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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 Sections 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 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
23,556,137 Outstanding shares of common stock as of April 22, 2015
VALMONT INDUSTRIES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements:
Condensed Consolidated Statements of Earnings for the thirteen weeks ended March 28, 2015 and March 29, 2014
Condensed Consolidated Statements of Comprehensive Income for the thirteen weeks ended March 28, 2015 and March 29, 2014
Condensed Consolidated Balance Sheets as of March 28, 2015 and December 27, 2014
Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended March 28, 2015 and March 29, 2014
Condensed Consolidated Statements of Shareholders' Equity for the thirteen weeks ended March 28, 2015 and March 29, 2014
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 Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
Signatures
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Dollars in thousands, except per share amounts) (Unaudited)
Product sales
Services sales
Net sales
Product cost of sales
Services cost of sales
Total cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Other income (expenses):
Interest expense
Interest income
Other
Earnings before income taxes
Income tax expense (benefit):
Current
Deferred
Net earnings
Less: Earnings attributable to noncontrolling interests
Net earnings attributable to Valmont Industries, Inc.
Earnings per share:
Basic
Diluted
Cash dividends declared 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.
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (Unaudited)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments:
Unrealized translation gain (loss)
Unrealized gain/(loss) on cash flow hedge:
Amortization cost included in interest expense
Gain on cash flow hedges
Actuarial gain (loss) in defined benefit pension plan
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive loss (income) attributable to noncontrolling interests
Comprehensive income (loss) attributable to Valmont Industries, Inc.
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except shares and per share amounts)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
Receivables, net
Inventories
Prepaid expenses
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 stock of $1 par value—
Authorized 500,000 shares; none issued
Common stock of $1 par value—
Authorized 75,000,000 shares; 27,900,000 issued
Retained earnings
Accumulated other comprehensive income (loss)
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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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash flows from operations:
Depreciation and amortization
Noncash loss on trading securities
Stock-based compensation
Defined benefit pension plan expense
Contribution to defined benefit pension plan
Gain on sale of property, plant and equipment
Changes in assets and liabilities (net of acquisitions):
Receivables
Income taxes 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
Other, net
Net cash flows from investing activities
Cash flows from financing activities:
Net borrowings under short-term agreements
Principal payments on long-term borrowings
Dividends paid
Dividends to noncontrolling interest
Purchase of treasury shares
Proceeds from exercises under stock plans
Excess tax benefits from stock option exercises
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
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands) (Unaudited)
Balance at December 28, 2013
Cash dividends declared
Dividends to noncontrolling interests
Acquisition of DS SM
Stock plan exercises; 57,854 shares acquired
Stock options exercised; 110,339 shares issued
Tax benefit from stock option exercises
Stock option expense
Stock awards; 8,290 shares issued
Balance at March 29, 2014
Balance at December 27, 2014
Purchase of treasury shares; 598,227 shares acquired
Stock plan exercises; 16,950 shares acquired
Stock options exercised; 25,119 shares issued
Stock awards; 9,656 shares issued
Balance at March 28, 2015
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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 March 28, 2015, the Condensed Consolidated Statements of Earnings and Comprehensive Income for the thirteen weeks ended March 28, 2015 and March 29, 2014, and the Condensed Consolidated Statements of Cash Flows and Shareholders' Equity for the thirteen week period 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 March 28, 2015 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 27, 2014. 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 27, 2014. The results of operations for the period ended March 28, 2015 are not necessarily indicative of the operating results for the full year.
Approximately 41% and 44% of inventory is valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market as of March 28, 2015 and December 27, 2014, respectively. 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 is approximately $43,908 and $47,178 at March 28, 2015 and December 27, 2014, respectively.
Inventories consisted of the following:
Raw materials and purchased parts
Work-in-process
Finished goods and manufactured goods
Subtotal
Less: LIFO reserve
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Earnings before income taxes and equity in earnings of nonconsolidated subsidiaries for the thirteen weeks ended March 28, 2015 and March 29, 2014, were as follows:
United States
Foreign
Pension Benefits
The Company incurs expenses in connection with the Delta Pension Plan ("DPP"). The DPP was acquired as part of the Delta plc acquisition in fiscal 2010 and has no members that are active employees. In order to measure expense and the related benefit obligation, various assumptions are made including discount rates used to value the obligation, expected return on plan assets used to fund these expenses and estimated future inflation rates. These assumptions are based on historical experience as well as current facts and circumstances. An actuarial analysis is used to measure the expense and liability associated with pension benefits.
