Table of Contents
UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-Q
Valmont Industries, Inc. (Exact name of registrant as specified in its charter)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
26,443,449 Outstanding shares of common stock as of October 18, 2011
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements:
Condensed Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended September 24, 2011 and September 25, 2010
Condensed Consolidated Balance Sheets as of September 24, 2011 and December 25, 2010
Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 24, 2011 and September 25, 2010
Condensed Consolidated Statements of Shareholders' Equity for the thirty-nine weeks ended September 24, 2011 and September 25, 2010
Notes to Condensed Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
Signatures
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Product sales
Services sales
Net sales
Product cost of sales
Services cost of sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Other income (expenses):
Interest expense
Interest income
Other
Earnings before income taxes and equity in earnings of nonconsolidated subsidiaries
Income tax expense (benefit):
Current
Deferred
Earnings before equity in earnings of nonconsolidated subsidiaries
Equity in earnings of nonconsolidated subsidiaries
Net earnings
Less: Earnings attributable to noncontrolling interests
Net earnings attributable to Valmont Industries, Inc.
Earnings per share attributable to Valmont Industries, Inc.—Basic
Earnings per share attributable to Valmont Industries, Inc.—Diluted
Cash dividends per share
Weighted average number of shares of common stock outstanding—Basic (000 omitted)
Weighted average number of shares of common stock outstanding—Diluted (000 omitted)
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Receivables, net
Inventories
Prepaid expenses and other current assets
Refundable and deferred income taxes
Total current assets
Property, plant and equipment, at cost
Less accumulated depreciation and amortization
Net property, plant and equipment
Goodwill
Other intangible assets, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt
Notes payable to banks
Accounts payable
Accrued employee compensation and benefits
Accrued expenses
Dividends payable
Total current liabilities
Deferred income taxes
Long-term debt, excluding current installments
Defined benefit pension liability
Deferred compensation
Other noncurrent liabilities
Shareholders' equity:
Preferred stockAuthorized 500,000 shares; none issued
Common stock of $1 par valueAuthorized 75,000,000 shares; 27,900,000 issued
Retained earnings
Accumulated other comprehensive income
Treasury stock
Total Valmont Industries, Inc. shareholders' equity
Noncontrolling interest in consolidated subsidiaries
Total shareholders' equity
Total liabilities and shareholders' equity
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash flow from operations:
Depreciation and amortization
Stock-based compensation
Defined benefit pension plan expense
Contribution to defined benefit pension plan
Loss (gain) on sale of assets
Changes in assets and liabilities, net of the effects of acquisitions:
Receivables
Prepaid expenses
Income taxes payable/refundable
Net cash flows from operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment
Proceeds from sale of assets
Acquisitions, net of cash acquired
Dividends from nonconsolidated subsidiaries
Other, net
Net cash flows from investing activities
Cash flows from financing activities:
Net borrowings (payments) under short-term agreements
Proceeds from long-term borrowings
Principal payments on long-term obligations
Purchase of noncontrolling interest
Settlement of financial derivative
Dividends paid
Dividends to noncontrolling interests
Debt issuance costs
Proceeds from exercises under stock plans
Excess tax benefits from stock option exercises
Purchase of treasury shares
Purchase of common treasury shares—stock plan exercises
Net cash flows from financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents—beginning of year
Cash and cash equivalents—end of period
5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Balance at December 26, 2009
Comprehensive income:
Currency translation adjustment
Total comprehensive income
Cash dividends ($0.480 per share)
Acquisition of Delta plc
Purchase of 12,351 treasury shares
Stock options exercised; 84,900 shares issued
Stock plan exercises; 29,095 shares purchased
Tax benefit from exercise of stock options
Stock option expense
Stock awards; 9,088 shares issued
Balance at September 25, 2010
Balance at December 25, 2010
Loss on cash flow hedge
Amortization of loss
Cash dividends ($0.525 per share)
Acquisitions
Purchase of 53,847 treasury shares
Stock options exercised; 291,208 shares issued
Stock plan exercises; 181,603 shares purchased
Stock awards; 2,992 shares issued
Balance at September 24, 2011
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) (Unaudited)
1. Summary of Significant Accounting Policies
Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of September 24, 2011, the Condensed Consolidated Statements of Operations for the thirteen and thirty-nine week periods ended September 24, 2011 and September 25, 2010, the Condensed Consolidated Statements of Cash Flows and Shareholders' Equity for the thirty-nine week periods then ended have been prepared by the Company, without audit. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) have been made to present fairly the financial statements as of September 24, 2011 and for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 2010. The accounting policies and methods of computation followed in these interim financial statements are the same as those followed in the financial statements for the year ended December 25, 2010. The results of operations for the periods ended September 24, 2011 are not necessarily indicative of the operating results for the full year.
