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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
24,605,848Outstanding shares of common stock as of October 20, 2014
VALMONT INDUSTRIES, INC. INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements:
Condensed Consolidated Statements of Earnings for the thirteen and thirty-nine weeks ended September 27, 2014 and September 28, 2013
Condensed Consolidated Statements of Comprehensive Income for the thirteen and thirty-nine weeks ended September 27, 2014 and September 28, 2013
Condensed Consolidated Balance Sheets as of September 27, 2014 and December 28, 2013
Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 27, 2014 and September 28, 2013
Condensed Consolidated Statements of Shareholders' Equity for the thirty-nine weeks ended September 27, 2014 and September 28, 2013
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 6.
Exhibits
Signatures
2
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
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
Costs associated with refinancing of debt
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:
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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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments:
Unrealized translation gain (loss)
Realized loss included in net earnings during the period
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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CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except shares and per share amounts)
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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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash flows from operations:
Depreciation and amortization
Loss on investment
Non-cash debt refinancing costs
Stock-based compensation
Change in fair value of contingent consideration
Defined benefit pension plan expense
Contribution to defined benefit pension plan
Gain on sale of property, plant and equipment
Equity in earnings in nonconsolidated subsidiaries
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
Proceeds from long-term borrowings
Principal payments on long-term borrowings
Settlement of financial derivatives
Dividends paid
Dividends to noncontrolling interest
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
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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Balance at December 29, 2012
Cash dividends declared
Dividends to noncontrolling interests
Acquisition of Locker
Stock plan exercises; 93,059 shares acquired
Stock options exercised; 192,377 shares issued
Tax benefit from stock option exercises
Stock option expense
Stock awards; 9,801 shares issued
Balance at September 28, 2013
Balance at December 28, 2013
Acquisition of DS SM
Acquisition of AgSense
Addition of noncontrolling interest
Purchase of treasury shares; 2,126,392 shares acquired
Stock plan exercises; 83,431 shares acquired
Stock options exercised; 171,508 shares issued
Stock awards; 8,247 shares issued
Balance at September 27, 2014
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of September 27, 2014, the Condensed Consolidated Statements of Earnings and Comprehensive Income for the thirteen and thirty-nine weeks ended September 27, 2014 and September 28, 2013, and 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 27, 2014 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 28, 2013. 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 28, 2013. The results of operations for the period ended September 27, 2014 are not necessarily indicative of the operating results for the full year.
Approximately 43% of inventory is valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market as of September 27, 2014 and December 28, 2013, 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 $47,380 and $45,204 at September 27, 2014 and December 28, 2013, 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)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Earnings before income taxes and equity in earnings of nonconsolidated subsidiaries for the thirteen and thirty-nine weeks ended September 27, 2014 and September 28, 2013, 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 expense for the thirteen and thirty-nine weeks ended September 27, 2014 and September 28, 2013 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 September 27, 2014, 1,463,600 shares of common stock remained available for issuance under the plans. Shares and options issued and available are subject to changes in capitalization.
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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.
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 and thirty-nine weeks ended September 27, 2014 and September 28, 2013, 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. In February 2013, the Company sold its nonconsolidated investment in Manganese Materials Company Pty. Ltd. to the majority owner of the business for approximately $29,250. The profit on the sale was not significant, which included the recognition of $5,194 in currency translation adjustments previously recorded as part of "Accumulated other comprehensive income" on the Condensed Consolidated Balance Sheet. The Company also recognized certain deferred tax benefits of approximately $3,200 associated with the sale in the first quarter of fiscal 2013.
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.
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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 $36,308 ($27,133 at December 28, 2013) 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. The Company's ownership in Delta EMD Pty. Ltd. (JSE:DTA) of $8,295 and $13,910 is recorded at fair value at September 27, 2014 and December 28, 2013, respectively. Quoted market prices are available for these securities in an active market and therefore categorized as a Level 1 input.