The components of the net periodic pension (benefit) expense for the thirteen weeks ended March 28, 2015 and March 29, 2014 were as follows:
Net periodic (benefit) expense:
Interest cost
Expected return on plan assets
Net periodic (benefit) expense
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 options, nonqualified stock options, stock appreciation rights, non-vested stock awards and bonuses of common stock. At March 28, 2015, 1,191,723 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 closing 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.
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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 options for the thirteen weeks ended March 28, 2015 and March 29, 2014, respectively, were as follows:
Compensation expense
Income tax benefits
Equity Method Investments
The Company has equity method investments in non-consolidated subsidiaries, which are recorded within "Other assets" on the Condensed Consolidated Balance Sheet.
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 refer 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:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
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.
Trading Securities: The assets and liabilities recorded for the investments held in the Valmont Deferred Compensation Plan of $39,718 ($36,439 at December 27, 2014) represent mutual funds, invested in debt and equity securities, classified as trading securities in accordance with Accounting
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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.
The Company's ownership of shares in Delta EMD Pty. Ltd. (JSE:DTA) is also classified as trading securities. During first quarter of 2015, the Company received a special dividend of $5,010 from Delta EMD Pty. Ltd and the market price of the shares were proportionately decreased accordingly. The shares are valued at $4,826 and $9,034 as of March 28, 2015 and December 27, 2014, respectively, which is the estimated fair value. Quoted market prices are available for these securities in an active market and therefore categorized as a Level 1 input.
Assets:
Trading Securities
Comprehensive Income
Comprehensive income includes net earnings, currency translation adjustments, certain derivative-related activity and changes in net actuarial gains/losses from a pension plan. 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 March 28, 2015 and December 27, 2014:
Current-period comprehensive income (loss)
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the
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revenue recognition requirements in Accounting Standards Codification ("ASC") 605, Revenue Recognition. The new revenue recognition standard requires entities to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016 and is to be applied retrospectively. Early adoption is not permitted. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated results of operations and financial position.
Subsequent Event
In April 2015, the Company's Board of Directors authorized a broad restructuring plan (the "Plan") of up to $60 million to respond to the market environment in certain businesses. The initial restructuring activities primarily involve consolidation of operations in the Utility segment and consolidation of Asia Pacific operations within the Engineered Infrastructure Products and Coatings segments. Accordingly, the Company expects to incur pre-tax cash severance and property relocation and site closure expenses of $19 million and asset impairments of approximately $11 million. The asset impairments are primarily write-downs of property, plant, and equipment in the Utility, Engineered Infrastructure Products, and Coatings segments. These charges are expected to be incurred over the remainder of 2015.
Certain of these initial restructuring actions are within the APAC Coatings reporting unit which has approximately $16 million of goodwill as of March 28, 2015. The Company expects these activities to improve the profitability of this reporting unit. Should operating income not improve within this reporting unit after these restructuring activities are implemented, the Company will have to perform an interim goodwill impairment analysis. In addition to this goodwill, the Company is also evaluating other potential restructuring activities authorized under the Plan. In total, these restructuring items could result in asset impairments of up to $25 million and cash charges of $5 million.
(2) ACQUISITIONS
On March 3, 2014, the Company purchased 90% of the outstanding shares of DS SM A/S, which was renamed Valmont SM. Valmont SM is a manufacturer of heavy complex steel structures for a diverse range of industries including wind energy, offshore oil and gas, and electricity transmission. Valmont SM's operations are reported in the Engineered Infrastructure Products Segment. Valmont SM's annual sales are approximately $190,000 and it operates two manufacturing locations in Denmark. The purchase price paid for the business at closing (net of $56 cash acquired) was $120,483, including the payoff of an intercompany note payable by Valmont SM to its prior affiliates. The purchase is subject to an earn-out clause that is contingent on meeting future operational metrics for which no liability has been established based on expectations. The acquisition, which was funded by cash held by the Company, was completed to participate in markets for wind energy, oil and gas exploration, power transmission and other related infrastructure projects and to increase the Company's geographic footprint in Europe. The Company also funded a portion of the acquisition with an intercompany note payable. The excess purchase price over the fair value of assets resulted in goodwill, which is not deductible for tax purposes.
