Valmont Industries, Inc. Form 10-Q Summary
Business context and reporting period
Unaudited results cover the thirteen and thirty-nine weeks ended September 27, 2014, compared with September 28, 2013. Valmont operates through Engineered Infrastructure Products, Utility Support Structures, Coatings, Irrigation, and Other businesses, serving global infrastructure, utility, agricultural, industrial, and related markets.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 39 Weeks 2014 | 39 Weeks 2013 |
|---|---|---|---|---|
| Net sales | $765.7 million | $778.0 million | $2,360.0 million | $2,476.3 million |
| Gross profit | $199.5 million | $225.6 million | $627.0 million | $722.4 million |
| Gross margin | 26.1% | 29.0% | 26.6% | 29.2% |
| Operating income | $87.8 million | $109.9 million | $291.4 million | $372.4 million |
| Operating margin | 11.5% | 14.1% | 12.3% | 15.0% |
| Net earnings attributable to Valmont | $23.6 million | $56.5 million | $143.5 million | $223.6 million |
| Diluted EPS | $0.92 | $2.10 | $5.43 | $8.31 |
- Q3 sales declined 1.6%; year-to-date sales declined 4.7%.
- Q3 net earnings declined 58.2%; year-to-date net earnings declined 35.8%.
- Net cash provided by operating activities was $82.7 million year to date, down from $249.1 million in the prior-year period.
- Capital expenditures were $63.4 million year to date versus $75.1 million; management expected approximately $85 million of full-year 2014 capital spending.
- Cash and cash equivalents were $452.2 million at September 27, 2014, compared with $613.7 million at December 28, 2013.
- Total interest-bearing debt was approximately $786.7 million, compared with $490.1 million at year-end 2013. Long-term debt on the balance sheet was $768.6 million.
- Working capital was $1,111.5 million at quarter-end versus $1,161.3 million at year-end 2013.
Material changes versus the prior comparable period
- Engineered Infrastructure Products was the strongest segment: Q3 sales rose 20.8% to $284.2 million and operating income rose 29.2% to $33.2 million, primarily from the Valmont SM and Armorflex acquisitions and a $4.3 million reversal of the Locker earn-out liability.
- Utility Support Structures Q3 sales fell 21.1% and operating income fell 59.0%, reflecting lower volumes, unfavorable mix, pricing competition, reduced fixed-cost leverage, and higher depreciation from added capacity.
- Coatings Q3 sales fell 2.3% and operating income fell 11.1%, primarily due to lower Asia-Pacific volumes, currency effects, and reduced fixed-cost leverage.
- Irrigation Q3 sales were essentially flat, but operating income declined 14.1%. Year-to-date sales and operating income declined 12.0% and 25.6%, respectively, due mainly to weaker North American demand, lower farm income expectations, and lower beginning backlogs.
- Other sales and operating income declined due to lower grinding-media volumes, weaker Australian mining demand, currency effects, and the deconsolidation of Delta EMD.
- Gross margin contracted because of lower prices, unfavorable mix, reduced volumes, and slightly higher raw-material costs. SG&A declined as lower incentive accruals and pension costs more than offset acquisition-related costs.
Debt, liquidity, outlook, risks, and unusual items
- In September 2014, Valmont issued $250.0 million of 5.00% senior notes due 2044 and $250.0 million of 5.25% senior notes due 2054. It repurchased $199.8 million of 6.625% notes due 2020, leaving $250.2 million outstanding.
- The refinancing generated $38.7 million of expense, including approximately $41.2 million of cash prepayment costs, partly offset by recognition of an unamortized premium and other adjustments.
- The revolving credit facility was amended on October 17, 2014, increasing commitments from $400 million to $600 million and extending maturity to October 2019. No borrowings were outstanding at quarter-end; approximately $582.4 million was available at October 21, 2014 after letters of credit.
- Valmont was in compliance with debt covenants. Reported leverage was 1.81 times EBITDA and interest coverage was 14.08 times, compared with covenant limits of 3.5 times and 2.5 times, respectively.
- The company authorized a $500 million share-repurchase program. By September 27, 2014, it had repurchased 2.126 million shares for approximately $316.3 million; by October 20, repurchases totaled 2.426 million shares for $356.4 million. The quarterly dividend increased to $0.375 per share.
- Management stated that available credit facilities, recent note issuance, and expected operating cash flows provided adequate liquidity. However, approximately $294.5 million of cash was held outside the United States, and repatriation of all foreign cash was estimated to generate approximately $34.1 million of taxes.
- Subsequent to quarter-end, Valmont acquired Shakespeare Composite Structures for $48 million in cash. The business has approximately $55 million of annual sales and will be included in Engineered Infrastructure Products.
- Valmont acquired 90% of Valmont SM for approximately $120.5 million and 51% of AgSense for $17 million during 2014. Purchase-price allocations remained preliminary, and Valmont SM had contributed $105.8 million of sales and $6.6 million of net earnings year to date.
- Management identified risks from cyclical markets, raw-material availability and pricing, competitive pricing, foreign-exchange movements, weaker utility, mining, agricultural, and international demand, government policy, and the lack of long-term U.S. federal highway funding legislation.
- Goodwill and trade names were tested for impairment during the third quarter and were not impaired. The filing states that the new revenue-recognition standard, ASU 2014-09, was being evaluated and its financial effect was not yet determined.
Most important facts for investors to verify
- Whether weak utility and irrigation demand and lower gross margins persist into the fourth quarter and fiscal 2015.
- The effect of the refinancing, higher debt balance, and long-term interest obligations on future earnings and cash flow.
- Progress and final purchase-price allocations for Valmont SM, AgSense, and the subsequent Shakespeare acquisition.
- Remaining authorization and pace of the share-repurchase program relative to liquidity and leverage objectives.
- Foreign-currency exposure, overseas cash availability, pension funding requirements, and potential repatriation taxes.
- Potential exposure to approximately $44.4 million of long-term liabilities related to income tax, environmental, and other matters for which payment timing could not be reliably estimated.