Valmont Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Valmont Industries manufactures engineered infrastructure products, utility support structures, coatings, irrigation equipment and other industrial products and services. This unaudited filing covers the thirteen and twenty-six weeks ended June 30, 2012, compared with June 25, 2011. The company had 26,599,305 common shares outstanding as of July 24, 2012.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Change |
|---|---|---|---|
| Net sales | $767.3 million | $668.6 million | 14.8% |
| Gross profit | $199.4 million | $168.0 million | 18.7% |
| Gross margin | 26.0% | 25.1% | Up 0.9 percentage points |
| Operating income | $97.4 million | $68.6 million | 42.0% |
| Operating margin | 12.7% | 10.3% | Up 2.4 percentage points |
| Net earnings attributable to Valmont | $60.0 million | $45.8 million | 31.0% |
| Diluted EPS | $2.24 | $1.72 | 30.2% |
For the first twenty-six weeks, net sales were $1.485 billion, up 20.1%; operating income was $180.2 million, up 58.2%; net earnings attributable to Valmont were $112.3 million, up 57.3%; and diluted EPS was $4.20, up 56.1%. First-half gross margin was 26.0%, compared with 24.6%, while operating margin was 12.1%, compared with 9.2%.
- Q2 segment net sales were $211.1 million for Engineered Infrastructure Products, $211.8 million for Utility Support Structures, $71.6 million for Coatings, $194.5 million for Irrigation and $78.4 million for Other.
- Utility Support Structures was the largest growth contributor, with Q2 sales up 57.2% and operating income up 104.6% year over year.
- Q2 operating income increased across all reportable segments. Irrigation generated $37.6 million, Coatings $19.5 million, Engineered Infrastructure Products $14.2 million and Utility Support Structures $26.6 million.
- Net interest expense declined 37.5% in Q2 and 26.8% year to date, primarily because of the June 2011 refinancing and the absence of approximately $2.8 million of refinancing expense recorded in Q2 2011.
Cash flow, liquidity and debt
- Cash used in operating activities was $3.5 million in the first half of 2012, compared with $19.9 million of operating cash flow provided in the prior-year period. Higher earnings were more than offset by working-capital investment and income-tax payment timing.
- Capital expenditures were $39.2 million, compared with $27.9 million in the prior-year period. Management expected approximately $100 million of capital spending for fiscal 2012, primarily for utility capacity expansion and irrigation manufacturing investment.
- Cash and cash equivalents were $328.4 million at June 30, 2012, compared with $362.9 million at December 31, 2011. Net working capital increased to $931.0 million from $844.9 million.
- Total interest-bearing debt was $491.2 million, compared with $486.1 million at year-end. Long-term debt was $473.6 million, and bank notes payable were $17.4 million.
- The company had $60.2 million of short-term bank lines, of which $47.9 million was unused, and no borrowings under its $280 million revolving credit agreement. Management reported additional borrowing capacity of $264.9 million under that facility.
- Debt consisted primarily of $450 million face value of 6.625% senior unsecured notes due April 2020 and the revolving credit facility. The company was in compliance with all debt covenants. Reported leverage was 1.20 times EBITDA, versus a 3.75-times limit, and interest coverage was 12.70 times, versus a 2.50-times minimum.
- Long-term debt to invested capital was 25.2%, compared with 26.8% at December 31, 2011; management intended to keep the ratio below 40%.
Material changes, outlook and risks
- Sales growth was driven primarily by higher unit volumes, especially in Utility Support Structures and Irrigation. Aggregate Q2 pricing was comparable with the prior year, while first-half pricing and mix were approximately $7 million favorable.
- Gross margin benefited from improved pricing and mix, moderating raw-material costs, lower zinc costs and lower LIFO expense. Q2 and first-half LIFO expense were $4.9 million and $12.8 million lower, respectively, than in the comparable periods.
- Foreign currency translation reduced Q2 sales by approximately $18.0 million and operating income by $1.7 million. The stronger U.S. dollar particularly affected the euro, Australian dollar and South African rand.
- Operating results included production inefficiencies and unanticipated costs of $3.9 million in EIP and $5.8 million in Utility during Q2. Management also cited capacity-expansion start-up costs, European volume-related inefficiencies and costs associated with a large utility order.
- Nonrecurring or unusual items included a $1.2 million Australian stamp-duty expense in the first half, approximately $2.3 million of Q2 settlements related to a property insurance claim and vendor dispute, and a $1.4 million insurance settlement included in corporate results.
- Management expected the effective tax rate to approximate 34%, compared with 34.3% in Q2 and 34.7% year to date. The higher rate reflected a greater share of U.S. earnings and favorable tax items in 2011 that did not recur.
- Management described favorable agricultural conditions and farm economics supporting Irrigation demand, while noting challenging transportation infrastructure markets, competitive utility pricing, European economic weakness, currency volatility, raw-material availability and costs, cyclical demand, and production execution risks.
- The company was negotiating a replacement revolving credit agreement and expected a new five-year agreement during the third quarter of 2012, with similar covenants.
- Approximately $299 million of cash was held outside the United States. The company had approximately $547 million of undistributed foreign earnings intended for reinvestment and estimated a tax cost of approximately $27.0 million if all foreign cash were repatriated.
- Goodwill was not impaired in the most recent annual testing, but the Webforge reporting unit had only $3.1 million of excess fair value over carrying value; management continued to monitor economic conditions for potential impairment indicators.
Most important facts to verify
- Whether the expected 2012 capital spending of approximately $100 million and utility capacity expansions generate the anticipated returns.
- Whether operating cash flow recovers as receivables and inventories normalize relative to sales growth.
- The execution and terms of the replacement revolving credit agreement expected in the third quarter of 2012.
- Whether Utility production inefficiencies, large-order costs and EIP capacity-expansion costs are temporary or recur.
- The sustainability of favorable irrigation demand, farm economics, pricing and raw-material trends.
- Exposure to foreign exchange movements, European weakness, competitive utility pricing and transportation infrastructure funding.
- Potential goodwill impairment at Webforge and the tax implications of repatriating foreign cash or foreign earnings.