12
(2) ACQUISITIONS (Continued)
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the date of acquisition, which was finalized in the fourth quarter of 2014.
Current assets
Property, plant and equipment
Intangible assets
Total fair value of assets acquired
Current liabilities
Intercompany note payable
Long-term debt
Total fair value of liabilities assumed
Non-controlling interests
Net assets acquired
Based on the fair value assessments, the Company allocated $30,340 of the purchase price to acquired intangible assets. The following table summarizes the major classes of Valmont SM's acquired intangible assets and the respective weighted average amortization periods:
Trade Names
Backlog
Customer Relationships
Total Intangible Assets
On October 6, 2014, the Company acquired Shakespeare Composite Structures (Shakespeare) for $48,272 in cash, plus assumed liabilities. Shakespeare is a manufacturer of fiberglass reinforced composite structures and products with two manufacturing facilities in South Carolina. Shakespeare's annual sales are approximately $55,000 and its operations will be included in the Engineered Infrastructure Products segment. The acquisition of Shakespeare was completed to expand our product offering of composite structure solutions.
The preliminary fair value measurement disclosed below is subject to management reviews and completion of the fair value measurements of the assets acquired and liabilities assumed. The Company expects the fair value measurement process and purchase price allocation for Shakespeare to be completed in the second quarter of 2015.
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The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the date of the Shakespeare acquisition (goodwill is not deductible for tax purposes):
Based on the preliminary fair value assessments, the Company allocated $13,500 of the purchase price to acquired intangible assets. The following table summarizes the major classes of Shakespeare acquired intangible assets and the respective weighted-average amortization periods:
On August 25, 2014, the Company acquired 51% of AgSense, LLC (AgSense) for $17 million in cash. AgSense operates in South Dakota and is the creator of global WagNet network which provides growers with a more complete view of their entire farming operation by tying irrigation decision making to field, crop and weather conditions. In the measurement of fair values of assets acquired and liabilities assumed, goodwill of $17,343 and $13,510 of customer relationships, trade name and other intangible assets were recorded. A portion of the goodwill is deductible for tax purposes. AgSense is included in the Irrigation Segment.
The Company's Condensed Consolidated Statement of Earnings for the thirteen weeks ended March 28, 2015 included net sales of $41,924 and net earnings of $1,997 resulting from the Valmont SM, AgSense, and Shakespeare acquisitions. The pro forma effect of these acquisitions on the first quarter of the 2014 Statement of Earnings was as follows:
Earnings per share—diluted
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(3) GOODWILL AND INTANGIBLE ASSETS
Amortized Intangible Assets
The components of amortized intangible assets at March 28, 2015 and December 27, 2014 were as follows:
Proprietary Software & Database
Patents & Proprietary Technology
Amortization expense for intangible assets for the thirteen weeks ended March 28, 2015 and March 29, 2014, respectively was as follows:
Estimated annual amortization expense related to finite-lived intangible assets is as follows:
2015
2016
2017
2018
2019
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
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(3) GOODWILL AND INTANGIBLE ASSETS (Continued)
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 March 28, 2015 and December 27, 2014 were as follows:
Webforge
Valmont SM
Newmark
Ingal EPS/Ingal Civil Products
Donhad
Shakespeare
Industrial Galvanizers
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 Company's trade names were tested for impairment in the third quarter of 2014. The values of the trade names were determined using the relief-from-royalty method. Based on this evaluation, the Company determined that its trade names were not impaired.
The carrying amount of goodwill by segment as of March 28, 2015 and December 27, 2014 was as follows:
Foreign currency translation
16
The Company's goodwill was tested for impairment during the third quarter of 2014. As a result of that testing, the Company determined that its goodwill was not impaired, as the valuation of the reporting units exceeded their respective carrying values. The Company continues to monitor changes in the global economy that could impact future operating results of its reporting units. If such conditions arise, the Company will test a given reporting unit for impairment prior to the annual test.
