Valmont Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. filed an unaudited Form 10-Q for the thirteen and thirty-nine weeks ended September 25, 2010, compared with September 26, 2009. The company operates through Engineered Support Structures, Utility Support Structures, Coatings, Irrigation, Delta, and Other segments. Delta plc was acquired on May 12, 2010 and is included in consolidated results from that date.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | Year-to-date 2010 | Year-to-date 2009 |
|---|---|---|---|---|
| Net sales | $527.8 million | $434.0 million | $1,376.8 million | $1,388.0 million |
| Gross profit | $132.5 million | $136.4 million | $361.9 million | $409.4 million |
| Gross margin | 25.1% | 31.4% | 26.3% | 29.5% |
| Operating income | $47.1 million | $62.7 million | $116.1 million | $190.5 million |
| Operating margin | 8.9% | 14.5% | 8.4% | 13.7% |
| Net earnings attributable to Valmont | $25.9 million | $40.5 million | $59.5 million | $120.6 million |
| Diluted EPS | $0.98 | $1.53 | $2.25 | $4.59 |
| Operating cash flow | Not separately provided | Not separately provided | $85.3 million | $266.4 million |
Third-quarter sales increased 21.6%, primarily because of $130.9 million of Delta sales. Excluding Delta, company sales volumes declined approximately 6%. Year-to-date sales declined 0.8%, while operating income fell 39.0% and net earnings attributable to Valmont fell 50.6%.
As of September 25, 2010, cash and cash equivalents were $323.2 million, compared with $180.8 million at December 26, 2009. Receivables were $400.7 million and inventories were $296.3 million. Total assets were $2.06 billion and total shareholders’ equity was $936.6 million.
Total interest-bearing debt was approximately $497.6 million, including $300.0 million of 6.625% senior unsecured notes due in 2020, $150.0 million of 6.875% senior subordinated notes due in 2014, and $23.0 million drawn under the revolving credit facility. The company had approximately $233.6 million of additional revolver availability and was in compliance with its debt covenants. The long-term debt-to-invested-capital ratio was 28.1%, versus 15.2% at year-end 2009.
Capital expenditures were $20.3 million year to date, and management expected full-year 2010 capital spending of approximately $40 million. The company paid dividends of $0.480 per share year to date and declared a quarterly dividend of $0.165 per share, implying an indicated annual rate of $0.66 per share.
Material changes versus the prior comparable period
- Delta contributed $131.4 million of third-quarter sales, $205.5 million of year-to-date sales, and $15.4 million of year-to-date operating income from the acquisition date.
- Delta acquisition-related expenses totaled $0.5 million in the quarter and $14.6 million year to date. Related financing and bridge-loan costs also increased interest expense. Management estimated the after-tax impact of these items at approximately $0.3 million for the quarter and $15.6 million year to date.
- Gross margin declined because of weaker Utility segment margins, lower volumes, competitive pricing, unfavorable mix, and higher steel costs.
- Utility Support Structures sales declined 27.8% in the quarter and 38.9% year to date; operating income declined 79.5% and 73.5%, respectively.
- Engineered Support Structures sales and operating income declined because of weaker lighting and communications demand, lower pricing, and competitive pressure.
- Coatings and Irrigation performed better. Third-quarter operating income increased 14.1% in Coatings and 90.5% in Irrigation; year-to-date increases were 4.0% and 55.8%, respectively.
- Operating cash flow decreased by $181.1 million year to date, primarily because of lower earnings and the absence of the substantial inventory reduction benefit realized in 2009.
- Debt increased substantially to finance the Delta acquisition. The acquisition also added approximately $124.7 million of goodwill and $94.3 million of intangible assets compared with year-end balances.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2010 capital expenditures of approximately $40 million and stated that it expected to maintain long-term debt to invested capital below 40%, subject to acquisition activity and steel-industry conditions.
- Management believed available cash, credit facilities, the senior-notes issuance, and expected operating cash flows provided adequate liquidity.
- The company described its businesses as cyclical and identified risks including economic and market conditions, customer demand, infrastructure and government spending, raw-material availability and pricing, product pricing, competition, foreign currency movements, and changes in government policies.
- Delta included a defined-benefit pension plan with a $124.7 million liability at September 25, 2010. Required employer contributions were approximately $9.9 million annually, plus approximately $1.6 million for administrative costs.
- The company recorded a $20 million provision related to legal and factual uncertainties concerning potential transferee tax liability associated with historical Delta transactions. The matter remains subject to uncertainty.
- Delta acquisition accounting remained preliminary at September 25, 2010. Management expected to complete the fair-value process in the fourth quarter of 2010.
- Goodwill was not impaired in the third-quarter annual test, although the North American Communications Structures reporting unit had fair value only slightly above carrying value. The PiRod trade name was under further impairment evaluation.
- Management concluded disclosure controls were effective, but the internal-control assessment excluded Delta because it was acquired during the year. The company also implemented enterprise-resource-planning and related process enhancements during the quarter.
Important facts for investors to verify
- Whether Delta integration, operating performance, acquisition accounting, and related costs develop as expected.
- Whether Utility and Engineered Support Structures demand, pricing, backlog, and margins recover from 2010 declines.
- The sustainability of the lower consolidated gross and operating margins and the effect of steel, zinc, and other raw-material prices.
- Debt reduction capacity, covenant headroom, revolver availability, refinancing requirements, and the effect of higher interest expense.
- The ultimate valuation of the PiRod trade name and any subsequent goodwill or intangible-asset impairment.
- Funding requirements, actuarial assumptions, and potential cash exposure related to the Delta pension plan.
- The outcome of the $20 million provision related to Delta’s historical tax matter and the timing of any payment.
- Whether operating cash flow improves after the significant year-to-date decline from 2009.