Assets:
Trading Securities
Derivative Instruments
On September 22, 2014, the Company issued and sold $250,000 aggregate principal amount of the Company's 5.00% Senior Notes due 2044 (the "2044 Notes") and $250,000 aggregate principal amount of the Company's 5.25% Senior Notes due 2054 (the "2054 Notes"). During the third quarter of 2014, the Company executed a contract to lock in the treasury rate related to the issuance of the 2044 Notes and a second contract to lock in the base interest rate on the issuance of the 2054 Notes. These contracts, each for a notional amount of $125,000, were 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 that same benchmark, this was deemed an effective hedge at inception. On September 10, 2014, these contracts were settled with the Company receiving approximately $4,837
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from the counterparties which was recorded in accumulated other comprehensive income and will be amortized as a reduction of interest expense over the term of the debt.
In conjunction with the repurchase through a partial tender offer of $199,800 of the Company's 6.625% Senior notes due 2020 (the "2020 Notes") during September 2014, the Company recognized $983 of expense, which is a proportionate amount of the unrealized loss on cash flow hedge with respect to the 2020 Notes recorded within other comprehensive income. This $983 is included in the costs associated with refinancing of debt in the condensed consolidated statement of earnings.
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 September 27, 2014 and December 28, 2013:
Current-period comprehensive income (loss)
Subsequent Events
On October 6, 2014, the Company purchased the assets of Shakespeare Composite Structures (Shakespeare) for $48 million in cash, net of assumed liabilities. Shakespeare is a manufacturer of fiberglass reinforced composite structures and products, and the originator of the composite light pole, with two manufacturing facilities in South Carolina. Shakespeare's annual sales are approximately $55 million and it will be included in the Engineered Infrastructure Products Segment. The acquisition, which was funded by cash held by the Company, was completed to extend Valmont's leading product offerings in the lighting, traffic, and utility markets.
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 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 application 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.
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(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 current expectations. Additionally, the fair value measurements are subject to a trade working capital adjustment that has not yet been finalized. 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.
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 to be completed in the fourth quarter of 2014 in conjunction with the finalization of the trade working capital settlement.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the date of acquisition.
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
The Company's Condensed Consolidated Statements of Earnings for the thirteen and thirty-nine weeks ended September 27, 2014 included net sales of $41,284 and $105,805 and net earnings of $2,466 and $6,568, respectively, resulting from Valmont SM's operations from March 3, 2014 to September 27,
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(2) ACQUISITIONS (Continued)
2014. No proforma information for 2014 has been provided as it does not have a material effect on the financial statements.
Based on the preliminary 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 February 5, 2013, the Company purchased 100% of the outstanding shares of Locker Group Holdings Pty. Ltd. ("Locker"). Locker is a manufacturer of perforated and expanded metal for the non-residential market, industrial flooring and handrails for the access systems market, and screening media for applications in the industrial and mining sectors in Australia and Asia. Locker's operations are reported in the Engineered Infrastructure Products Segment. The acquisition, which was funded by cash held by the Company, was completed to expand our product offering and sales coverage for access systems and related products in Asia Pacific.
The purchase price paid for the business at closing (net of $116 cash acquired) was $53,152. In addition, a maximum of $7,911 additional purchase price could be paid to the sellers upon the achievement of certain gross profit and inventory targets over the two years following date of acquisition and the Company recognized an estimated liability of $7,178 at February 5, 2013. During 2014 and 2013, the Company made payments of approximately $2.3 million to the sellers with respect to achievement of these targets. The Company determined that the additional purchase price tied to a gross profit target for the twelve months ending February 2015 would not be achieved and therefore the additional purchase price with respect to that target will not be paid. As such, approximately $4.3 million of this liability was reversed and recognized against cost of goods sold during the third quarter of 2014.
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 preliminary 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 and the purchase price allocation is expected to be finalized in the fourth quarter of 2014.
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In December 2013, the Company purchased 100% of the outstanding shares of Armorflex International Ltd. ("Armorflex") for $10,000. Armorflex is a company holding proprietary intellectual property for products serving the highway safety market. In the measurement of fair values of assets acquired and liabilities assumed, we recorded goodwill of $6,823 and an aggregate of $3,792 for customer relationships, patented technology and other intangible assets. The goodwill is not deductible for tax purposes. Armorflex is included in the Engineered Infrastructure Products segment and was acquired to expand the Company's highway safety product offerings in the Asia Pacific region. This acquisition did not have a significant effect on the Company's fiscal 2013 financial results.
