Valmont Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Valmont Industries, Inc. is a global manufacturer and service provider operating through Engineered Infrastructure Products, Utility Support Structures, Coatings, Irrigation, and other businesses. This unaudited filing covers the thirteen weeks ended March 29, 2014, compared with the thirteen weeks ended March 30, 2013.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $751.7 million | $819.6 million | (8.3%) |
| Gross profit | $207.0 million | $235.4 million | (12.1%) |
| Gross margin | 27.5% | 28.7% | (120 bps) |
| Operating income | $98.9 million | $118.2 million | (16.3%) |
| Operating margin | 13.2% | 14.4% | (120 bps) |
| Net earnings attributable to Valmont | $56.0 million | $77.6 million | (27.8%) |
| Diluted EPS | $2.08 | $2.89 | (28.0%) |
| Operating cash flow | $21.9 million | $64.6 million | $(42.7) million |
| Capital expenditures | $23.5 million | $21.8 million | +$1.7 million |
Net interest expense was $6.5 million, compared with $6.8 million. The effective tax rate increased to 34.7% from 31.0%, principally because the prior-year period included approximately $3.2 million of non-cash tax benefits related to an investment sale and higher research and development tax credits. The company declared a quarterly dividend of $0.250 per share, compared with $0.225.
Segment Performance and Material Changes
- Engineered Infrastructure Products: Sales increased 7.6% to $208.9 million and operating income increased 7.9% to $13.7 million, primarily reflecting the DS SM acquisition and improved communication, highway safety, and selected lighting activity.
- Utility Support Structures: Sales declined 10.5% to $214.2 million and operating income declined 29.0% to $32.8 million due to lower volumes, unfavorable pricing and mix, shipment delays, and reduced fixed-cost leverage.
- Coatings: Sales declined 10.3% to $67.2 million, while operating income increased 3.7% to $13.9 million. Cost containment and capacity reductions in Australia supported profitability.
- Irrigation: Sales declined 13.1% to $212.7 million and operating income declined 21.1% to $43.1 million, mainly because of lower North American volumes, lower farm-income expectations, and lower beginning backlogs.
- Other: Sales declined 26.9% to $48.7 million and operating income declined 20.4% to $8.6 million, reflecting weaker grinding-media demand and the deconsolidation of EMD.
Consolidated sales were negatively affected by estimated volume declines of $56.2 million, unfavorable pricing and mix of $5.6 million, and currency translation of $22.1 million, partially offset by $16.0 million from acquisitions. Management attributed the gross-margin decline to lower prices, unfavorable mix, and slightly higher raw-material costs. SG&A declined 7.8%, primarily due to lower incentive accruals, currency effects, lower deferred compensation expense, and EMD deconsolidation.
Cash Flow, Debt, Liquidity, and Balance Sheet
- Cash and cash equivalents were $488.2 million at March 29, 2014, down from $613.7 million at December 28, 2013.
- Cash used in investing activities was $143.6 million, including $120.5 million for the DS SM acquisition and $23.5 million of capital expenditures.
- Total interest-bearing debt was $494.2 million, compared with $490.1 million at year-end. Long-term debt was $479.1 million and notes payable to banks were $14.9 million.
- The company had $114.5 million of short-term bank lines, of which $100.5 million was unused, and $382.4 million available under its $400 million revolving credit facility after standby letters of credit.
- Long-term debt to invested capital was 21.6%, below the company’s internal objective of 40% or less. The company was in compliance with its debt covenants, including a 3.5 times maximum leverage covenant and a 2.5 times minimum interest-coverage covenant.
- Net working capital was $1.115 billion, compared with $1.161 billion at December 28, 2013. Approximately $401.5 million of cash was held outside the United States; the company estimated approximately $47.1 million of tax would be payable if all foreign cash were repatriated.
Acquisition, Outlook, Risks, and Unusual Items
On March 3, 2014, Valmont acquired 90% of DS SM A/S, renamed Valmont SM, for $120.5 million net of cash acquired. Valmont SM manufactures heavy complex steel structures for wind energy, offshore oil and gas, electricity transmission, and related markets. The acquisition contributed $17.3 million of sales and $1.2 million of net earnings during the period. Purchase accounting remained preliminary, and the company expected to complete the fair-value process in the second quarter of 2014. The transaction includes a contingent earn-out for which no liability was recorded based on current expectations.
Management expected approximately $100 million of capital spending for fiscal 2014 and stated that available cash, credit facilities, recent debt issuance, and historical operating cash flows provided adequate liquidity. The filing does not provide specific full-year revenue or earnings guidance.
Key risks include cyclical demand, raw-material availability and prices, competitive pricing, market acceptance of products, foreign-currency volatility, economic conditions, weather-related disruption, weaker utility and irrigation demand, and government policy changes. Management noted transportation-market challenges related in part to the absence of long-term U.S. federal highway funding legislation. Other expense included a $3.4 million loss from the change in fair value of the EMD investment and additional foreign-exchange losses. No material changes were reported in financial commitments, off-balance-sheet arrangements, market risk, or critical accounting policies.
Important Facts for Investors to Verify
- Whether the sharp decline in operating cash flow and higher inventory levels normalize during subsequent quarters.
- The final purchase-price allocation, earn-out exposure, and operating performance of Valmont SM.
- Whether Utility and Irrigation demand, pricing, backlogs, and fixed-cost utilization recover.
- The sustainability of the 27.5% gross margin amid pricing, mix, raw-material, and currency pressures.
- Foreign-currency exposure and the potential tax cost of repatriating foreign cash.
- Compliance with debt covenants and the availability of revolving-credit capacity following acquisitions and capital spending.
- Actual fiscal 2014 capital expenditures versus the approximately $100 million expectation and the company’s subsequent full-year outlook.