At September 24, 2011, approximately 36% of inventory is valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market. All other inventory is valued at the lower of cost, determined on the first-in, first-out (FIFO) method or market. Finished goods and manufactured goods inventories include the costs of acquired raw materials and related factory labor and overhead charges required to convert raw materials to manufactured and finished goods. The excess of replacement cost of inventories over the LIFO value was $50,775 and $42,559 at September 24, 2011 and December 25, 2010, respectively.
Inventories consisted of the following:
Raw materials and purchased parts
Work-in-process
Finished goods and manufactured goods
Subtotal
LIFO reserve
Net inventory
Stock Plans
The Company maintains stock-based compensation plans approved by the shareholders, which provide that the Human Resource Committee of the Board of Directors may grant incentive stock
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
options, nonqualified stock options, stock appreciation rights, non-vested stock awards and bonuses of common stock. At September 24, 2011, 861,939 shares of common stock remained available for issuance under the plans. Shares and options issued and available are subject to changes in capitalization.
Under the plans, the exercise price of each option equals the market price at the date of the grant. Options vest beginning on the first anniversary of the grant in equal amounts over three to six years or on the fifth anniversary of the grant. Expiration of grants is from six to ten years from the date of grant. The Company's compensation expense (included in selling, general and administrative expenses) and associated income tax benefits related to stock option for the thirteen and thirty-nine weeks ended September 24, 2011 and September 25, 2010, respectively, were as follows:
Compensation expense
Income tax benefits
Fair Value
The Company applies the provisions of Accounting Standards Codification 820, Fair Value Measurements ("ASC 820") which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 apply to other accounting pronouncements that require or permit fair value measurements. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
ASC 820 establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refers broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value.
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Trading Securities: The assets and liabilities recorded for the investments held in the Valmont Deferred Compensation Plan represent mutual funds, invested in debt and equity securities, classified as trading securities in accordance with Accounting Standards Codification 320, Accounting for Certain Investments in Debt and Equity Securities, considering the employee's ability to change investment allocation of their deferred compensation at any time. Quoted market prices are available for these securities in an active market and therefore categorized as a Level 1 input.
Assets:
Trading Securities
Accumulated Other Comprehensive Income (Loss)
Results of operations for foreign subsidiaries are translated using the average exchange rates during the period. Assets and liabilities are translated at the exchange rates in effect on the balance sheet dates. "Accumulated other comprehensive income (loss)" consisted of the following at September 24, 2011 and December 25, 2010:
Foreign currency translation adjustment
Actuarial gain in defined benefit pension plan
Derivative Instrument
During the second quarter of 2011, the Company executed a contract to lock in the treasury rate related to the issuance of the $150,000 of principal amount of senior notes due in 2020. The contract, for a notional amount of $130,000, was executed to hedge the risk of potential fluctuations in the treasury rates which would change the amount of net proceeds received from the debt offering. As the benchmark rate component of the fixed rate debt issuance and the cash flow hedged risk is based on
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that same benchmark, this was deemed an effective hedge at inception. On June 8, 2011, this contract was settled with the Company paying approximately $3,568 to the counterparty. The Company recorded the $3,568 in accumulated other comprehensive income and is amortizing this loss to interest expense over the term of the debt.
Recently Issued Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220), requiring entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. Reclassification adjustments between net income and other comprehensive income must be shown on the face of the statement(s), with no resulting change in net earnings. ASU 2011-05 is effective for statements issued by the Company after January 1, 2012. The Company will provide the required financial reporting presentation upon the effective date.
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Accounting Standards Codification Topic 350. This guidance will become effective for annual or interim goodwill impairment tests for fiscal years beginning after December 15, 2011. The Company will adopt this starting in fiscal 2012 and it is not expected to have a significant effect on its financial position, results of operations or cash flows.
2. Acquisitions
On May 12, 2010, the Company acquired Delta, plc. ("Delta") a public limited company incorporated in Great Britain, and listed on the London Stock Exchange (LSE: DLTA). The price paid per share was 185 pence in cash for each Delta share, or £284,463, or $436,736 based on the contracted average exchange rate of $1.5353 / £. Delta has manufacturing operations employing over 2,500 people in Australia, Asia, South Africa and the United States. Delta's businesses include engineered steel products, galvanizing services and manganese materials.
The Company's pro forma results of operations for the thirty-nine weeks ended September 25, 2010, assuming that the acquisition occurred at the beginning of fiscal 2010 was as follows:
Earnings per share—diluted
On June 24, 2011, the Company acquired the remaining 40% of Donhad Pty. Ltd. ("Donhad") that it did not own for $25,253. As this transaction was the acquisition of the remaining shares of a
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2. Acquisitions (Continued)
consolidated subsidiary with no change in control, it was recorded within shareholders' equity. On June 1, 2011, the Company acquired 60% of an irrigation monitoring services company for $1,539. This acquisition did not have and is not expected to have a significant effect on the Company's fiscal 2011 financial results.