The Company's Condensed Consolidated Statement of Earnings for the thirteen and thirty-nine weeks ended September 27, 2014 included net sales of $64,838 and $168,891 and net earnings of $8,185 and $13,760 resulting from the Valmont SM, AgSense, Locker, and Armorflex acquisitions. The pro forma effect of these acquisitions on the third quarter and first three quarters of the 2013 Statement of Earnings was as follows:
Earnings per share—diluted
(3) GOODWILL AND INTANGIBLE ASSETS
Amortized Intangible Assets
The components of amortized intangible assets at September 27, 2014 and December 28, 2013 were as follows:
Proprietary Software & Database
Patents & Proprietary Technology
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(3) GOODWILL AND INTANGIBLE ASSETS (Continued)
Amortization expense for intangible assets for the thirteen and thirty-nine weeks ended September 27, 2014 and September 28, 2013, respectively was as follows:
Estimated annual amortization expense related to finite-lived intangible assets is as follows:
2014
2015
2016
2017
2018
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.
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Non-amortized intangible assets
Intangible assets with indefinite lives are not amortized. The carrying values of trade names at September 27, 2014 and December 28, 2013 were as follows:
Webforge
Valmont SM
Newmark
Ingal EPS/Ingal Civil Products
Donhad
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 September 27, 2014 and December 28, 2013 was as follows:
Acquisitions
Foreign currency translation
The goodwill from acquisitions arose from the acquisition of Valmont SM in the first quarter, and the purchase of 51% ownership in AgSense in the third quarter of 2014. 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
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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 thirty-nine weeks ended September 27, 2014 and September 28, 2013 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. As of September 27, 2014, the Company has acquired 2,126,392 shares for approximately $316.3 million.
(5) EARNINGS PER SHARE
The following table provides a reconciliation between Basic and Diluted earnings per share (EPS):
Thirteen weeks ended September 27, 2014:
Shares outstanding
Per share amount
Thirteen weeks ended September 28, 2013:
Thirty-nine weeks ended September 27, 2014:
Thirty-nine weeks ended September 28, 2013:
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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 September 27, 2014, there were 273,170 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 ending September 27, 2014. At September 28, 2013, there were 1,172 outstanding stock options with exercise prices exceeding the market price of common stock.
(6) LONG-TERM DEBT
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.
5.00% senior unsecured notes due 2044(a)
5.25% senior unsecured notes due 2054(b)
Unamortized discount on 5.00% and 5.25% senior unsecured notes(a and b)
6.625% senior unsecured notes due 2020(c)
Unamortized premium on 6.625% senior unsecured notes(c)
Revolving credit agreement(d)
IDR Bonds(e)
Other notes
Total long-term debt
Less current installments of long-term debt
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(6) LONG-TERM DEBT (Continued)
part, at any time at 100% of their principal amount plus a make-whole premium and accrued and unpaid interest. These notes are guaranteed by certain subsidiaries of the Company.
Plus, in each case, 0 to 62.5 basis points, depending on the credit rating of the Company's senior debt published by Standard & Poor's Rating Services and Moody's Investors Service, Inc.
At September 27, 2014, the Company had no outstanding borrowings under the revolving credit agreement. The revolving credit agreement contains certain financial covenants that may limit additional borrowing capability under the agreement. At October 21, 2014, the Company had the ability to borrow $582.4 million under this facility. Standby letters of credit totaling $17.6 million related to various insurance obligations were outstanding at October 21, 2014 and reduce the amount available to borrow under this agreement.
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The lending agreements include certain maintenance covenants, including financial leverage and interest coverage. The Company was in compliance with all financial debt covenants at September 27, 2014. The minimum aggregate maturities of long-term debt for each of the five years following 2014 are: $1,262, $1,265, $1,050, $1,050 and $1,050.
The obligations arising under the 5.00% senior unsecured notes due 2044, the 5.25% senior unsecured notes due 2054, the 6.625% senior unsecured notes due 2020, and the Amended Credit Agreement are guaranteed by the Company and its wholly-owned subsidiaries PiRod, Inc., Valmont Coatings, Inc., Valmont Newmark, Inc., Valmont Group Pty. Ltd. and Valmont Queensland Pty. Ltd.
