Valmont Industries, Inc. — Fiscal 2013 Form 10-K
Reporting period: Fiscal year ended December 28, 2013, consisting of 52 weeks. Comparable fiscal 2012 also consisted of 52 weeks; fiscal 2011 consisted of 53 weeks. The fourth quarter of 2013 included a $12.0 million after-tax loss from deconsolidating Delta EMD and a $4.6 million after-tax fixed-asset impairment loss.
Business Context
Valmont is a diversified global manufacturer and service provider operating through Engineered Infrastructure Products, Utility Support Structures, Coatings, and Irrigation segments. Products include lighting, traffic, wireless communication, roadway safety and access structures; utility poles; metal coating services; and mechanized agricultural irrigation equipment. Approximately 37% of 2013 sales were sold in markets or produced by facilities outside North America.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $3,304.2 million | $3,029.5 million | 9.1% |
| Gross profit | $945.2 million | $802.5 million | 17.8% |
| Gross margin | 28.6% | 26.5% | +210 bps |
| Operating income | $473.1 million | $382.3 million | 23.8% |
| Operating margin | 14.3% | 12.6% | +170 bps |
| Net earnings attributable to Valmont | $278.5 million | $234.1 million | 19.0% |
| Diluted EPS | $10.35 | $8.75 | 18.3% |
| Net cash from operating activities | $396.4 million | $197.1 million | Up $199.3 million |
| Capital expenditures | $106.8 million | $97.1 million | Up $9.7 million |
| EBITDA | $546.2 million | $462.4 million | 18.1% |
Net earnings included $16.6 million, or $0.62 per diluted share, of after-tax EMD-related losses. Excluding those items, the filing does not present a single adjusted EPS measure.
Segment Performance
| Segment | 2013 Sales | Sales Change | 2013 Operating Income | Operating Income Change |
|---|---|---|---|---|
| Engineered Infrastructure Products | $897.5 million | 7.7% | $87.7 million | 62.4% |
| Utility Support Structures | $959.7 million | 10.3% | $174.7 million | 35.4% |
| Coatings | $301.0 million | 6.7% | $74.9 million | 4.6% |
| Irrigation | $882.2 million | 17.5% | $181.5 million | 26.3% |
| Other | $263.8 million | (10.2%) | $31.0 million | (33.5%) |
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $613.7 million at year-end, versus $414.1 million in 2012; approximately $395.1 million was held outside the United States.
- Working capital was $1.161 billion, compared with $1.014 billion in 2012.
- Total interest-bearing debt was approximately $490.1 million, including $471.1 million of long-term debt. The principal debt was $450 million of 6.625% senior unsecured notes due April 2020.
- The company had no borrowings under its $400 million revolving credit facility and $382.1 million of borrowing capacity after standby letters of credit.
- Debt-to-invested-capital was 22.3%, down from 23.9%; management’s internal objective is to remain at or below 40%.
- Debt covenants were satisfied, including debt not exceeding 3.5 times EBITDA and EBITDA of at least 2.5 times interest expense. Reported ratios were 0.90 times and 16.81 times, respectively.
- Net cash used in investing activities was $131.7 million, including $106.8 million of capital expenditures and $63.2 million for acquisitions, partly offset by $37.6 million of asset-sale proceeds.
- Management expected approximately $100 million of fiscal 2014 capital expenditures and stated that available liquidity and expected operating cash flows were adequate for fiscal 2014 and beyond.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected higher volume, favorable pricing and mix, acquisitions contributing approximately $99 million, and a $42.8 million adverse currency-translation effect.
- Gross-margin expansion reflected improved pricing and mix, better factory operations, and moderating raw-material costs.
- All four reportable segments increased operating income. Utility benefited from stronger U.S. demand, improved pricing and mix, and the absence of approximately $12.9 million of prior-year production and rework costs.
- Irrigation benefited from higher global volumes, favorable agricultural conditions, pricing increases and moderating material costs.
- EIP benefited from improved lighting operations, North American communication demand and the Locker acquisition.
- Coatings results included a $4.6 million gain on the sale of an Australian galvanizing operation and approximately $4.1 million of operating income from Pure Metal Galvanizing.
- Other operating income declined primarily because of a $12.2 million impairment charge at the electrolytic manganese dioxide operation.
- SG&A increased 12.4%, driven by acquired businesses, higher incentives and compensation, doubtful-account provisions, and pension-related costs.
- Operating cash flow more than doubled because of improved earnings and more effective working-capital management.
- Backlog declined to $666.6 million from $902.5 million. Utility backlog was $334.4 million, EIP $200.8 million, Irrigation $104.4 million, Coatings $0.7 million and Other $26.3 million.
Outlook, Risks and Unusual Items
Management did not provide a consolidated revenue or earnings forecast in the filing. It expected fiscal 2014 capital expenditures of approximately $100 million and planned to maintain long-term debt-to-invested-capital below 40%, subject to acquisition activity and operating conditions.
- Demand is cyclical and depends on infrastructure and government spending, utility capital programs, commercial and industrial construction, wireless investment, farm income, commodity prices, weather, water regulations and interest rates.
- Steel, aluminum, zinc, natural gas and fuel prices can increase costs; fixed-price contracts may delay recovery of raw-material inflation and pressure margins.
- Foreign currency movements reduced 2013 reported sales by approximately $42.8 million and affected international profitability; Australia represented approximately 15% of sales.
- The Delta U.K. pension plan was underfunded by approximately $154.4 million at year-end. Contractual pension contributions and administrative funding were approximately $18.1 million annually.
- Contractual cash obligations totaled approximately $1.048 billion, including debt, interest, pension contributions, operating leases, acquisition earn-outs and purchase commitments. Additional long-term liabilities of approximately $43.9 million related to tax, environmental and other matters were not included because payment timing could not be reliably estimated.
- Cash held by foreign subsidiaries may incur estimated U.S. tax costs of approximately $49.8 million to $138.3 million if repatriated.
- Product warranty liabilities were $20.7 million. A 50% change in the estimate would affect operating income by approximately $10.4 million.
- The company reported no material legal proceedings and stated that known claims, environmental costs and contingencies were not expected to have a material adverse effect.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor Verification Points
- Verify whether the sharp 2013 operating-margin improvement, particularly in Utility, is sustainable after the absence of prior-year rework costs and the benefit of lower raw-material costs.
- Reconcile reported EPS to the $0.62 per-share EMD impairment and deconsolidation charges and assess the ongoing economics of the remaining EMD investment.
- Monitor backlog conversion, especially the year-over-year decline in Utility and Irrigation backlog, and compare new orders with expected fiscal 2014 shipments.
- Review the location and availability of cash, including potential tax costs associated with repatriating foreign cash.
- Assess the Delta pension plan’s funding requirements and sensitivity to discount rates, inflation, investment returns and the 2015 funding-plan review.
- Evaluate exposure to commodity prices, foreign exchange, government infrastructure spending, agricultural conditions and cyclical end markets.
- Review acquisition integration and earn-out obligations related to Locker, Armorflex and Pure Metal Galvanizing.