3. Goodwill and Intangible Assets
The Company's annual impairment testing of goodwill was performed and completed during the third quarter of 2011. As a result of that testing, it was determined that the goodwill on the Company's Condensed Consolidated Balance Sheet was not impaired. The Company continues to monitor changes in the global economy and its reporting units that could impact future operating results of its reporting units and related components.
Amortized Intangible Assets
The components of amortized intangible assets at September 24, 2011 and December 25, 2010 were as follows:
Customer Relationships
Proprietary Software & Database
Patents & Proprietary Technology
Non-compete Agreements
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3. Goodwill and Intangible Assets (Continued)
Amortization expense for intangible assets for the thirteen and thirty-nine weeks ended September 24, 2011 and September 25, 2010, respectively was as follows:
2011
2012
2013
2014
2015
The useful lives assigned to finite-lived intangible assets included consideration of factors such as the Company's past and expected experience related to customer retention rates, the remaining legal or contractual life of the underlying arrangement that resulted in the recognition of the intangible asset and the Company's expected use of the intangible asset.
Non-amortized intangible assets
Intangible assets with indefinite lives are not amortized. The carrying values of trade names at September 24, 2011 and December 25, 2010 were as follows:
Webforge
Newmark
Ingal EPS/Ingal Civil Products
Donhad
PiRod
Industrial Galvanizers
The Company's trade names were tested for impairment separately from goodwill in the third quarter of 2011. The values of the trade names were determined using the relief-from-royalty method. The Company has not completed its evaluation of trade names as of the end of the third quarter of 2011, as it is considering its future use of certain trade names. This evaluation is planned to be completed during the fourth quarter of 2011.
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In its determination of these intangible assets as indefinite-lived, the Company considered such factors as its expected future use of the intangible asset, legal, regulatory, technological and competitive factors that may impact the useful life or value of the intangible asset and the expected costs to maintain the value of the intangible asset. The Company expects that these intangible assets will maintain their value indefinitely. Accordingly, these assets are not amortized.
The carrying amount of goodwill as of September 24, 2011 was as follows:
Balance December 25, 2010
Acquisition
Foreign currency translation
Balance September 24, 2011
4. Cash Flows
The Company considers all highly liquid temporary cash investments purchased with a maturity of three months or less to be cash equivalents. Cash payments for interest and income taxes (net of refunds) for the thirty-nine weeks ended were as follows:
Interest
Income taxes
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5. Earnings Per Share
The following table reconciles Basic and Diluted earnings per share (EPS):
Thirteen weeks ended September 24, 2011:
Shares outstanding
Per share amount
Thirteen weeks ended September 25, 2010:
Thirty-nine weeks ended September 24, 2011:
Thirty-nine weeks ended September 25, 2010:
At September 24, 2011 there were 218,007 shares of outstanding stock options with exercise prices exceeding the market price of common stock that were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended September 24, 2011. At September 24, 2010 there were 403,867 of outstanding stock options with exercise prices exceeding the market price of common stock that were excluded from the computation of diluted earnings per share for the thirteen and thirty-nine weeks ended September 24, 2010.
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6. Long-term Debt
6.625% Senior Unsecured Notes(a)
Unamortized premium on senior unsecured notes(a)
6.875% Senior Subordinated Notes(b)
Revolving credit agreement(c)
IDR Bonds(d)
1.75% to 3.485% notes
Total long-term debt
Less current installments of long-term debt
At September 24, 2011, the Company had $20,000 in outstanding borrowings under the revolving credit agreement, at an annual interest rate of 2.94%, not including facility fees. The
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6. Long-term Debt (Continued)
revolving credit agreement has a termination date of October 16, 2013 and contains certain financial covenants that may limit additional borrowing capability under the agreement. At September 24, 2011, the Company had the ability to borrow an additional $240,869 under this facility.
The lending agreements include certain maintenance covenants, including financial leverage and interest coverage. The Company was in compliance with all debt covenants at September 24, 2011.
The minimum aggregate maturities of long-term debt for each of the four years following 2011 are: $291, $20,256, $262 and $275.
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7. Business Segments
The Company aggregates its operating segments into four reportable segments. Aggregation is based on similarity of operating segments as to economic characteristics, products, production processes, types or classes of customer and the methods of distribution. Net corporate expense is net of certain service-related expenses that are allocated to business units generally on the basis of employee headcounts and sales dollars.
Reportable segments are as follows:
ENGINEERED INFRASTRUCTURE PRODUCTS: This segment consists of the manufacture of engineered metal structures and components for the global lighting and traffic, wireless communication, roadway safety and access systems applications;
UTILITY SUPPORT STRUCTURES: This segment consists of the manufacture of engineered steel and concrete structures for the global utility industry;
COATINGS: This segment consists of galvanizing, anodizing and powder coating services on a global basis; and
IRRIGATION: This segment consists of the manufacture of agricultural irrigation equipment and related parts and services for the global agricultural industry.