(7) 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, electrolytic manganese dioxide for disposable batteries 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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(7) 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
22
(8) 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 2014, the Company classified "Equity in earnings of nonconsolidated subsidiaries" as an adjustment to reconcile net earnings to operating cash flows, as part of "Net cash flows from operating activities" in the Condensed Consolidating Statement of Cash Flows. In the 2013 Condensed Consolidating Statement of Cash Flows, these amounts were classified within "Other, net", as part of "Net cash flows from investing activities". The Company revised its presentation for 2013 with respect to the supplemental information included in this footnote in order to achieve comparability in the Condensed Consolidating Statements of Cash Flows.
The revisions consisted of recording the amounts previously reported in "Other, net" in cash flows from investing activities that were related to earnings from subsidiaries to "Equity in earnings of nonconsolidated subsidiaries" in cash flows from operating activities. Accordingly, the eliminations to reconcile consolidated net earnings are contained in the "Net cash flows from operating activities".
The "Non-Guarantor" and "Total" columns were not affected by any of these revisions. There was also no effect on the consolidated (total) net cash flows or any other statements in this footnote. The following is a reconciliation of the columns affected for 2013.
2013
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(8) GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (Continued)
Consolidated financial information for the Company ("Parent"), the Guarantor subsidiaries and the Non-Guarantor subsidiaries is as follows:
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Thirteen weeks ended September 27, 2014
Cost of sales
Other income (expense):
Net earnings attributable to Valmont Industries, Inc
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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Thirty-nine weeks ended September 27, 2014
25
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Thirteen weeks ended September 28, 2013
26
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Thirty-nine weeks ended September 28, 2013
27
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Thirteen weeks ended September 27, 2014
Unrealized gains (losses) arising during the period
Unrealized loss on cash flow hedge:
Actuarial gain (loss) in defined benefit pension plan liability
Equity in other comprehensive income
Comprehensive income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Valmont Industries, Inc.
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Thirty-nine weeks ended September 27, 2014
29
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Thirteen weeks ended September 28, 2013
30
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Thirty-nine weeks ended September 28, 2013
Realized (loss) included in net earnings during the period
31
CONDENSED CONSOLIDATED BALANCE SHEETS September 27, 2014
Other intangible assets
Investment in subsidiaries and intercompany accounts
Common stock of $1 par value
Additional paid-in capital
32
CONDENSED CONSOLIDATED BALANCE SHEETS December 28, 2013
Accumulated other comprehensive income
33
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Thirty-nine Weeks Ended September 27, 2014
Income taxes payable (refundable)
Settlement of financial derivative
Intercompany dividends
Intercompany interest on long-term note
Intercompany capital contribution
Purchase of common treasury shares—stock plan exercises:
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Thirty-nine Weeks Ended September 28, 2013
Cash flows from operations:
Changes in assets and liabilities:
Net cash flows from operations
Dividend to noncontrolling interests
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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 28, 2013. 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
Refinancing costs
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 third quarter and first three quarters of fiscal 2014, as compared with 2013, reflected lower sales in all reportable segments except for the Engineered Infrastructure Products (EIP) segment. The changes in net sales in the third quarter and first three quarters of fiscal 2014, as compared with fiscal 2013, were as follows:
Sales—2013
Volume
Pricing/mix
Acquisitions/Divestiture
Currency translation
Sales—2014
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 Locker Group Holdings ("Locker"), Armorflex International Ltd. ("Armorflex"), AgSense LLC, and DS SM A/S, which was renamed Valmont SM. We acquired Locker in February 2013, Armorflex in December 2013, AgSense in August 2014, and Valmont SM in March 2014. All of these acquisitions are reported in the Engineered Infrastructure Products segment, except for AgSense which is reported in the Irrigation segment. In the "Other" category, the sales reduction of $10.9 million and $29.1 million in the third quarter and first three quarters of 2014 reflects the deconsolidation of Delta EMD Pty. Ltd. ("EMD") in December 2013, following the reduction of our ownership in the operation to below 50%.
