks and unusual items
- Management expected 2012 capital expenditures of approximately $75 million and planned to maintain long-term debt as a percentage of invested capital below 40%, subject to acquisitions and operating conditions.
- Year-end backlog was $703.0 million, compared with $411.0 million in 2010. Management expected most of the backlog to be filled during fiscal 2012.
- Key risks include steel, aluminum, zinc, natural gas and freight-price volatility; fixed-price contracts may prevent timely recovery of cost increases.
- Demand is cyclical and exposed to utility, construction, government infrastructure, wireless communications and agricultural spending. The lack of long-term U.S. highway funding legislation was cited as a constraint on transportation-related demand.
- International operations expose the company to foreign-exchange, political, economic, trade and regulatory risks. Approximately $323.6 million of cash was held outside the United States.
- The Delta U.K. defined-benefit pension plan was underfunded by approximately $68.0 million at year-end. Agreed annual contributions were approximately $11.3 million, subject to future funding-plan negotiations.
- A Delta-related legal restructuring generated a $66.0 million income tax benefit, reducing the effective tax rate to 2.0%. Management indicated the underlying effective tax rate would have been approximately 32% to 33% absent nonrecurring items.
- Fourth-quarter unusual items included approximately $3.8 million of trade-name impairment charges, a $1.5 million favorable insurance-related effect from damage to an Australian galvanizing facility, and approximately $0.3 million of goodwill impairment associated with an irrigation retail operation being disposed of.
- Total contractual cash obligations were $965.5 million, including debt, interest, pension contributions, operating leases and purchase commitments. The filing also disclosed approximately $45.0 million of long-term liabilities related to tax, environmental and other matters whose payment timing could not be estimated reliably.
- No material legal proceedings were reported. Management and Deloitte & Touche LLP concluded that internal control over financial reporting was effective, and Deloitte issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the $703.0 million backlog converts to revenue and cash flow as expected during 2012.
- Whether steel, zinc, energy and other input costs can be recovered through pricing without further margin compression.
- How much of the 2011 earnings increase was attributable to the nonrecurring $66.0 million tax benefit, the extra fiscal week, Delta consolidation and currency translation.
- Operating cash conversion, particularly given the $118.9 million inventory increase and operating cash flow that was essentially flat year over year.
- Progress on the Delta pension plan funding obligation and the potential effect of future actuarial assumptions or regulatory negotiations.
- Compliance with debt covenants and availability under the revolving credit facility as business conditions and acquisition activity change.
- Exposure to international currencies, foreign cash repatriation taxes and economic conditions in Australia, Europe, China and other foreign markets.