In addition to these four reportable segments, the Company has other businesses and activities that individually are not more than 10% of consolidated sales. These include the manufacture of forged steel grinding media for the mining industry, tubular products for industrial customers, the electrolytic manganese dioxide for disposable batteries and the distribution of industrial fasteners and are reported in the "Other" category.
In the fourth quarter of 2010, the Company reorganized its segment reporting structure to reflect the management structure as a result of the acquisition of Delta plc. The main business units of Delta are organized as follows in the reportable segment structure:
Fiscal 2010 figures have been reclassified to conform to the fiscal 2011 segment presentation.
The accounting policies of the reportable segments are the same as those described in Note 1. The Company evaluates the performance of its business segments based upon operating income and
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7. Business Segments (Continued)
invested capital. The Company does not allocate interest expense, non-operating income and deductions, or income taxes to its business segments.
Sales:
Engineered Infrastructure Products segment:
Lighting & Traffic
Communication Structures
Access Systems
Engineered Infrastructure Products segment
Utility Support Structures segment
Steel
Concrete
Coatings segment
Irrigation segment
Total
Intersegment Sales:
Net Sales:
Operating Income:
Net corporate expense
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8. Guarantor/Non-Guarantor Financial Information
On April 8, 2010, the Company issued $300,000 of senior unsecured notes at a coupon interest rate of 6.625% per annum. In June 2011, the Company issued an additional $150,000 principal amount of these notes to redeem the Senior Subordinated Notes that were issued in 2004. The notes are guaranteed, jointly, severally, fully and unconditionally by certain of the Company's current and future direct and indirect domestic and foreign subsidiaries (collectively the "Guarantors"), excluding its other current domestic and foreign subsidiaries which do not guarantee the debt (collectively referred to as the "Non-Guarantors"). All Guarantors are 100% owned by the parent company.
On May 4, 2004, the Company completed a $150,000 offering of 67/8% Senior Subordinated Notes. The notes were redeemed on June 16, 2011 at a redemption price of 101.146% of the principal amount plus accrued and unpaid interest thereon. The notes were guaranteed, jointly, severally, fully and unconditionally, on a senior subordinated basis by the Guarantors.
Condensed consolidated financial information for the Company ("Parent"), the Guarantor subsidiaries and the Non-Guarantor subsidiaries is as follows:
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Thirteen Weeks Ended September 24, 2011
Other income (expense):
Earnings before income taxes and equity in earnings/(losses) of nonconsolidated subsidiaries
Earnings before equity in earnings/(losses) of nonconsolidated subsidiaries
Equity in earnings/(losses) of nonconsolidated subsidiaries
Net Earnings
Net Earnings attributable to Valmont Industries, Inc.
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8. Guarantor/Non-Guarantor Financial Information (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Thirty-nine Weeks Ended September 24, 2011
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Thirteen Weeks Ended September 25, 2010
21
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSFor the Thirty-nine Weeks Ended September 25, 2010
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CONDENSED CONSOLIDATED BALANCE SHEETSSeptember 24, 2011
Other intangible assets
Investment in subsidiaries and intercompany accounts
Common stock of $1 par value
Additional paid-in capital
Accumulated other comprehensive income (loss)
23
CONSOLIDATED BALANCE SHEETSDecember 25, 2010
Commitments and contingencies
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Thirty-nine Weeks Ended September 24, 2011
Cash flows from operations:
Depreciation
Changes in assets and liabilities:
Net cash flows from operations
Net borrowings (repayments) under short-term agreements
Intercompany dividends
Debt issue fees
25
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Thirty-nine Weeks Ended September 25, 2010
Loss on sale of assets
Acquisitions, gross of cash acquired
Cash acquired through acquisitions
Net repayments under short-term agreements
Debt issue costs
Activity under intercompany note
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIESPART 1. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that management has made in light of experience in the industries in which the Company operates, as well as management's perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond the Company's control) and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions. Many factors could affect the Company's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include, among other things, risk factors described from time to time in the Company's reports to the Securities and Exchange Commission, as well as future economic and market circumstances, industry conditions, company performance and financial results, operating efficiencies, availability and price of raw materials, availability and market acceptance of new products, product pricing, domestic and international competitive environments, and actions and policy changes of domestic and foreign governments.
This discussion should be read in conjunction with the financial statements and the notes thereto, and the management's discussion and analysis, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 2010.
In the fourth quarter of 2010, we reorganized our segment reporting structure to reflect our management structure as a result of the acquisition of Delta plc. The main business units of Delta are organized as follows in our segment structure:
We reclassified fiscal 2010 to conform to the fiscal 2011 segment presentation.
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Results of Operations
Dollars in millions, except per share amounts
Consolidated
as a percent of sales
SG&A expense
Net interest expense
Effective tax rate
Earnings per share attributable to Valmont Industries, Inc.—diluted
Net Corporate expense
Operating loss
NM=Not meaningful
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On May 12, 2010, we acquired Delta plc (Delta). The total amount of the acquisition was $436.7 million and was financed by a combination of cash, borrowings under our revolving credit agreement of $85.0 million and $300.0 million of senior unsecured notes.
