Valmont Industries, Inc. — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended September 28, 2013, compared with September 29, 2012. The interim financial statements are unaudited. Valmont operates through Engineered Infrastructure Products, Utility Support Structures, Coatings, Irrigation, and Other businesses.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Year-to-date 2013 | Year-to-date 2012 |
|---|---|---|---|---|
| Net sales | $778.0 million | $729.8 million | $2,476.3 million | $2,214.5 million |
| Gross profit | $225.6 million | $192.4 million | $722.4 million | $578.1 million |
| Gross margin | 29.0% | 26.4% | 29.2% | 26.1% |
| Operating income | $109.9 million | $90.4 million | $372.4 million | $270.6 million |
| Operating margin | 14.1% | 12.4% | 15.0% | 12.2% |
| Net earnings attributable to Valmont | $56.5 million | $56.7 million | $223.6 million | $169.0 million |
| Diluted EPS | $2.10 | $2.12 | $8.31 | $6.32 |
- Q3 sales increased 6.6%, gross profit increased 17.3%, and operating income increased 21.6%. Year-to-date sales increased 11.8%, gross profit increased 25.0%, and operating income increased 37.6%.
- Q3 net earnings attributable to Valmont declined 0.4% and diluted EPS declined 0.9%, primarily reflecting a higher effective tax rate and lower equity earnings. Year-to-date net earnings and diluted EPS increased 32.3% and 31.5%, respectively.
- Effective tax rates were 42.8% in Q3 2013 versus 34.1% in Q3 2012, and 35.6% year-to-date versus 36.2%.
- Operating cash flow was $249.1 million year-to-date, compared with $117.7 million in the prior-year period. Capital expenditures were $75.1 million, and investing cash flow was negative $87.4 million.
- Cash and cash equivalents were $543.4 million at September 28, 2013, compared with $414.1 million at December 29, 2012. Net working capital was $1,166.6 million.
- Total interest-bearing debt was $488.7 million, including $471.3 million of long-term debt and $17.1 million of bank notes. The company had $85.3 million of unused short-term bank lines and $384.3 million available under its revolving credit facility after letters of credit.
- The $450 million principal amount of senior unsecured notes bears interest at 6.625% and is due in April 2020. The company reported compliance with all debt covenants.
- Cash dividends declared were $0.250 per share in Q3 and $0.725 per share year-to-date, versus $0.225 and $0.630, respectively, in the comparable periods.
Material changes versus the prior comparable period
- All reportable segments increased Q3 and year-to-date operating income. Year-to-date operating income grew most strongly in Utility Support Structures, up 58.5%, and Engineered Infrastructure Products, up 49.1%; Irrigation increased 45.3%.
- Year-to-date net sales increased in Engineered Infrastructure Products by 6.8%, Utility Support Structures by 12.7%, Coatings by 7.7%, and Irrigation by 26.2%. Other sales declined 8.2%.
- Growth reflected higher volume, pricing and mix, acquisitions, and improved factory performance. Currency translation reduced Q3 sales by approximately $17.1 million and year-to-date sales by approximately $26.1 million.
- The February 2013 acquisition of Locker Group contributed $46.7 million of year-to-date sales and $1.4 million of Q3 operating profit. The December 2012 acquisition of Pure Metal Galvanizing also increased Coatings results.
- Gross-margin expansion reflected improved pricing and mix, better factory operations, and moderating steel and other raw-material costs.
- SG&A increased 13.4% in Q3 and 13.8% year-to-date, driven by acquired businesses, higher compensation, and employee incentive accruals. Corporate expense also increased.
- Q3 and year-to-date comparisons benefited from the absence of approximately $1.3 million and $8.4 million, respectively, of prior-year Utility production and rework costs. Coatings also benefited from a $4.6 million gain on the sale of an Australian galvanizing facility in Q2 2013.
- Equity earnings from nonconsolidated subsidiaries declined following the February 2013 sale of the company’s 49% investment in a manganese materials operation. The sale generated approximately $29.3 million of proceeds and no significant gain or loss.
- Accumulated other comprehensive income fell to $0.3 million from $43.9 million at year-end, primarily due to foreign-currency translation losses.
Guidance, outlook, risks, and unusual items
- Management expected fiscal 2013 capital spending of approximately $110 million, primarily for Utility capacity expansion and additional Irrigation manufacturing investment.
- Management stated that liquidity was adequate based on cash, available credit facilities, and positive operating cash flow. The company’s long-term debt-to-invested-capital ratio was 22.0%, below its internal objective of 40% or less.
- Management identified risks from cyclical markets, economic and industry conditions, raw-material availability and pricing, product acceptance, competition, government policies, foreign exchange, and international operating conditions.
- U.S. lighting and traffic demand remained affected by the lack of long-term federal highway funding. European roadway demand was weakened by economic conditions and restricted government spending. Australian access systems and coatings demand was affected by weak mining and construction activity.
- Irrigation demand benefited from favorable agricultural economies and farm commodity prices, but the filing notes that these conditions may not persist.
- The Q3 tax rate included an $8.3 million increase in tax expense from the reduction of U.K. tax rates and related deferred-tax remeasurement. Year-to-date results included tax benefits associated with the sale of a nonconsolidated investment and increased U.S. research and development credits.
- The company tested goodwill and trade names for impairment during Q3 and reported no impairment. It also reported no material changes in financial obligations, off-balance-sheet arrangements, critical accounting policies, or market risk.
- Approximately $381.8 million of cash was held outside the United States. Management estimated that repatriation of all foreign cash would create approximately $38.6 million of income taxes. Approximately $644.3 million of undistributed foreign earnings had not been provided for U.S. income taxes because management intended to reinvest them.
Investor verification points
- Verify the sustainability of gross-margin improvement and the extent to which results benefited from acquisitions, favorable pricing, lower raw-material costs, and nonrecurring items.
- Assess exposure to foreign-currency movements, particularly the Australian dollar, Brazilian real, and South African rand.
- Review the Locker and Pure Metal Galvanizing integration, acquisition earn-out exposure, and contribution to future growth.
- Monitor Utility and Irrigation backlogs, capital-spending returns, and the continuation of favorable agricultural and utility-market conditions.
- Reconcile reported cash with its foreign location, potential repatriation taxes, debt maturities, covenant requirements, and available borrowing capacity.
- Evaluate the impact of the higher Q3 effective tax rate, U.K. deferred-tax remeasurement, and future tax-rate changes.
- Review foreign-currency translation losses, pension obligations, international receivables provisions, and potential goodwill or trade-name impairment.