(4) CASH FLOW SUPPLEMENTARY INFORMATION
The Company considers all highly liquid temporary cash investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash payments for interest and income taxes (net of refunds) for the thirteen weeks ended March 28, 2015 and March 29, 2014 were as follows:
Interest
Income taxes
On May 13, 2014, the Company announced a new capital allocation philosophy which increased the dividend by 50% and covered a share repurchase program of up to $500 million of the Company's outstanding common stock to be acquired from time to time over twelve months at prevailing market prices, through open market or privately-negotiated transactions. On February 24, 2015, the Board of Directors authorized an additional purchase of up to $250 million of the Company's outstanding common stock with no stated expiration date. As of March 28, 2015, the Company has acquired 3,309,376 shares for approximately $467.9 million under the share repurchase program.
(5) EARNINGS PER SHARE
The following table provides a reconciliation between Basic and Diluted earnings per share (EPS):
Thirteen weeks ended March 28, 2015:
Shares outstanding
Per share amount
Thirteen weeks ended March 29, 2014:
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(5) EARNINGS PER SHARE (Continued)
Earnings per share are computed independently for each of the quarters. Therefore, the sum of the quarterly earnings per share does not equal the total for the year primarily due to the share buyback program that began in the second quarter of 2014.
At March 28, 2015 and March 29, 2014, there were 452,103 and 1,172 outstanding stock options with exercise prices exceeding the market price of common stock that were excluded from the computation of diluted earnings per share, respectively.
(6) BUSINESS SEGMENTS
The Company has four reportable segments based on its management structure. Each segment is global in nature with a manager responsible for segment operational performance and the allocation of capital within the segment. 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, wind energy, offshore oil and gas, 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, and the distribution of industrial fasteners and are reported in the "Other" category.
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 invested capital. The Company does not allocate interest expense, non-operating income and deductions, or income taxes to its business segments.
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(6) BUSINESS SEGMENTS (Continued)
Summary by Business
SALES:
Engineered Infrastructure Products segment:
Lighting, Traffic, and Roadway Products
Communication Products
Offshore Structures
Access Systems
Engineered Infrastructure Products segment
Utility Support Structures segment:
Steel
Concrete
Utility Support Structures segment
Coatings segment
Irrigation segment
Total
INTERSEGMENT SALES:
NET SALES:
OPERATING INCOME:
Corporate
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(7) GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
On September 22, 2014, the Company issued and sold $250,000 aggregate principal amount of the Company's 5.00% senior notes due 2044 and $250,000 aggregate principal amount of the Company's 5.25% senior notes due 2054. On September 22, 2014, the Company repurchased through a partial tender offer $199,800 in aggregate principal amount of the Company's 6.625% senior notes due 2020, and $250,200 of the notes remain outstanding following the conclusion of the tender offer. All of 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.
In the fourth quarter of 2014, a subsidiary of the Company was removed as a guarantor of our revolving credit facility, and consequently was removed as a guarantor of the notes. All prior year consolidated financial information has been recast to reflect the current guarantor structure. Consolidated financial information for the Company ("Parent"), the Guarantor subsidiaries and the Non-Guarantor subsidiaries is as follows:
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(7) GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Thirteen weeks ended March 28, 2015
Cost of sales
Other income (expense):
Earnings before income taxes and equity in earnings of nonconsolidated subsidiaries
Earnings before equity in earnings of nonconsolidated subsidiaries
Equity in earnings of nonconsolidated subsidiaries
Net earnings attributable to Valmont Industries, Inc
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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Thirteen weeks ended March 29, 2014
22
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Thirteen weeks ended March 28, 2015
Unrealized gains (losses) arising during the period
Unrealized loss on cash flow hedge:
Equity in other comprehensive income
Comprehensive income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Valmont Industries, Inc.
23
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Thirteen weeks ended March 29, 2014
Actuarial gain (loss) in defined benefit pension plan liability
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CONDENSED CONSOLIDATED BALANCE SHEETS March 28, 2015
Other intangible assets
Investment in subsidiaries and intercompany accounts
Common stock of $1 par value
Additional paid-in capital
25
CONDENSED CONSOLIDATED BALANCE SHEETS December 27, 2014
Accumulated other comprehensive income
26
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Thirteen Weeks Ended March 28, 2015
Loss on investment
Equity in earnings in nonconsolidated subsidiaries
Income taxes payable (refundable)
Proceeds from long-term borrowings
Settlement of financial derivative
Intercompany dividends
Purchase of common treasury shares—stock plan exercises:
27
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Thirteen Weeks Ended March 29, 2014
Intercompany capital contribution
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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 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 27, 2014. Segment sales in the table below are presented net of intersegment sales.
