Valmont Industries, Inc. — 2011 Q1 Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. reported unaudited results for the thirteen weeks ended March 26, 2011, compared with the thirteen weeks ended March 27, 2010. The company manufactures engineered infrastructure and utility support structures, provides coatings services, manufactures agricultural irrigation equipment, and operates other industrial businesses. The results include Delta plc for the first full comparable quarter following its May 12, 2010 acquisition.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $567.9 million | $367.4 million | 54.6% |
| Gross profit | $136.5 million | $100.7 million | 35.5% |
| Gross margin | 24.0% | 27.4% | Down 340 basis points |
| Operating income | $45.3 million | $31.7 million | 43.1% |
| Operating margin | 8.0% | 8.6% | Down 60 basis points |
| Net earnings attributable to Valmont | $25.6 million | $16.5 million | 55.6% |
| Diluted EPS | $0.97 | $0.62 | 54.8% |
| Effective tax rate | 33.9% | 36.4% | Down 250 basis points |
| Net cash from operations | $5.7 million | $19.3 million | Decrease |
Segment net sales and operating income were: Engineered Infrastructure Products, $163.0 million and $2.2 million; Utility Support Structures, $125.3 million and $13.5 million; Coatings, $61.9 million and $10.3 million; Irrigation, $151.0 million and $23.9 million; and Other, $66.6 million and $8.9 million.
Cash and cash equivalents were $358.3 million at March 26, 2011, compared with $346.9 million at December 25, 2010. Total current assets were $1.17 billion and current liabilities were $358.9 million. Inventories increased to $324.0 million from $280.2 million, primarily to support higher sales.
Total interest-bearing debt was approximately $494.7 million, compared with $477.7 million at year-end 2010. Long-term debt was $484.5 million, and bank notes payable were $9.9 million. The company had $47.5 million of unused short-term bank lines and approximately $236.9 million of additional borrowing capacity under its revolving credit facility. The long-term debt-to-invested-capital ratio was 26.5%.
Capital expenditures were $12.6 million, compared with $4.6 million in the prior-year quarter. Investing cash flow was negative $11.5 million, while financing cash flow was positive $8.1 million. The company paid $4.4 million of dividends and declared cash dividends of $0.165 per share, compared with $0.15 per share in the prior-year quarter.
Material changes versus the prior comparable period
- Delta contributed $133.2 million of sales and $6.2 million of operating income in the quarter; Delta was not included in Q1 2010.
- Excluding Delta, sales growth was primarily driven by higher unit volumes in Irrigation and Utility Support Structures, with overall pricing approximately 3% higher due mainly to rising steel costs.
- Gross margin declined because of raw-material inflation, a $7.0 million increase in LIFO expense, competitive pricing in the U.S. and European infrastructure markets, and disruption from heavy rains and flooding affecting Australian operations.
- SG&A increased 32.0%, including $21.4 million of Delta-related expenses and $1.7 million of higher employee incentive accruals, partly offset by $1.8 million of lower acquisition and integration costs.
- Coatings and Irrigation operating income increased substantially, while Engineered Infrastructure Products and Utility Support Structures operating income declined modestly despite higher sales.
- Operating cash flow fell despite higher earnings because receivables, inventories and prepaid expenses increased. Inventory growth alone used $40.0 million of cash.
- The effective tax rate decreased primarily because Q1 2010 included nondeductible Delta acquisition expenses.
Guidance, outlook, commentary and risks
- Management expected fiscal 2011 capital spending of approximately $60 million to $70 million.
- Management planned to maintain long-term debt as a percentage of invested capital below 40%, subject to acquisition activity and steel-industry conditions.
- Management stated that available credit facilities, recent senior-note financing and historically positive operating cash flow provided adequate liquidity.
- The company expects continued exposure to cyclical markets, raw-material availability and pricing, competitive pricing pressure, customer demand, foreign exchange, international economic conditions and government infrastructure funding.
- North American transportation demand remained constrained by the lack of long-term federal highway funding and state budget deficits. European infrastructure demand was also weak and pricing and product mix were unfavorable.
- Australian operations were affected by flooding-related disruption to customers and suppliers, although company facilities did not sustain material damage.
- Debt agreements require interest-bearing debt not to exceed 3.75 times trailing EBITDA and trailing EBITDA to be at least 2.50 times interest expense. At quarter-end, the reported leverage ratio was 1.90 and the interest coverage ratio was 7.83; the company was in compliance.
- The company had approximately $388 million of undistributed foreign earnings intended for reinvestment. Repatriation could result in additional U.S. income taxes.
- Goodwill and indefinite-lived trade names were not impaired in the latest annual testing. The filing states that there were no material changes to financial commitments, off-balance-sheet arrangements, critical accounting policies or market risk disclosures.
Most important facts for investors to verify
- Whether Delta integration and acquired operations sustain expected sales and operating income contributions.
- Whether steel and other raw-material inflation can be recovered through pricing without further margin compression.
- Whether inventory and receivables growth converts into stronger operating cash flow in subsequent quarters.
- Actual fiscal 2011 capital expenditures relative to the $60 million to $70 million expectation.
- Compliance with debt covenants and the availability and utilization of revolving-credit capacity.
- Demand trends in irrigation, utility structures and infrastructure markets, including the effects of government funding and regional economic conditions.
- Potential effects of foreign currency movements, flooding or other supply-chain disruptions on international operations.