We began consolidating Delta's financial results in our consolidated financial statements beginning on May 12, 2010. On a segment reporting basis, Delta's operations are included in our results as follows:
The increases in sales and operating income by segment attributable to a full year effect of Delta in fiscal 2011, as compared with fiscal 2010, were as follows (in millions):
Engineered Infrastructure Products
Utility Support Structures
Coatings
Overview
On a consolidated basis, the increase in net sales in the third quarter and year-to-date fiscal 2011, as compared with 2010, were the result of improved sales in all reportable segments, part of which was the result of Delta's financial results being included in our consolidated financial statements for all of 2011.
For the company as a whole, our 2011 third quarter and, without consideration of Delta sales, our year-to-date sales increases over 2010 were mainly due to increased unit sales volumes. On a reportable segment basis, the most significant unit sales volume increases were in the Irrigation and Utility Support Structures (Utility) segments. Sales prices overall were up modestly in the third quarter and year-to-date of fiscal 2011, as compared with 2010, mainly in response to rising steel prices. The increase in net sales in the third quarter and year-to-date fiscal 2011, as compared with 2010, due to currency translation effects were approximately $29 million and $54 million, respectively.
The decrease in gross profit margin (gross profit as a percent of sales) for the third quarter and year-to-date fiscal 2011, as compared with 2010, was due to the following factors:
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Selling, general and administrative (SG&A) spending for the third quarter and year-to-date of fiscal 2011, as compared with 2010, increased due to the following factors:
These increases were somewhat offset by $12.9 million in lower acquisition and integration costs in the first three quarters of 2011, as compared with fiscal 2010, associated with the Delta acquisition.
On a reportable segment basis, the Irrigation, Utility and Coatings segments reported improved operating income in the third quarter and year-to-date 2011, as compared with 2010. The EIP segment operating income in 2011 was comparable to fiscal 2010. Currency translation effects also contributed to the increase in third quarter and year-to-date operating income in fiscal 2011, as compared with 2010, of approximately $2.9 million and $5.6 million, respectively.
The decrease in net interest expense in the third quarter of fiscal 2011, as compared with 2010, was mainly due to interest savings resulting from the refinancing of our senior subordinated debt in the second quarter of fiscal 2011 and increased interest income resulting from certain income tax refunds received in fiscal 2011. On a year-to-date basis, the increase in interest expense in fiscal 2011, as compared with 2010, was attributable to $2.8 million of expense incurred when we redeemed our senior subordinated debt and the full year effect (approximately $5.0 million) of interest expense associated with the $300 million in senior unsecured notes issued in April 2010, less $2.9 million of bank fees incurred in the first quarter of fiscal 2010 to provide the required bridge loan funding commitment for the Delta acquisition and the full impact of interest income from Delta's cash balances.
The increase in "Other" expense in the third quarter and first three quarters of fiscal 2011, as compared with 2010, was mainly due to investment losses in the assets held in our deferred compensation plan ($1.5 million and $1.8 million, respectively). The decreases in the value of these assets were offset by corresponding decreases in our deferred compensation liabilities, which were reflected as decreases in net corporate expense. Accordingly, there was no effect on net earnings from these investment losses.
Our effective income tax rate in third quarter of fiscal 2011 was higher than 2010, due to the reconciliation of our 2010 income tax returns and non-deductible currency losses incurred in our Mexican operation. On a year-to-date basis, the effective tax rate in fiscal 2011 was lower than 2010. This reduction was mainly due to the:
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Aside from these events that are non-recurring in nature, we believe our year-to-date effective tax rate in fiscal 2011 and 2010 would have been approximately 32.0-33.0%.
Our cash flows provided by operations were approximately $64.1 million in 2011, as compared with $85.3 million in 2010. While net earnings increased in 2011, as compared with 2010, higher levels of working capital to support increased business activity in the Utility and Irrigation segments in 2011 and contributions to the Delta Pension Plan of $11.8 million in 2011 were the main reasons for the lower operating cash flow in 2011, as compared with 2010.
Engineered Infrastructure Products (EIP) segment
The increases in net sales in the third quarter and the first three quarters of 2011 as compared with 2010 were mainly due to currency translation effects ($14.1 million and $27.0 million, respectively) and improved international sales volumes. Year-to-date sales in fiscal 2011 were higher than 2010 due to these factors and the full year effect of the Delta operations. Global lighting markets continue to experience weak demand, resulting in increased price competition, despite higher raw material prices. In the Lighting product line, 2011 North American sales in the third quarter and first three quarters of the year were down slightly as compared with 2010. Market conditions in North America continue to be weak, especially in the transportation market, where funding is through federal, state and local governments. We believe sales demand in the transportation market was dampened by the lack of a long-term federal highway funding legislation and state budget deficits, as the lack of long-term funding legislation does not give the various states ample visibility to implement long-term initiatives. Furthermore, highway spending sponsored under the federal program requires the various states to provide part of required funding. Many states are in budget deficits, which may constrain their ability to access federal matching funds to implement roadway projects. Sales in other market channels helped to offset the lower transportation market sales in 2011, as compared with 2010. In Europe, sales were higher in the third quarter and first three quarters of 2011, as compared with 2010. However, sales pricing and product mix generally were unfavorable due to weak demand, as infrastructure spending in Europe has been affected by budget deficit control measures and public debt issues.