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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
Diluted earnings per share
Engineered Infrastructure Products
Utility Support Structures
Coatings
Irrigation
Net corporate expense
Operating loss
NM=Not meaningful
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Overview
On a consolidated basis, the decrease in net sales in the first quarter of fiscal 2015, as compared with 2014, reflected lower sales in all reportable segments except for the Engineered Infrastructure Products (EIP) segment. The changes in net sales in the first quarter of fiscal 2015, as compared with fiscal 2014, were as follows:
Sales—2014
Volume
Pricing/mix
Acquisitions
Currency translation
Sales—2015
Volume effects are estimated based on a physical production or sales measure. Since products we sell are not uniform in nature, pricing and mix relate to a combination of changes in sales prices and the attributes of the product sold. Accordingly, pricing and mix changes do not necessarily directly result in operating income changes.
Acquisitions included AgSense LLC, Shakespeare, and DS SM A/S, which was renamed Valmont SM. We acquired AgSense in August 2014, Shakespeare in October 2014, and Valmont SM in March 2014. Shakespeare and Valmont SM are reported in the Engineered Infrastructure Products segment, and AgSense is reported in the Irrigation segment.
In the first quarter of fiscal 2015, we realized a decrease in operating profit, as compared with fiscal 2014, due to currency translation effects. On average, the U.S. dollar strengthened in particular against the Australian dollar, Brazilian Real, Euro, and South Africa Rand, resulting in less operating profit in U.S. dollar terms. The breakdown of this effect by segment was as follows:
First quarter
The decrease in gross margin (gross profit as a percent of sales) in fiscal 2015, as compared with 2014, was due to a combination of lower sales prices, unfavorable sales mix, and reduced sales volumes in 2015, as compared with 2014.
Selling, general and administrative (SG&A) spending in the first quarter of fiscal 2015, as compared with the same period in 2014, decreased mainly due to the following factors:
The above reductions in SG&A were partially offset by the acquisition of Shakespeare, AgSense LLC, and Valmont SM with expenses totaling $5.4 million.
The decrease in operating income on a reportable segment basis in 2015, as compared to 2014, was due to reduced operating performance in all segments. The decrease in operating income is primarily attributable to lower volumes and sales pricing.
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Net interest expense increased in the first quarter of fiscal 2015, as compared with 2014, primarily due to additional long-term debt borrowed in the third quarter of 2014. Interest income decreased due to less cash on hand.
The decrease in other expense was mainly attributable to the difference in the investment income from the Company's shares of Delta EMD. In 2014, we recorded a non-cash mark to market loss of $3.4 million and in 2015, we received an approximately $5 million special dividend offset by a noncash mark to market loss of approximately $4.4 million. The remaining decrease in other expense relates to more favorable currency transactional gains/losses compared to 2014 of approximately $2.2 million.
Our effective income tax rate in the first quarter of fiscal 2015 was relatively flat when compared with the same period in fiscal 2014.
Earnings attributable to noncontrolling interest was slightly higher in the first quarter of fiscal 2015, as compared with 2014 due to the acquisitions completed in 2014.
Our cash flows provided by operations were approximately $55.5 million in the first quarter of fiscal 2015, as compared with $21.9 million provided by operations in 2014. The increase in operating cash flow in the first quarter of fiscal 2015 was the result of improved net working capital, partially offset by lower net earnings, compared with 2014.
Engineered Infrastructure Products (EIP) segment
The increase in net sales in the first quarter of fiscal 2015 as compared with 2014 was mainly due to the acquisition of Valmont SM in early March 2014 and Shakespeare in October 2014 totaling $29.3 million.
Global lighting. traffic, and roadway product sales in the first quarter of fiscal 2015 improved compared to the same period in fiscal 2014. This improvement was offset somewhat by unfavorable currency translation effects of $1.8 million. In 2015, sales volumes in the U.S. were higher in the commercial markets and slightly lower in the transportation markets. The transportation market continues to be challenging, due in part to the lack of long-term U.S. federal highway funding legislation. Sales volumes in Canada increased in the first quarter of 2015 as compared to 2014, due to some improvement in the markets and more favorable weather conditions. Sales in Europe were higher in the first quarter of fiscal 2015 compared to the same periods in fiscal 2014 due primarily to a large project in the Middle East, offset to an extent by unfavorable currency translation effects. In the Asia Pacific region, sales were relatively flat in the first quarter of fiscal 2015 over 2014 with improved volumes in Australia and India offset by decreased volumes in China. Highway safety product sales decreased slightly in the first quarter of 2015 compared to 2014, due to lower sales volumes.
