Valmont Industries, Inc. — Form 10-Q Summary
Reporting period: Thirteen and twenty-six weeks ended June 28, 2014, compared with the periods ended June 29, 2013. Financial statements are unaudited. Valmont manufactures engineered metal and concrete structures, provides coatings services, produces irrigation equipment, and operates related industrial businesses.
Financial Performance and Position
| Metric | Q2 2014 | Q2 2013 | Change | First Half 2014 | First Half 2013 | Change |
|---|---|---|---|---|---|---|
| Net sales | $842.6 million | $878.7 million | (4.1%) | $1,594.3 million | $1,698.3 million | (6.1%) |
| Gross profit | $220.5 million | $261.5 million | (15.7%) | $427.5 million | $496.8 million | (13.9%) |
| Gross margin | 26.2% | 29.8% | (360 bps) | 26.8% | 29.3% | (250 bps) |
| Operating income | $104.8 million | $144.3 million | (27.4%) | $203.6 million | $262.5 million | (22.4%) |
| Operating margin | 12.4% | 16.4% | (400 bps) | 12.8% | 15.5% | (270 bps) |
| Net earnings attributable to Valmont | $64.0 million | $89.6 million | (28.6%) | $120.0 million | $167.1 million | (28.2%) |
| Diluted EPS | $2.38 | $3.33 | (28.5%) | $4.46 | $6.22 | (28.3%) |
Cash flow and liquidity: First-half cash flow from operations was $91.9 million, down from $175.6 million. Capital expenditures were $47.0 million, compared with $54.3 million, and management expected approximately $100 million of full-year 2014 capital spending. Cash and cash equivalents were $455.9 million at June 28, 2014, versus $613.7 million at year-end 2013.
Debt: Total interest-bearing debt was $496.2 million, compared with $490.1 million at December 28, 2013. Long-term debt was $478.5 million, including $450 million principal amount of 6.625% senior unsecured notes due April 2020. The company had no borrowings under its $400 million revolving credit facility and could borrow $382.3 million after standby letters of credit. Short-term bank lines totaled $115.1 million, of which $98.5 million was unused. Valmont was in compliance with all debt covenants; its leverage ratio was 0.98 and interest coverage ratio was 15.41.
Balance sheet: Total assets were $2.859 billion and shareholders' equity was $1.615 billion. Net working capital was $1.096 billion, compared with $1.161 billion at year-end 2013. The company held approximately $387.2 million of cash outside the United States and estimated that repatriation of all foreign cash would generate approximately $52.7 million of income taxes.
Material Changes Versus Prior Comparable Period
- Consolidated sales declined primarily because of lower volumes, unfavorable pricing and mix, and adverse foreign currency translation. The decline was partially offset by acquisitions.
- Gross margin declined because of lower sales prices, unfavorable mix, reduced volumes, and slightly higher raw-material costs.
- Utility Support Structures sales declined 7.0% in the quarter and 8.8% year to date; operating income declined 37.5% and 33.1%, respectively, due to lower volumes, fixed-cost deleverage, capacity-related depreciation, and increased price competition.
- Irrigation sales declined 18.6% in the quarter and 16.0% year to date, reflecting weaker North American demand, lower expected farm income, and reduced beginning backlogs. Operating income declined 35.1% and 28.6%, respectively.
- Coatings sales declined 11.3% in the quarter and 10.8% year to date due to weaker volumes in Australia, Asia Pacific, and North America. The prior-year quarter also benefited from a $4.6 million gain on the sale of an Australian galvanizing operation.
- Engineered Infrastructure Products was the strongest segment: sales increased 25.3% in the quarter and 17.1% year to date, while operating income increased 26.5% and 19.8%. Results benefited from the Valmont SM and Armorflex acquisitions and stronger communication products demand.
- Other sales declined 25.6% in the quarter and 26.1% year to date, partly because Delta EMD was deconsolidated in December 2013 and because of weaker grinding-media demand.
- The U.S. dollar strengthened against the Australian dollar, Brazilian real, and South African rand, reducing sales and operating profit. Management estimated total operating-profit effects of negative $1.7 million in the quarter and negative $3.8 million year to date.
Guidance, Outlook, Risks, and Unusual Items
- Management expected approximately $100 million of 2014 capital expenditures and intended to maintain long-term debt as a percentage of invested capital below 40%; the ratio was 21.7% at June 28, 2014.
- Management stated that available cash, credit facilities, senior notes, and historical operating cash flows provided adequate liquidity. The business remains cyclical and exposed to economic conditions, industry demand, raw-material prices, product pricing, competition, foreign exchange, government policy, and customer acceptance of new products.
- On March 3, 2014, Valmont acquired 90% of DS SM A/S, renamed Valmont SM, for $120.5 million. The acquisition added $64.5 million of first-half sales and $4.1 million of net earnings. The purchase-price allocation remained preliminary, and an earn-out liability had not been recorded based on current expectations.
- The company authorized a share-repurchase program of up to $500 million over twelve months. By June 28, it had repurchased 490,172 shares for approximately $77.1 million; by July 22, total repurchases were 1,039,092 shares for $159.5 million. The quarterly dividend was increased 50% to $0.375 per share.
- Other unusual items included a $3.5 million loss on the fair value of the EMD investment, foreign-exchange effects, lower employee incentive accruals, and lower pension-plan expense. The company also recorded $3.5 million of first-half loss on investment.
- Approximately $675.5 million of foreign subsidiary earnings had not been provided for U.S. income taxes because management intended to reinvest them. Access to certain foreign cash, including $100.7 million held by Delta Ltd., may be constrained by pension-funding requirements.
- The company adopted no new accounting policy during the period that materially changed results. It was evaluating the effect of the new revenue-recognition standard, ASU 2014-09, effective for periods beginning after December 15, 2016.
Most Important Facts to Verify
- Whether weaker Utility, Irrigation, Coatings, and Other segment demand and lower margins persist in the second half of 2014.
- The final purchase-price allocation, working-capital adjustment, and any earn-out obligation related to Valmont SM.
- The pace and funding of the remaining share-repurchase authorization and its effect on cash, debt, and per-share results.
- Foreign-exchange sensitivity, particularly to the Australian dollar, Brazilian real, and South African rand.
- Availability and geographic accessibility of cash, including potential taxes and pension restrictions on foreign cash repatriation.
- Compliance with debt covenants and continued availability under the revolving credit facility.
- Whether irrigation demand is affected by U.S. farm income, crop prices, and beginning customer backlogs.