In the third quarter and first three quarters of fiscal 2014, we realized a decrease in operating profit, as compared with fiscal 2013, due to currency translation effects. On average, the U.S. dollar strengthened in particular against the Australian dollar, Brazilian Real and South Africa Rand, resulting in less operating profit in U.S. dollar terms. The breakdown of this effect by segment was as follows:
Third quarter
Year-to-date
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The decrease in gross margin (gross profit as a percent of sales) in fiscal 2014, as compared with 2013, was due to a combination of lower sales prices, unfavorable sales mix, reduced sales volumes and slightly higher raw material costs in 2014, as compared with 2013.
Selling, general and administrative (SG&A) spending in the third quarter and first three quarters of fiscal 2014, as compared with the same periods in 2013, decreased mainly due to the following factors:
The above reductions in SG&A were partially offset by the following:
The decrease in operating income on a reportable segment basis in 2014, as compared to 2013, was due to reduced operating performance in the Utility, Irrigation, and Coatings segments. The EIP segment showed improved operating performance in 2014 compared to 2013, primarily due to the acquisitions of Valmont SM and Armorflex. The "Other" category reported reduced operating performance in 2014 compared to 2013, mainly due to lower grinding media sales.
Net interest expense increased slightly in the third quarter and first three quarters of fiscal 2014, as compared with 2013, due to slightly higher interest expense due to additional long-term debt issued in the third quarter.
The approximate $38.7 million in costs associated with refinancing of debt is due to the Company's repurchase through partial tender of $199.8 million in aggregate principal amount of a portion of the 6.625% senior unsecured notes due 2020. This expense was comprised of the following:
The increase in other expense in the third quarter and first three quarters of 2014, as compared with 2013, was mainly attributable to recording the change (loss) in fair value of the Company's investment in EMD of $1.4 million and $4.9 million, respectively. $1.3 million in lower appreciation of the deferred compensation assets in the third quarter and first three quarters of 2014 as compared to 2013 also contributed to the higher other expense.
Our effective income tax rate in the third quarter of fiscal 2014 was lower than the same period in fiscal 2013, principally due to a lowering of the U.K. income tax rates in 2013. In the third quarter of fiscal 2013, U.K. tax rates were collectively reduced from 23% to 20%. Accordingly, we reduced the value of our deferred tax assets associated with net operating loss carryforwards and certain timing
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differences by $8.3 million in the third quarter of fiscal 2013, with a corresponding increase in income tax expense. The year-to-date effective tax rate in fiscal 2014 was slightly lower than 2013, mainly due to lower U.K. tax rates discussed above, offset by approximately $3.2 million of non-cash tax benefits associated with the first quarter 2013 sale of our nonconsolidated investment in South Africa and $1.0 million of higher research and development tax credits in the U.S in 2013.
Earnings in non-consolidated subsidiaries were lower in fiscal 2014, as compared with 2013, with a small amount of activity in 2014. In February 2013, the Company sold its 49% ownership interest in a manganese materials operation. There was no significant gain or loss on the sale.
Our cash flows provided by operations were approximately $82.7 million in the first three quarters of fiscal 2014, as compared with $249.1 million provided by operations in 2013. The decrease in operating cash flow in the first three quarters of fiscal 2014 was the result of the cash prepayment expenses related to the refinancing of debt, decreased net earnings, and higher net working capital, as compared with 2013.
Engineered Infrastructure Products (EIP) segment
The increase in net sales in the third quarter and first three quarters of fiscal 2014 as compared with 2013 was mainly due to the acquisition of Valmont SM in early March 2014 and Armorflex in December 2013 ($43.9 million and $112.6 million).