Communication product line sales were slightly higher in the first quarter of fiscal 2015, as compared with the same periods in fiscal 2014. North America communication structure sales decreased, primarily due to one customer who significantly reduced its 4G wireless network build out in 2015 compared with 2014. Communication component sales were flat year over year. In China, sales of wireless communication structures in the first quarter of fiscal 2015 increased over the same period in 2014 as the investment levels by the major wireless carriers have remained strong.
Access systems product line sales decreased in the first quarter of 2015, as compared with 2014, primarily due to the negative impact of currency translation of $3.8 million and lower volumes. The volume decrease was primarily related to the slowdown in mining sector investment in Australia and weaker market conditions in China.
Operating income for the segment in the first quarter of fiscal 2015 was lower, as compared with the same period of fiscal 2014, due to unfavorable currency translation effects of $0.8 million and sales mix. The increase in SG&A spending in the first quarter of 2015 were due to costs related to the
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Shakespeare and Valmont SM acquisitions totaling $4.4 million, and increased compensation and incentive costs of $1.2 million. Currency effects reduced SG&A expense for the first quarter of 2015 as compared to 2014.
Utility Support Structures (Utility) segment
In the Utility segment, sales decreased in the first quarter of 2015, as compared with 2014, due to lower sales volume, a decrease in sales price most notably for our steel products, and an unfavorable sales mix. Our mix of revenue from very large transmission projects in first quarter of 2015 was unfavorable to first quarter of 2014. A backlog including some very large transmission projects at year-end 2013 provided for the more favorable mix of large transmission projects revenue in first quarter 2014. As steel prices have declined in 2015, our average selling prices for steel products were lower as well. In North America, sales volumes in tons for steel and concrete utility structures were down in the first quarter of 2015, as compared with 2014. In the first quarter of 2015, as compared to 2014, international utility structures sales decreased due to lower sales volumes in the Asia Pacific region.
SG&A expense decreased approximately $1.2 million in the first quarter of 2015, as compared with 2014, primarily due to lower employee compensation and sales commissions. Operating income in the first quarter of 2015, as compared with 2014, decreased due to lower sales and reduced leverage of fixed costs.
Coatings segment sales decreased in the first quarter of 2015, as compared with 2014, due to lower sales volumes globally and currency translation effects related to the strengthening of the U.S. dollar against the Australian and Canadian dollars. Sales volume decreases were partially offset by price increases to recover higher costs for zinc in 2015 as compared to 2014.
SG&A expense decreased approximately $0.6 million due to currency translation effects and other reduced general expenses. Operating income was also lower in the first quarter of 2015, as compared with 2014, due to the lower sales volumes, unfavorable currency impacts, and reduced leverage of fixed costs in both Australia and North America.
The decrease in Irrigation segment net sales in the first quarter of fiscal 2015, as compared with 2014, was mainly due to sales volume decreases in both North American and International markets. In North America, lower expected net farm income in 2015, as compared with 2014, and much lower sales backlogs at the beginning of the year resulted in lower sales of irrigation equipment in 2015, as compared with 2014. In fiscal 2015, net farm income in the United States is expected to decrease 32% from the levels of 2014, due in part to lower market prices for corn and soybeans. We believe this reduction contributed to lower demand for irrigation machines in North America in the first quarter of 2015, as compared with 2014. In international markets, sales decreased in the first quarter of 2015, as compared with 2014, primarily due to reduced demand in Brazil and Eastern Europe and unfavorable currency translation effects.
SG&A decreased slightly in the first quarter of fiscal 2015, as compared with 2014, due to reduced employee compensation and incentives of $1.2 million and favorable currency translation effects of $0.5 million. These reductions in SG&A were offset partially by expenses incurred by AgSense that was acquired in August 2014. Operating income for the segment declined in the first quarter of fiscal 2015 over 2014, due to the sales volume decrease and associated operating deleverage of fixed operating costs.
