Valmont Industries, Inc. 2010 Form 10-K Summary
Business Context and Reporting Period
Valmont is a diversified global producer of engineered metal structures, utility support structures, coatings services, mechanized irrigation equipment and related industrial products. Reportable segments are Engineered Infrastructure Products, Utility Support Structures, Coatings and Irrigation, with additional activities reported as Other.
The filing covers the 52-week fiscal year ended December 25, 2010, compared primarily with the 52-week fiscal year ended December 26, 2009. Approximately 42% of 2010 sales were sold in markets or produced by facilities outside North America. The company operated more than 80 manufacturing plants on six continents and employed 9,188 people at year-end.
Financial Performance and Position
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $1,975.5 million | $1,786.6 million | 10.6% |
| Gross profit | $519.6 million | $532.0 million | (2.3)% |
| Gross margin | 26.3% | 29.8% | Down 350 bps |
| Operating income | $178.4 million | $238.0 million | (25.0)% |
| Operating margin | 9.0% | 13.3% | Down 430 bps |
| Net earnings attributable to Valmont | $94.4 million | $150.6 million | (37.3)% |
| Diluted EPS | $3.57 | $5.73 | (37.7)% |
| Cash flow from operations | $152.2 million | $349.5 million | (56.4)% |
| Capital expenditures | $36.1 million | $44.1 million | Down $8.0 million |
| EBITDA | $243.6 million | $284.0 million | (14.2)% |
Cash and cash equivalents increased to $346.9 million from $180.8 million. Working capital increased to $747.3 million from $458.6 million, primarily because of the Delta acquisition. Total assets increased to $2.09 billion from $1.30 billion, while Valmont shareholders’ equity increased to $915.9 million from $786.3 million.
Total interest-bearing debt was approximately $477.7 million at year-end, compared with $172.4 million in 2009. Long-term debt as a percentage of invested capital was 26.7%, versus 15.2% in 2009. The company had $254.6 million of additional borrowing capacity under its revolving credit facility and was in compliance with its debt covenants. The company reported $51.8 million of short-term bank lines, of which approximately $46.8 million was unused.
Segment Results
- Engineered Infrastructure Products: Sales increased 14.9% to $669.2 million and operating income increased 15.7% to $52.2 million, primarily because of Delta’s access systems, poles and highway safety businesses and factory improvements.
- Utility Support Structures: Sales declined 32.3% to $472.7 million and operating income declined 68.6% to $51.7 million. Results were affected by lower U.S. volumes, lower prices, unfavorable mix and delayed utility projects.
- Coatings: Sales increased 130.0% to $208.4 million and operating income increased 72.5% to $42.6 million, primarily from Delta’s galvanizing operations and improved volumes.
- Irrigation: Sales increased 22.4% to $443.4 million and operating income increased 76.6% to $62.0 million, reflecting stronger North American and international demand and improved mix.
- Other: Sales increased to $181.8 million from $53.3 million and operating income increased to $28.5 million, primarily because of Delta’s grinding media and manganese dioxide businesses.
Material Changes Versus the Prior Comparable Period
- Valmont acquired Delta plc on May 12, 2010 for approximately $436.7 million and began consolidating its results on that date. Delta contributed approximately $348.0 million of sales and $26.4 million of operating income for the post-acquisition period, including approximately $10.1 million of purchase-accounting-related depreciation, amortization and other expenses.
- The Delta acquisition added approximately $135.3 million of goodwill, $100.7 million of acquired intangible assets and a defined-benefit pension liability of approximately $104.2 million.
- 2010 included $15.3 million of Delta acquisition and integration expenses and $5.1 million of related financing expenses. Management estimated the after-tax impact of these costs at approximately $16.4 million.
- Gross margin declined because of weaker Utility and EIP volumes, competitive pricing and unfavorable mix. Rising input costs produced $3.0 million of LIFO expense in 2010, compared with an $18.6 million LIFO benefit in 2009.
- SG&A increased 16.1% to $341.2 million, reflecting Delta’s expenses and acquisition costs, partly offset by lower incentive compensation, commissions and discretionary spending.
- Operating cash flow fell substantially because of lower earnings and the absence of the significant inventory reduction benefit realized in 2009.
- Year-end backlog increased to approximately $411.0 million from $354.3 million. Management expected most of the backlog to be fulfilled during fiscal 2011.
Outlook, Risks, Contingencies and Unusual Items
Management expected 2011 capital expenditures of approximately $60 million and planned to maintain long-term debt as a percentage of invested capital below 40%, subject to acquisition activity and operating conditions. Management stated that available credit facilities, recent debt issuance and historically positive operating cash flow provided adequate liquidity.
- Key risks include cyclical demand, weak construction and infrastructure spending, utility capital-expenditure delays, agricultural conditions, wireless-communications spending and government funding decisions.
- Steel, aluminum, zinc, natural gas and transportation-cost volatility may pressure margins, particularly where contracts are fixed price and cost increases cannot be passed through promptly.
- International operations create exposure to currency movements, political and economic instability, trade restrictions and foreign exchange controls.
- The Delta acquisition created integration risk and included an underfunded U.K. pension plan. The company agreed to annual contributions of approximately $9.7 million for the funding shortfall and $1.5 million for administrative expenses, subject to future valuation and regulatory requirements.
- The company disclosed approximately $948.3 million of contractual cash obligations, including debt, interest, Delta pension contributions, operating leases and purchase commitments. It also had approximately $50 million of long-term liabilities related to income tax, environmental and other matters for which payment timing could not be reliably estimated.
- A Delta-related tax matter involving potential transferee liability resulted in a $20 million provision included in other noncurrent liabilities.
- Goodwill and intangible assets were not impaired in 2010, although the North American Communication reporting unit had only a $5.7 million excess of fair value over carrying value above approximately $6.1 million of goodwill.
- The company reported no material legal proceedings, effective disclosure controls and effective internal control over financial reporting. Deloitte & Touche issued unqualified audit opinions.
Important Facts for Investors to Verify
- Whether Delta integration produces the expected operating synergies and whether acquisition-related costs and pension obligations remain within disclosed expectations.
- Utility Support Structures’ order rates, backlog conversion, pricing and margins after the significant 2010 decline.
- Whether higher steel, zinc, aluminum, energy and freight costs can be recovered through customer pricing.
- Cash conversion and working-capital requirements, particularly as operating cash flow declined sharply from 2009.
- Debt maturities, covenant compliance, refinancing needs and the company’s ability to keep leverage below its stated internal target.
- Funding requirements and actuarial changes relating to the Delta U.K. pension plan.
- Realization of Delta’s deferred tax assets, which were subject to a substantial valuation allowance, and potential tax costs if foreign earnings are repatriated.
- Progress toward the disclosed 2011 capital-spending plan and conversion of the $411.0 million year-end backlog into revenue.