Communication product line sales in third quarter and first three quarters of fiscal 2011 were comparable to 2010. North America sales were lower in the third quarter of 2011, as compared with 2010 while year-to-date 2011 sales were slightly higher than 2010. While market conditions are generally more favorable in 2011 as compared with 2010, we believe uncertainty surrounding the AT&T/T-Mobile merger has caused demand for communication structures and components to slow down in the third quarter of 2011. In China, sales of wireless communication structures were higher in the third quarter and first three quarters of 2011, as compared with 2010. In 2010, annual supply contracts with Chinese wireless carriers were settled later than in the past and 2011 was more in line with what we believe is a more normal demand pattern.
Operating income for the segment was comparable in the third quarter and first three quarters of fiscal 2011, as compared with 2010. While operating income was enhanced by the addition of the Delta operations, the impact of rising raw material costs and very competitive pricing conditions in most of our markets hampered operating income for the segment. The impact of lower North America sales on operating profit was mitigated to an extent by factory operational improvements. The operating income effect of the increased sales associated with the Delta operations was relatively minor, as we experienced generally increased sales pricing competition, including that from outside Australia resulting from the stronger Australian dollar. Operating income in the third quarter and first three quarters of fiscal 2011, as compared with 2010, was enhanced by currency translation effects of $1.6 million and $2.8 million, respectively. The increase in SG&A expense in the first three quarters of
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fiscal 2011 was mainly due to the acquisition of the Delta operations ($14.3 million), offset to a degree by lower spending levels in North America and Asia.
Utility Support Structures (Utility) segment
In the Utility segment, the sales increases in the third quarter and first three quarters of fiscal 2011, as compared with 2010, were due to improved unit sales volumes in the U.S., offset to a degree by lower sales volumes in international markets. In U.S. markets, electrical utility companies are increasing their investment in the electrical grid over a relatively slow 2010. The sales pricing environment is slowly improving but continues to be very competitive. Our sales in 2011 were somewhat reflective of market conditions in 2010 when certain utility structures projects were awarded at relatively low prices. In international markets, the sales decrease was mainly due to lower project sales into emerging markets and lower sales volumes in China, offset to a degree by improved sales volumes in Australia.
Operating income in fiscal 2011, as compared with 2010, increased due to the substantial increase in North America sales volume and associated operational leverage. Gross profit margins were negatively affected by the competitive pricing environment in North America and higher raw material costs, offset to an extent by productivity gains due to increased production volumes. The increase in SG&A expense for the segment in fiscal 2011 was higher than in 2010, mainly due to increased employee incentives associated with the increase in operating income.
Net sales in the Coatings segment increased in the third quarter of fiscal 2011, as compared with 2010, mainly due to currency translation effects. On a year-to-date basis, the sales increase resulted from the effect of the galvanizing operations acquired in the Delta transaction, currency translation effects (approximately $7.5 million) and stronger unit sales demand in our operations.
The increase in segment operating income in the third quarter of fiscal 2011, as compared with 2010, was mainly due to the effects of currency translation. Higher average zinc costs in 2011, as compared with 2010, were largely recovered through sales price increases and productivity improvements. On a year-to-date basis, the increase in operating income also was due to the effect of the acquired Delta businesses, improved sales volume and currency translation effects (approximately $0.8 million). SG&A expenses for the segment in the third quarter and first three quarters of 2011 were higher than the comparable periods in 2010, mainly due to the effect of the Delta businesses.
In 2011, a fire occurred at one of our galvanizing facilities in Australia. A property damage and business interruption claim was filed with our insurance carrier and settlement of the claim is ongoing. We are making the necessary capital expenditures to restore the facility and plan for operations to commence in the fourth quarter of 2011. We believe that the insurance claim proceeds will exceed the net book value of the assets damaged. The financial effect of this event will be reflected in our financial statements when the insurance claim is settled.
Irrigation segment net sales in the third quarter and first three quarters of fiscal 2011 substantially improved over 2010, mainly due to stronger sales volumes in both North American and international markets. In global markets, the sales growth was due to a very strong agricultural economy. Farm commodity prices are generally favorable and net farm income is projected to be strong in 2011. In addition, weather conditions in North America in 2011 were generally drier than 2010, further enhancing demand for irrigation machines and related service parts. In international markets, the sales improvement in fiscal 2011, as compared with 2010, was realized in most markets, particularly in Asia Pacific and South America.
