Business Context and Reporting Period
Valmont Industries, Inc. reported unaudited results for the thirteen and thirty-nine weeks ended September 29, 2012, compared with the periods ended September 24, 2011. The company operates through Engineered Infrastructure Products, Utility Support Structures, Coatings, Irrigation, and Other businesses serving infrastructure, utility, industrial, agricultural, mining, and related markets.
Financial Highlights
| Metric | Q3 2012 | Q3 2011 | Year-to-date 2012 | Year-to-date 2011 |
|---|---|---|---|---|
| Net sales | $729.8 million | $672.2 million | $2,214.5 million | $1,908.8 million |
| Gross profit | $192.4 million | $167.4 million | $578.1 million | $471.9 million |
| Gross margin | 26.4% | 24.9% | 26.1% | 24.7% |
| Operating income | $90.4 million | $72.0 million | $270.6 million | $186.0 million |
| Operating margin | 12.4% | 10.7% | 12.2% | 9.7% |
| Net earnings attributable to Valmont | $56.7 million | $42.1 million | $169.0 million | $113.6 million |
| Diluted EPS | $2.12 | $1.59 | $6.32 | $4.28 |
| Operating cash flow | Not separately provided | Not separately provided | $117.7 million | $64.1 million |
- Third-quarter sales increased 8.6%, operating income increased 25.6%, and diluted EPS increased 33.3%. Year-to-date sales increased 16.0%, operating income increased 45.5%, and diluted EPS increased 47.7%.
- Gross-margin expansion reflected improved pricing and mix, moderating steel and zinc costs, and $10.3 million of lower year-to-date LIFO expense.
- Cash and cash equivalents were $427.1 million at September 29, 2012, versus $362.9 million at December 31, 2011. Net working capital was $996.5 million, compared with $844.9 million at year-end.
- Year-to-date capital expenditures were $58.7 million. Total interest-bearing debt was approximately $489.2 million, including $450 million of 6.625% senior unsecured notes due April 2020.
- The company had no borrowings under its new $400 million revolving credit agreement and reported $384.9 million of remaining borrowing capacity. It also maintained short-term bank lines totaling $63.9 million, of which $51.8 million was unused.
- The quarterly dividend was $0.225 per share, compared with $0.180 in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Utility Support Structures was the strongest growth contributor: third-quarter net sales rose 39.7% and operating income rose 105.4%; year-to-date sales rose 48.8% and operating income rose 98.8%.
- Engineered Infrastructure Products delivered modest sales growth but higher operating income, while Coatings benefited from improved productivity, volume leverage, and lower zinc costs.
- Irrigation sales increased 3.9% in the quarter and 12.6% year to date, supported by favorable agricultural markets, drought-related U.S. demand, pricing, and mix.
- Other businesses experienced lower third-quarter sales and operating income, principally from weaker tubing and electrolytic manganese dioxide results.
- Foreign-currency translation reduced third-quarter sales by approximately $16.2 million and operating income by $1.7 million; the year-to-date effects were reductions of approximately $34.2 million and $3.4 million, respectively.
- SG&A increased 6.9% in the quarter and 7.6% year to date, driven by higher compensation, incentive accruals, commissions, and deferred compensation costs. These increases were partly offset by insurance and vendor dispute settlements and favorable currency translation.
- The year-to-date effective tax rate increased to 36.2% from 30.6%, while the quarterly rate declined to 33.3% from 36.1%. Management attributed the year-to-date increase primarily to prior-year tax benefits and a greater proportion of U.S. earnings.
Outlook, Commentary, Risks, and Unusual Items
- Management expected full-year 2012 capital expenditures of approximately $100 million, primarily for Utility capacity expansion and additional Irrigation manufacturing investment.
- Management expected the effective tax rate to approximate 34% going forward, subject to geographic earnings mix and enacted tax rates.
- Management stated that liquidity was adequate based on operating cash flows, available credit facilities, and recent debt financing. The company’s long-term debt-to-invested-capital ratio was 24.2%, below its objective of maintaining it at or below 40%.
- Debt agreements include a maximum interest-bearing debt-to-trailing-four-quarter EBITDA ratio of 3.50x and a minimum EBITDA-to-interest expense ratio of 2.50x. Actual ratios were 1.13x and 13.03x, respectively, and all covenants were satisfied.
- Management cited cyclical markets, raw-material availability and pricing, foreign exchange, economic conditions, competitive pressures, government policies, product acceptance, and international market weakness as principal risks.
- European infrastructure spending remained weak and uncertain, while U.S. roadway activity was constrained by state budget issues. Utility investment, global agricultural conditions, and demand for irrigation equipment were more favorable.
- Approximately $565 million of undistributed foreign earnings were intended to be reinvested. Approximately $347 million of cash was held outside the United States; full repatriation would generate estimated taxes of approximately $24.7 million.
- Third-quarter testing found no impairment of goodwill or trade names. The filing states that there were no material changes to financial commitments, off-balance-sheet arrangements, critical accounting policies, or market risk disclosures.
Important Facts for Investors to Verify
- Confirm whether Utility Support Structures’ exceptional growth and margin improvement are sustainable, including the effect of large orders, pricing, production inefficiencies, and capacity expansion.
- Assess the sustainability of gross-margin gains from lower raw-material and LIFO costs, pricing, and product mix.
- Monitor foreign-exchange exposure and economic conditions in Europe, Australia, and other international markets.
- Reconcile cash generation with rising receivables, inventories, planned $100 million capital spending, and the company’s dividend policy.
- Review the terms and covenants of the August 15, 2012 revolving credit agreement and the 2020 senior notes.
- Evaluate the potential tax cost of repatriating foreign cash and the sensitivity of the approximately 34% expected tax rate to geographic earnings mix.