Valmont Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. filed an unaudited Form 10-Q for the thirteen and twenty-six weeks ended June 26, 2010, compared with the corresponding periods ended June 27, 2009. The company manufactures engineered support structures, utility structures, coatings, irrigation equipment, and related industrial products. Results include Delta plc from its May 12, 2010 acquisition.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $481.6 million | $498.8 million | $849.0 million | $954.0 million |
| Gross profit | $128.6 million | $144.7 million | $229.4 million | $273.0 million |
| Gross margin | 26.7% | 29.0% | 27.0% | 28.6% |
| Operating income | $37.3 million | $69.4 million | $69.0 million | $127.7 million |
| Operating margin | 7.7% | 13.9% | 8.1% | 13.4% |
| Net earnings attributable to Valmont | $17.1 million | $44.2 million | $33.6 million | $80.1 million |
| Diluted EPS | $0.65 | $1.69 | $1.27 | $3.05 |
| Operating cash flow | Not separately provided | Not separately provided | $54.0 million | $135.6 million |
Q2 net sales declined 3.5%, while first-half sales declined 11.0%. Operating income fell 46.3% in the quarter and 46.0% year to date. Net interest expense increased 98.7% in the quarter and 69.3% year to date, primarily because of acquisition financing. Effective tax rates were 38.9% in Q2 and 37.7% year to date, compared with 32.7% and 32.8%, respectively, in the prior-year periods.
At June 26, 2010, cash and cash equivalents were $314.4 million, compared with $180.8 million at December 26, 2009. Current assets were $1.063 billion and current liabilities were $360.6 million. Total assets increased to $2.030 billion from $1.302 billion, largely because of the Delta acquisition.
Total long-term debt was $518.2 million, including $300.0 million of 6.625% senior unsecured notes due 2020, $150.0 million of 6.875% senior subordinated notes due 2014, and $58.0 million drawn under the revolving credit facility. The company reported $198.6 million of remaining availability under the revolver and compliance with all debt covenants. Long-term debt to invested capital was 31.0%, compared with 15.2% at year-end 2009.
First-half investing cash flow was negative $258.2 million, including $245.3 million of acquisitions net of cash acquired and $11.0 million of capital expenditures. Financing cash flow was positive $345.4 million, principally reflecting $491.0 million of long-term borrowings less principal repayments, dividends, and debt issuance costs.
Material changes versus the prior comparable period
- Delta plc was acquired for approximately $436.7 million on May 12, 2010. Delta contributed $74.2 million of sales and $7.2 million of operating income from acquisition through quarter-end.
- Acquisition-related expenses reduced reported results, including $11.9 million of SG&A in Q2, $14.1 million year to date, and interest-related financing costs of $2.4 million and $5.1 million, respectively. Management estimated the after-tax impact at approximately $12.0 million for Q2 and $15.3 million year to date.
- Utility Support Structures was the principal source of weakness: Q2 sales declined 47.8% and operating income declined 76.0%. Engineered Support Structures sales declined 7.8%, while Coatings and Irrigation sales increased 21.9% and 11.0%, respectively.
- Irrigation operating income increased 69.3% in Q2 and 47.0% year to date. Coatings Q2 operating income increased 18.7%, but first-half operating income declined 2.1%.
- Company-wide sales unit volumes were approximately 11% lower year over year. Lower volumes, lower average selling prices, unfavorable mix, and competitive pressure reduced margins.
- Rising steel prices and LIFO accounting reduced gross profit by approximately $4.1 million in Q2 and $7.6 million year to date. Rising zinc costs also pressured Coatings results.
- SG&A increased 21.4% in Q2 and 10.4% year to date, primarily because of Delta’s operations and transaction costs. Excluding those items, management stated that SG&A was lower than the prior-year periods.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected fiscal 2010 capital spending of approximately $45 million and stated that it intended to keep long-term debt below 40% of invested capital, subject to acquisition activity and operating conditions.
- Management stated that available credit facilities, the senior note issuance, and expected operating cash flows provided adequate liquidity.
- Demand remained uncertain because of weak construction markets, reduced utility spending, state budget deficits, delayed infrastructure funding, lower electricity demand, and reduced customer project activity. The company also cited raw-material availability and pricing, foreign currency, competitive conditions, and government policy as risks.
- Delta’s preliminary purchase-price allocation included $118.4 million of goodwill and $100.7 million of intangible assets. The valuation process was incomplete at quarter-end and was expected to be completed in the third quarter of 2010.
- Delta carried an underfunded U.K. defined-benefit pension obligation of $118.7 million. Annual employer contributions were set at approximately $9.4 million, plus approximately $1.5 million for administrative costs.
- In connection with a historical Delta tax matter involving UPC Holdings, Valmont recorded a $20 million provision for legal and factual uncertainties. The company also disclosed approximately $38.7 million of other long-term liabilities associated with the Delta acquisition and $2.3 million of unrecognized tax benefits whose payment timing could not be reliably estimated.
- The company corrected the presentation of certain December 26, 2009 guarantor and non-guarantor balance-sheet information. Management stated that the correction did not affect consolidated financial statements for the periods presented.
- Management concluded that disclosure controls were effective. The internal-control assessment excluded Delta because it was acquired during the quarter and represented approximately 39% of total assets at June 26, 2010.
- The quarterly dividend was increased to $0.165 per share, implying an annualized rate of $0.66 per share.
Most important facts for investors to verify
- Whether Delta’s operations, preliminary purchase accounting, pension liability, and integration costs develop as assumed.
- The sustainability of liquidity and covenant compliance after the material increase in debt used to finance Delta.
- Recovery prospects for Utility Support Structures and the effect of utility, construction, infrastructure, and wireless-market demand.
- The sensitivity of margins and cash flow to steel, zinc, and other raw-material prices, including LIFO effects.
- The ultimate exposure from the UPC Holdings tax matter, unrecognized tax benefits, pension funding obligations, and other acquisition-related contingencies.
- Whether reported earnings and operating cash flow improve after the nonrecurring Delta transaction and financing costs subside.