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This unit includes the grinding media, industrial tubing, and industrial fasteners operations. The decrease in sales in the first quarter of fiscal 2015, as compared with 2014, was mainly due to unfavorable currency translation of $2.9 million. Grinding media sales improved in 2015 due to higher volumes in Australia. Tubing sales in 2015 were lower due to reduced volumes compared to 2014. Operating income in the first quarter of fiscal 2015 was lower than the same period in 2014, due primarily to lower tubing sales volumes.
Net corporate expense in the first quarter of fiscal 2015 decreased over the same period in fiscal 2014. These decreases were mainly due to:
Restructuring Plan
In April 2015, our Board of Directors authorized a broad restructuring plan (the "Plan") of up to $60 million to respond to the market environment in certain of our businesses. The initial restructuring activities primarily involve consolidation of Asia Pacific operations within the Engineered Infrastructure Products and Coatings segments and in the Utility segment. Accordingly, we expect to incur pre-tax cash expenses of $19 million and asset impairments of approximately $11 million. These charges are expected to be incurred over the remainder of 2015.
Certain of these restructuring actions are within the APAC Coatings reporting unit which has approximately $16 million of goodwill as of March 28, 2015. We expect these activities to improve the profitability of this reporting unit. Should operating income not improve within this reporting unit after these restructuring activities are implemented, we will have to perform an interim goodwill impairment analysis. In addition to this goodwill, we are also evaluating other potential restructuring activities authorized under the Plan. In total, these restructuring items could result in asset impairments of up to $25 million and cash charges of $5 million.
Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows—Net working capital was $919.3 million at March 28, 2015, as compared with $995.7 million at December 27, 2014. The decrease in net working capital in 2015 mainly resulted from decreased cash on hand due to cash used in the share repurchase program. Cash flow provided by operations was $55.5 million in fiscal 2015, as compared with $21.9 million in fiscal 2014. The increase in operating cash flow in 2015 was primarily the result of working capital improvements over 2014, offset to an extent by reduced net earnings.
Investing Cash Flows—Capital spending in the first quarter of fiscal 2015 was $16.6 million, as compared with $23.5 million for the same period in 2014. Significant capital spending projects in 2015 and 2014 include certain investments in machinery and equipment across all businesses. We expect our capital spending for the 2015 fiscal year to be approximately $70 million. The biggest contributor to lower investing cash outflows in 2015 as compared to 2014, was the acquisition of Valmont SM in March 2014.
Financing Cash Flows—Our total interest-bearing debt decreased slightly to $781.3 million at March 28, 2015 from $781.8 million at December 27, 2014. Financing cash flows changed from a use of approximately $9.6 million in the first quarter of fiscal 2014 to a use of approximately $82.4 million in
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the first quarter of fiscal 2015. The primary change was due to the Company purchasing $72.9 million of treasury shares in 2015 related to the share repurchase program.
Financing and Capital
On May 13, 2014, we announced a capital allocation philosophy which covered a share repurchase program. The Board of Directors authorized the purchase of up to $500 million of the Company's outstanding common stock from time to time over twelve months at prevailing market prices, through open market or privately-negotiated transactions. As of March 28, 2015, we have acquired approximately 3.3 million shares for approximately $468 million under this share repurchase program. As of April 22, 2015, the date as of which we report on the cover of this form 10-Q the number of outstanding shares of our common stock, we have acquired a total of 3,438,677 shares for approximately $483 million under the share repurchase program. In February 2015, the Board of Directors authorized an additional $250 million of share purchase, without an expiration date. The share purchases will be funded from available working capital and short-term borrowings and will be made subject to market and economic conditions. We are not obligated to make any share repurchases under the share repurchase program and we may discontinue either or both share repurchase programs at any time.
Our capital allocation philosophy announcement included our intention to manage our capital structure to maintain our investment grade debt rating. Our most recent rating were Baa2 by Moody's Investors Services, Inc. and BBB+ rating by Standard and Poor's Rating Services. We would be willing to allow our debt rating to fall to Baa3 or BBB– to finance a special acquisition or other opportunity. Otherwise, we expect to maintain a ratio of debt to invested capital which will support our current investment grade debt rating.