Global lighting. traffic, and roadway product sales in the third quarter and first three quarters of fiscal 2014 improved compared to the same period in fiscal 2013. In the third quarter and first three quarters of fiscal 2014, sales volumes in the U.S. were slightly higher in the transportation markets as construction and installation activity continue to show slight improvement over 2013. However, 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 were down in the third quarter and first three quarters of 2014 as compared to 2013 due to project delays, lower government spending, and increased competition. Sales in Europe were lower in the third quarter of fiscal 2014 and slightly lower year-to-date compared to the same periods in fiscal 2013. Decreased volumes in France were offset to an extent by volume increases in the U.K and favorable currency impacts. In the Asia Pacific region, sales were lower in the third quarter of fiscal 2014 over 2013 due to softer market conditions in Australia, partially offset by growth in India. Highway safety product sales improved in the third quarter and first three quarters of 2014 compared to 2013, due to the acquisition of Armorflex in December 2013 (approximately $2.6 million and $6.7 million, respectively) and modestly improved market conditions in Australia and New Zealand due to more highway construction projects this year. This improvement is offset somewhat by unfavorable year-to-date currency translation effects of $2.7 million.
Communication product line sales were higher in the third quarter and first three quarters of fiscal 2014, as compared with the same periods in fiscal 2013. On a regional basis, North America sales in the third quarter and first three quarters increased. The year-to-date increase in North American sales was mainly attributable to higher wireless communication structures sales due to the continued build out of wireless networks, partially offset by decreased communication component sales resulting from a large customer temporarily curtailing spending. In China, sales of wireless communication structures in the third quarter and first three quarters of fiscal 2014 were higher than the same periods in fiscal 2013. Chinese wireless carriers are increasing investment in 4G upgrades, as the government began issuing licenses in late 2013.
Access systems product line sales decreased in the third quarter and first three quarters of 2014, as compared with 2013, primarily due to the negative impact of currency translation year-to-date of $7.5 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. The volume decrease was
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partially offset by the full 2014 effect of the Locker acquisition (approximately $4.5 million) that was acquired in February 2013.
Operating income for the segment in the third quarter and first three quarters of fiscal 2014 increased, as compared with the same period of fiscal 2013, due primarily to operating profit generated from the acquisitions of Valmont SM and Armorflex of $4.8 million and $12.5 million, respectively, and the reversal of the Locker earn-out liability in the third quarter of fiscal 2014 of approximately $4.3 million. The earn-out reversal was recorded against product cost of sales in the condensed consolidated statements of earnings.
The increase in SG&A spending in the third quarter and first three quarters of 2014 were due to costs related to the Armorflex and Valmont SM acquisitions totaling $3.7 million and $9.6 million, respectively. These increased costs in the third quarter and first three quarters of 2014 were offset by lower incentive costs of $1.1 million and $2.7 million, respectively. Currency effects also reduced SG&A expense for the three quarters ended September 27, 2014 approximately $1.3 million.
Utility Support Structures (Utility) segment
In the Utility segment, the sales decrease in the third quarter and first three quarters of 2014, as compared with 2013, was due to lower sales volume and a decline in the percentage of sales from very large transmission projects which changed the mix of utility structure sales between the reporting periods. In North America, sales volumes in tons for steel utility structures were down in the first three quarters of 2014, as compared with 2013, offset by increases in sales volume for concrete structures. We believe industry supply and demand are now more aligned as compared with this time in 2013, as we and our competitors have increased production capacity to meet demand. We believe this has resulted in increased price competition for certain portions of the market where orders are awarded based on competitive bidding. In the third quarter of 2014, as compared to 2013, international utility structures sales increased due to higher sales volumes. For the nine months ended September 27, 2014, as compared to the same period in 2013, international utility structures sales decreased due to lower sales volumes.
SG&A expense decreased approximately $1 million in the third quarter and first three quarters of 2014, as compared with 2013, primarily due to lower incentive compensation tied to lower operating income offset by higher employee compensation due to increased headcount to support capacity expansion to meet projected long-term growth. Operating income in the third quarter and first three quarters of 2014, as compared with 2013, decreased due to lower sales, reduced leverage of fixed costs, and increased depreciation expense on plant capacity added in 2013.
Coatings segment sales decreased in the third quarter and first three quarters of 2014, as compared with 2013, due to lower sales volumes in the Asia Pacific region and currency translation effects related to the strengthening of the U.S. dollar against the Australian dollar. More specifically, weak demand in Australia led to decreases in volumes offset somewhat by improved sales volumes in Asia. In the third quarter of fiscal 2014, U.S. sales were relatively flat as compared to the same period in fiscal 2013. On a year-to-date basis, the lower sales volumes in North America for galvanizing services were attributable to unfavorable winter weather conditions that affected our customers into early second quarter.
