Valmont Industries, Inc. — Q3 2011 Form 10-Q Summary
Business context and reporting period
Valmont Industries manufactures engineered infrastructure products, utility support structures, irrigation equipment, coatings and other industrial products and services. The unaudited report covers the thirteen and thirty-nine weeks ended September 24, 2011, compared with September 25, 2010. Fiscal 2010 results were reclassified to conform to the company’s post-Delta acquisition segment structure.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Year-to-date 2011 | Year-to-date 2010 |
|---|---|---|---|---|
| Net sales | $672.2 million | $527.8 million | $1,908.8 million | $1,376.8 million |
| Gross profit | $167.4 million | $132.5 million | $471.9 million | $361.9 million |
| Gross margin | 24.9% | 25.1% | 24.7% | 26.3% |
| Operating income | $72.0 million | $47.1 million | $186.0 million | $116.1 million |
| Operating margin | 10.7% | 8.9% | 9.7% | 8.4% |
| Net earnings attributable to Valmont | $42.1 million | $25.9 million | $113.6 million | $59.5 million |
| Diluted EPS | $1.59 | $0.98 | $4.28 | $2.25 |
- Q3 sales increased 27.4%, operating income increased 52.9%, and diluted EPS increased 62.2%. Year-to-date sales increased 38.6%, operating income increased 60.2%, and diluted EPS increased 90.2%.
- Net cash provided by operating activities was $64.1 million year to date, compared with $85.3 million in 2010. The decline primarily reflected higher working capital, particularly inventories, and an $11.8 million Delta pension contribution.
- Capital expenditures were $46.4 million year to date versus $20.3 million in 2010. Management expected full-year 2011 capital spending of approximately $70 million to $75 million.
- Cash and cash equivalents were $336.9 million at September 24, 2011, compared with $346.9 million at December 25, 2010. Net working capital increased to $831.7 million from $747.3 million.
- Total interest-bearing debt was approximately $506.0 million, compared with $477.7 million at year-end 2010. Long-term debt on the balance sheet was $495.0 million, including $450.0 million of 6.625% senior unsecured notes due in 2020.
- The company had $20.0 million drawn on its $280.0 million revolving credit facility and reported $240.9 million of additional availability. It was in compliance with all debt covenants; trailing leverage was 1.56x versus a 3.75x maximum, and interest coverage was 9.34x versus a 2.50x minimum.
Material changes versus the prior comparable period
- All reportable segments increased year-to-date sales. Irrigation sales rose 57.1% and operating income rose 89.6%; Utility Support Structures sales rose 19.3% and operating income rose 11.4%; Coatings sales rose 49.7% and operating income rose 41.4%.
- Engineered Infrastructure Products sales rose 25.1% year to date, but operating income declined 3.1% because higher raw-material costs and competitive pricing offset volume and Delta-related growth.
- Gross margin declined year to date from 26.3% to 24.7%, primarily because of higher steel and zinc costs, competitive pricing pressure and adverse effects from Australian flooding. Higher volumes and productivity gains partly offset these pressures.
- SG&A increased 16.3% year to date, reflecting the full-year inclusion of Delta expenses, higher incentive accruals and increased compensation costs. These increases were partly offset by $12.9 million of lower Delta acquisition and integration costs.
- The company refinanced $150.0 million of senior subordinated notes in June 2011 with additional 6.625% senior unsecured notes, extending maturities and taking advantage of favorable interest rates. The redemption premium was approximately $1.7 million.
- Valmont acquired the remaining 40% of Donhad Pty. Ltd. for $25.3 million and acquired a 60% interest in an irrigation monitoring services company for $1.5 million.
Outlook, commentary, risks and unusual items
- Management expected adequate liquidity based on available credit facilities, recent debt issuance and historical positive operating cash flow. It intended to keep long-term debt below 40% of invested capital; the ratio was 27.1% at September 24, 2011.
- The company identified cyclical demand, raw-material availability and pricing, product pricing, competition, foreign exchange, economic conditions and government policy as factors that could cause actual results to differ from forward-looking statements.
- North American lighting and transportation markets remained weak, affected by uncertainty over long-term federal highway funding and state budget deficits. European infrastructure demand was affected by deficit-control measures and public debt concerns.
- Irrigation demand benefited from strong agricultural conditions, favorable farm commodity prices, projected strong farm income and generally drier North American weather.
- A fire at an Australian galvanizing facility resulted in property damage and business interruption. Insurance settlement discussions were ongoing; management expected insurance proceeds to exceed the damaged assets’ net book value and expected operations to resume in the fourth quarter of 2011.
- The company completed its annual goodwill impairment testing and found no goodwill impairment. The evaluation of certain indefinite-lived trade names was incomplete and expected to be finalized in the fourth quarter of 2011.
- Unfunded or timing-uncertain long-term liabilities related to income tax, environmental and other matters were approximately $50.0 million. Total contractual cash obligations were approximately $994.9 million, including debt, interest, pension contributions, operating leases and purchase commitments.
- Approximately $388 million of undistributed foreign subsidiary earnings had not been provided for U.S. income taxes because management intended to reinvest the earnings. Repatriation could create additional tax obligations.
Most important facts for investors to verify
- Whether higher sales volumes and operating leverage can offset steel, zinc and other raw-material inflation and competitive pricing pressure.
- The sustainability of strong Irrigation and Utility results and the effect of agricultural, infrastructure and communications market conditions.
- The final insurance settlement and timing of the Australian galvanizing facility’s return to operations.
- The fourth-quarter evaluation of certain trade names and any resulting impairment charge.
- Working-capital requirements, inventory growth and operating cash-flow conversion as sales expand.
- Debt maturities, covenant compliance, pension contributions and the company’s ability to maintain its targeted debt-to-invested-capital ratio.
- The impact of foreign exchange movements and any taxes arising from repatriation of foreign earnings.