Our debt financing at March 28, 2015 is primarily long-term debt consisting of:
At March 28, 2015 and December 27, 2014, we had no outstanding borrowings under our revolving credit agreement. The revolving credit agreement contains certain financial covenants that may limit our additional borrowing capability under the agreement. At March 28, 2015, we had the ability to borrow $581.4 million under this facility, after consideration of standby letters of credit of $18.6 million associated with certain insurance obligations and international sales commitments. We also maintain certain short-term bank lines of credit totaling $106.0 million, $92.3 million of which was unused at March 28, 2015.
Our senior unsecured notes and revolving credit agreement each contain cross-default provisions which permit the acceleration of our indebtedness to them if we default on other indebtedness that results in, or permits, the acceleration of such other indebtedness.
The 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 as follows:
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At March 28, 2015, we were in compliance with all covenants related to the debt agreements. The key covenant calculations at March 28, 2015 were as follows:
Interest-bearing debt
EBITDA—last four quarters
Leverage ratio
Interest expense—last four quarters
Interest earned ratio
The calculation of EBITDA-last four quarters (March 30, 2014 through March 28, 2015) is as follows:
Net cash flows from operations
Income tax expense
Non-cash debt refinancing expense
Acquisition earn-out release
Deferred income tax benefit
Noncontrolling interest
Pension plan expense
Contribution to pension plan
Shakespeare EBITDA—March 30, 2014—Oct. 5, 2014
Changes in assets and liabilities
EBITDA
Depreciation and amortization expense
During the third quarter of 2014, we incurred $38,705 of costs associated with refinancing of debt. This category of expense is not in the definition of EBITDA for debt covenant calculation purposes per our debt agreements. As such, it has not been added back in the EBITDA reconciliation to cash flows from operation or net earnings for the four quarters between March 30, 2014 and March 28, 2015.
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.
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We have not made any provision for U.S. income taxes in our financial statements on approximately $608.9 million of undistributed earnings of our foreign subsidiaries, as we intend to reinvest those earnings. Of our cash balances at March 28, 2015, approximately $289.4 million is held in entities outside the United States with $104.2 million specifically held within consolidated Delta Ltd., a wholly-owned subsidiary of the Company. Delta Ltd. sponsors a defined benefit pension plan and therefore, the Company is allowed to dividend out Delta Ltd.'s available cash only as long as that dividend does not negatively impact Delta Ltd.'s ability to meet its annual contribution requirements of the pension plan. We believe that the cash payments Delta Ltd. receives from its intercompany notes will provide sufficient funds to meet the pension funding requirements but additional analysis on pension funding requirements would have to be performed prior to the repatriation of the $104.2 million of Delta Ltd.'s cash balances.
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. The income taxes that we would pay if cash were repatriated depends on the amounts to be repatriated and from which country. If all of our cash outside the United States were to be repatriated to the United States, we estimate that we would pay approximately $28.2 million in income taxes to repatriate that cash.
Financial Obligations and Financial Commitments
There have been no material changes to our financial obligations and financial commitments as described on page 40 in our Form 10-K for the fiscal year ended December 27, 2014.
Off Balance Sheet Arrangements
There have been no changes in our off balance sheet arrangements as described on page 40 in our Form 10-K for the fiscal year ended December 27, 2014.
Critical Accounting Policies
There have been no changes in our critical accounting policies as described on pages 42-45 in our Form 10-K for the fiscal year ended December 27, 2014 during the quarter ended March 28, 2015.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in the company's market risk during the quarter ended March 28, 2015. For additional information, refer to the section "Risk Management" in our Form 10-K for the fiscal year ended December 27, 2014.
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
December 28, 2014 to January 24, 2015
January 25, 2015 to February 28, 2015
March 1, 2015 to March 28, 2015
Item 5. Other Information
Submission of Matters to a Vote of Security Holders
Valmont's annual meeting of stockholders was held on April 28, 2015. The stockholders elected two directors to serve three-year terms, approved, on an advisory basis, a resolution approving Valmont's named executive officer compensation, and ratified the appointment of Deloitte & Touche LLP to audit the Company's financial statements for fiscal 2015. For the annual meeting there were 23,847,403 shares outstanding and eligible to votes of which 21,905,803 were present at the meeting in person or by proxy. The tabulation for each matter voted upon at the meeting was as follows:
Election of Directors:
Daniel P. Neary
Kenneth E. Stinson
Advisory vote on executive compensation:
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Proposal to ratify the appointment of Deloitte & Touche LLP as independent auditors for fiscal 2015:
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 29th day of April, 2015.
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Index of Exhibits
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