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Operating income for the segment improved in 2011 over 2010, due to improved sales unit volumes in North America and the associated operational leverage. Rising raw material prices resulted in $2.4 million in increased LIFO expense in the first three quarters of 2011, as compared with 2010, which negatively affected gross profit margins. SG&A expenses increased mainly due to employee compensation costs to support the increase in sales activity and future initiatives ($1.3 million and $3.7 million, respectively) and increased employee incentives due to improved operating performance in 2011 ($1.7 million and $2.7 million, respectively).
This unit includes the Delta grinding media and electrolytic manganese operations and our industrial tubing and fasteners operations. The increase in sales in the third quarter of 2011, as compared with 2010, was mainly due improved sales volumes in all of these operations and currency translation effects (approximately $5.6 million). Third quarter operating income improved due to improved operating results in the manganese dioxide and tubing operations and currency translation (approximately $0.8 million). On a year-to-date basis, the full year affect of the Delta operations and currency translation effects (approximately $9.1 million in sales and $1.4 million in operating income) also contributed to the sales increase and operating income increase.
Net corporate expense in the third quarter of 2011 was comparable to 2010. Expense increases included increased incentive expense associated with improved profitability in 2011 ($2.7 million), offset by lower deferred compensation expenses of $1.5 million, and favorable experience in health insurance expenses ($0.8 million).
On a year-to-date basis, the decrease in net corporate expense was due to Delta acquisition and integration costs that were incurred in 2010 ($12.9 million) but not 2011 and lower deferred compensation expense ($1.8 million). These decreases were offset somewhat by the full year effect of Delta's administration costs ($5.2 million) and higher employee incentive expense associated with improved profitability in 2011 as compared with 2010 ($5.9 million).
Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows—Net working capital was $831.7 million at September 24, 2011, as compared with $747.3 million at December 25, 2010. The increase in net working capital in 2011 mainly resulted from increased inventories to support the increase in sales, especially in the Irrigation and Utility Support Structures segments. Operating cash flow was $64.1 million in fiscal 2011, as compared with $85.3 million for the same period in 2010. The decrease in operating cash flow in 2011 mainly was the result of the increase in working capital as compared with 2010 and the annual contribution we made to the Delta Pension Plan of $11.8 million in fiscal 2011. In fiscal 2010, this contribution was made before we acquired Delta.
Investing Cash Flows—Capital spending in the fiscal 2011 was $46.4 million, as compared with $20.3 million in 2010. The most significant capital spending projects in 2011 included our new plant in India ($7.0 million), certain capacity expansions in the Utility segment ($4.7 million) and our Australian galvanizing operations ($3.9 million). We expect our capital spending for the 2011 fiscal year to be approximately $70 to $75 million. Investing cash flows for fiscal 2010 included $436.7 million of cash (less $198.8 million of cash acquired) for the Delta acquisition and an aggregate of $7.5 million associated with increasing our ownership interest in West Coast Engineering, Ltd. from 70% to 80% and the additional purchase price paid to the former shareholders of Stainton related to the performance of the operation after its acquisition in November 2008.
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Financing Cash Flows—Our total interest-bearing debt increased from $477.7 million at December 25, 2010 to $506.0 million as of September 24, 2011. The increase in borrowings in 2011 was a seasonal increase in borrowings due to the increase in working capital in the U.S. In the second quarter of fiscal 2011, we redeemed all of our $150 million of senior subordinated notes that were due in May 2014 with the proceeds from the sale of $150 million principal amount of senior unsecured notes. The senior unsecured notes became part of a series of senior unsecured notes previously issued in April 2010. The senior unsecured notes were issued at a premium of $14.8 million in excess of the principal amount. We refinanced the senior subordinated notes to take advantage of a favorable interest-rate environment and to extend our long-term debt maturities. Financing cash flows in 2011 included approximately $25.3 million to acquire the remaining 40% of the shares of Donhad Pty. Ltd. (a manufacturer of steel grinding media serving the Australian mining industry).
Sources of Financing and Capital
We have historically funded our growth, capital spending and acquisitions through a combination of operating cash flows and debt financing. We have an internal long-term objective to maintain long-term debt as a percent of invested capital at or below 40%. At September 24, 2011, our long-term debt to invested capital ratio was 27.1%, as compared with 26.7% at December 25, 2010. Subject to our level of acquisition activity and steel industry operating conditions (which could affect the levels of inventory we need to fulfill customer commitments), we plan to maintain this ratio below 40% in 2011.
Our debt financing at September 24, 2011 consisted primarily of long-term debt. We also maintain certain short-term bank lines of credit totaling $51.7 million, $45.2 million of which was unused at September 24, 2011. Our long-term debt principally consists of:
At September 24, 2011, we had $20.0 million in outstanding borrowings under the revolving credit agreement, at an annual interest rate of 2.94%, not including facility fees. The revolving credit agreement has a termination date of October 16, 2013 and contains certain financial covenants that may limit our additional borrowing capability under the agreement. At September 24, 2011, we had the ability to borrow an additional $240.9 million under this facility.
