Valmont Industries, Inc. — 2013 Q1 Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. is a global manufacturer and services provider serving infrastructure, utility, coatings, irrigation, mining, industrial and related markets. The filing covers the unaudited thirteen weeks ended March 30, 2013, compared with the thirteen weeks ended March 31, 2012.
Reportable segments were Engineered Infrastructure Products, Utility Support Structures, Coatings and Irrigation, plus an Other category. The company reclassified certain intercompany utility-structure sales into Engineered Infrastructure Products; prior-period segment sales were conformed, with no change to consolidated sales or operating income.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $819.6 million | $717.4 million | 14.2% |
| Gross profit | $235.4 million | $186.3 million | 26.4% |
| Gross margin | 28.7% | 26.0% | +270 bps |
| Operating income | $118.2 million | $82.8 million | 42.8% |
| Operating margin | 14.4% | 11.5% | +290 bps |
| Net earnings attributable to Valmont | $77.6 million | $52.3 million | 48.4% |
| Diluted EPS | $2.89 | $1.96 | 47.4% |
| Effective tax rate | 31.0% | 35.3% | Lower |
| Operating cash flow | $64.6 million | $(12.9) million | Improved |
Gross-margin expansion reflected improved pricing and mix, lower raw-material costs and approximately $2.6 million of lower LIFO expense. SG&A increased 13.2% to $117.2 million, but declined slightly as a percentage of sales to 14.3% from 14.4%.
- Engineered Infrastructure Products: Net sales of $194.2 million, up 4.7%; operating income of $12.7 million, up 58.8%.
- Utility Support Structures: Net sales of $239.2 million, up 26.4%; operating income of $46.2 million, up 84.1%.
- Coatings: Net sales of $74.9 million, up 6.7%; operating income of $13.4 million, down 18.8% due to unfavorable productivity and mix.
- Irrigation: Net sales of $244.7 million, up 25.0%; operating income of $54.6 million, up 42.2%.
- Other: Net sales of $66.6 million, down 13.1%; operating income of $10.8 million, down 5.3%.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $420.0 million at March 30, 2013, compared with $414.1 million at December 29, 2012.
- Net working capital increased to $1.060 billion from $1.014 billion, primarily because inventories increased to support higher sales.
- Capital expenditures were $21.8 million, compared with $20.1 million in the prior-year quarter. Management expected approximately $110 million of capital spending for fiscal 2013, mainly for utility and irrigation capacity expansion.
- Investing cash flow included $29.4 million of proceeds from the sale of a nonconsolidated subsidiary and $54.7 million paid for the Locker acquisition.
- Total interest-bearing debt was $485.8 million, compared with $486.2 million at year-end. Long-term debt was $472.2 million, including $450 million principal amount of 6.625% senior unsecured notes due in April 2020.
- The company had no borrowings under its $400 million revolving credit facility and approximately $384.0 million of borrowing capacity after standby letters of credit. Short-term bank lines totaled $101.8 million, of which $88.4 million was unused.
- Long-term debt to invested capital was 23.2%, below the company’s objective of maintaining the ratio at or below 40%. The company was in compliance with all debt covenants, including leverage and interest-coverage requirements.
- Approximately $330.5 million of cash was held outside the United States. The company had not provided for U.S. taxes on approximately $605.2 million of undistributed foreign earnings; estimated tax on repatriation of all foreign cash was approximately $36.7 million.
Material changes versus the prior comparable period
- Sales growth reflected approximately $55 million of higher unit sales, $31 million from pricing and mix, and approximately $19.8 million from the Locker and Pure Metal Galvanizing acquisitions. Foreign currency translation reduced sales by approximately $4.2 million and operating profit by approximately $0.7 million.
- The Utility and Irrigation segments drove much of the improvement, supported by stronger volumes, pricing, mix and fixed-cost leverage.
- The February 2013 acquisition of Locker Group Holdings for $54.7 million expanded access-system and related product offerings in Asia Pacific. Locker contributed $11.9 million of sales and $0.3 million of net earnings during the quarter and included preliminary goodwill of $16.7 million. Up to $7.9 million of additional contingent consideration could become payable.
- The company sold its 49%-owned manganese-materials investment for approximately $29.2 million. The transaction generated no significant profit or loss, but included recognition of $5.2 million of accumulated currency translation adjustments and approximately $3.2 million of deferred tax benefits.
- Net earnings benefited from the lower effective tax rate, including the noncash tax benefit from the investment sale and increased U.S. research and development tax credits.
- Other comprehensive income declined to a loss of $15.7 million from income of $31.5 million, primarily due to foreign-currency translation losses and pension actuarial losses.
Guidance, outlook, commentary and risks
Management stated that the company expected approximately $110 million of fiscal-2013 capital spending. No consolidated revenue or earnings guidance was provided in the filing.
- Management described U.S. utility demand and backlogs as strong, with continued investment in the electrical grid.
- Irrigation demand benefited from favorable farm commodity prices, global agricultural conditions and the effects of the prior-year drought in North America.
- Risks included cyclical businesses, raw-material availability and pricing, product pricing, competitive conditions, foreign exchange, economic weakness, government spending and policy changes, and market acceptance of new products.
- Transportation and roadway markets remained challenging because of limited long-term highway funding and state budget constraints. European roadway demand was affected by weak economic conditions and restricted government spending.
- Coatings profitability declined because of unfavorable factory productivity, less favorable mix and weak Australian demand.
- Goodwill and trade names had passed the latest impairment tests, but management continued to monitor global economic conditions for potential impairment indicators.
- The company said there were no material changes to financial commitments, off-balance-sheet arrangements, critical accounting policies or market risk disclosures from the 2012 Form 10-K.
- Management concluded that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether Utility and Irrigation demand, backlogs, pricing and margins remained durable after the unusually strong first quarter.
- The final purchase-price allocation for Locker, including any contingent consideration, goodwill and intangible-asset adjustments.
- The sustainability of the 28.7% gross margin and the extent to which lower raw-material and LIFO costs contributed to the improvement.
- Coatings productivity, Australian demand and the effect of the PMG acquisition on future profitability.
- Foreign-currency movements and the exposure of overseas cash and earnings to translation losses and potential repatriation taxes.
- Progress against the approximately $110 million fiscal-2013 capital-spending plan and its effect on free cash flow.
- Compliance with debt covenants, revolving-credit availability and the April 2020 maturity of the senior unsecured notes.
- Potential impairment indicators affecting the company’s $339.8 million of goodwill and $171.8 million of other intangible assets.