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These debt agreements contain covenants that require us to maintain certain coverage ratios and may limit us with respect to certain business activities, including capital expenditures. Our key debt covenants are that interest-bearing debt is not to exceed 3.75x EBITDA of the prior four quarters and that our EBITDA over our prior four quarters must be at least 2.50x our interest expense over the same period. At September 24, 2011, we were in compliance with all covenants related to these debt agreements. The key covenant calculations at September 24, 2011 were as follows:
Interest-bearing debt
EBITDA—last 12 months
Leverage ratio
Interest expense—last 12 months
Interest earned ratio
The calculation of EBITDA—last 12 months (September 25, 2010—September 24, 2011) is as follows:
Income tax expense
Deferred income tax benefit
Noncontrolling interest
Equity in earnings/(losses) in nonconsolidated subsidiaries
Pension plan expense
Contribution to pension plan
Payment of deferred compensation
Changes in assets and liabilities, net of acquisitions
EBITDA
Depreciation and amortization expense
Our businesses are cyclical, but we have diversity in our markets, from a product, customer and a geographical standpoint. We have demonstrated the ability to effectively manage through business cycles and maintain liquidity. We have consistently generated operating cash flows in excess of our capital expenditures. Based on our available credit facilities, recent issuance of senior unsecured notes and our history of positive operational cash flows, we believe that we have adequate liquidity to meet our needs. We have not made any provision for U.S. income taxes in our financial statements on approximately $388 million of undistributed earnings of our foreign subsidiaries, as we intend to reinvest those earnings. Therefore, if we need to repatriate foreign cash balances to the United States to meet our cash needs, income taxes would be paid to the extent that those cash repatriations were undistributed earnings of our foreign subsidiaries.
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Financial Obligations and Financial Commitments
Other than our additional borrowings under our senior unsecured notes related to the redemption of our senior subordinated notes and revolving credit agreement related to the Delta acquisition, there have been no material changes to our financial obligations and financial commitments as described beginning on page 35 in our Form 10-K for the year ended December 25, 2010. We have future financial obligations related to (1) payment of principal and interest on interest-bearing debt, (2) Delta pension plan contributions, (3) operating leases and (4) purchase obligations. These obligations at September 24, 2011 were as follows (in millions of dollars):
Long-term debt
Delta pension plan contributions
Operating leases
Unconditional purchase commitments
Total contractual cash obligations
Long-term debt mainly consisted of $450.0 million principal amount of senior unsecured notes. At September 24, 2011, we had $20.0 million of outstanding borrowings under our bank revolving credit agreement. We also had various other borrowing arrangements aggregating $10.6 million at September 24, 2011. Obligations under these agreements may accelerate in event of non-compliance with covenants. The Delta pension plan contributions are related to agreed-upon cash funding commitments to the plan with the plan's trustees, which are re-negotiated in conjunction with a triennial valuation. Operating leases relate mainly to various production and office facilities and are in the normal course of business.
Unconditional purchase obligations relate to purchase orders for zinc, aluminum and steel, all of which we plan to use in 2011, and certain capital investments planned for 2011. We believe the quantities under contract are reasonable in light of normal fluctuations in business levels and we expect to use the commodities under contract during the contract period.
At September 24, 2011, we had approximately $50.0 million of various long-term liabilities related to certain income tax, environmental and other matters. These items are not scheduled above because we are unable to make a reasonably reliable estimate as to the timing of any potential payments.
Off Balance Sheet Arrangements
There have been no changes in our off balance sheet arrangements as described on page 36 in our Form 10-K for the fiscal year ended December 25, 2010 during the fiscal quarter and year-to-date periods ended September 24, 2011.
Critical Accounting Policies
There have been no changes in our critical accounting policies as described on pages 37–41 on our Form 10-K for the fiscal year ended December 25, 2010 during the fiscal quarter and year-to-date periods ended September 24, 2011.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There were no material changes in the company's market risk during the quarter ended September 24, 2011. For additional information, refer to the section "Risk Management" beginning on page 36 in our Form 10-K for the fiscal year ended December 25, 2010.
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Item 4. Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 is (1) accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
No changes in the Company's internal control over financial reporting occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
June 26, 2011 to July 23, 2011
July 24, 2011 to August 27, 2011
August 28, 2011 to September 24, 2011
During the third quarter, the only shares reflected above were those delivered to the Company by employees as part of stock option exercises, either to cover the purchase price of the option or the related taxes payable by the employee as part of the option exercise. The price paid per share was the market price at the date of exercise.
Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf and by the undersigned hereunto duly authorized.
Dated this 26th day of October, 2011.
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Index of Exhibits
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