Operating income was also lower in the third quarter and first three quarters of 2014, as compared with 2013, due to the lower sales volumes, unfavorable currency impacts, and reduced leverage of fixed costs in both Australia and North America. The decrease in segment operating income in the first three quarters of 2014, as compared with 2013, was also due to the $4.6 million gain recognized on the sale of an Australian galvanizing operation in the second quarter of fiscal 2013. The decrease in segment
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operating income in the third quarter and first three quarters of 2014, as compared to the same periods in 2013, was partially offset by approximately $2.5 million of business interruption insurance proceeds received related to a 2013 fire at one of our North American facilities which was recorded against Service Cost of Sales in the Condensed Consolidated Statement of Earnings.
The decrease in Irrigation segment net sales in the third quarter and first three quarters of fiscal 2014, as compared with 2013, was mainly due to sales volume decreases in the North American market. The decrease in North America was offset to an extent by increased sales volumes in international markets. In North America, lower expected net farm income in 2014, as compared with 2013, and much lower sales backlogs at the beginning of the year resulted in lower sales of irrigation equipment in 2014, as compared with 2013. In fiscal 2014, net farm income in the United States is expected to decrease 13.8% from the record levels of 2013, 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 2014, as compared with 2013. In international markets, sales improved in the third quarter and first three quarters of fiscal 2014, as compared with 2013, mainly due to increased activity in Brazil, Middle East, and Australia.
Operating income for the segment declined in the third quarter and first three quarters of fiscal 2014 over 2013, due to the sales volume decrease and associated operating deleverage of fixed operating costs. The primary reasons for the slight decrease in SG&A expense in the first three quarters of fiscal 2014, as compared with 2013, related to reduced employee incentives of $3.5 million, offset by increased product development spending and increased employee headcount in the international business. Additionally, SG&A expense decreased in the third quarter and first three quarters of fiscal 2014, as compared to 2013, due to lower bad debt provisions for international receivables of $0.7 million and $2.1 million, respectively, and exchange rate translation effects.
This unit includes the grinding media, industrial tubing, and industrial fasteners operations. The decrease in sales in the third quarter and first three quarters of fiscal 2014, as compared with 2013, was mainly due lower sales volumes due to the deconsolidation of EMD in December 2013 (approximately $10.9 million and $29.1 million, respectively), lower sales volumes in the grinding media operations and exchange rate translation effects. Grinding media volumes were negatively affected by less favorable Australian mining industry demand. Tubing sales in 2014 were slightly lower due to lower volumes compared to 2013. Operating income in the third quarter and first three quarters of fiscal 2014 was lower than the same period in 2013, due to lower grinding media sales volumes, the deconsolidation of EMD in 2013, and currency translation effects.
Net corporate expense in the third quarter and first three quarters of fiscal 2014 decreased over the same period in fiscal 2013. These decreases were mainly due to:
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Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows—Net working capital was $1,111.5 million at September 27, 2014, as compared with $1,161.3 million at December 28, 2013. The decrease in net working capital in 2014 mainly resulted from decreased cash on hand due to the acquisition of Valmont SM and cash used in the share repurchase program. Cash flow provided by operations was $82.7 million in fiscal 2014, as compared with $249.1 million in fiscal 2013. The decrease in operating cash flow in 2014 was the result of the cash prepayment expenses related to the 2014 refinancing activities, lower net earnings and higher working capital in 2014, as compared with 2013.
Investing Cash Flows—Capital spending in the first three quarters of fiscal 2014 was $63.4 million, as compared with $75.1 million for the same period in 2013. The most significant capital spending projects in 2014 included certain investments in machinery and equipment across all businesses. We expect our capital spending for the 2014 fiscal year to be approximately $85 million. In 2013, investing cash flows included proceeds from asset sales of $39.6 million, principally consisting of $29.2 million received from the sale of our 49% owned non-consolidated subsidiary in South Africa and $8.2 million received from the sale of the Western Australia galvanizing operation. Investing cash flows also includes $120.5 million paid for the Valmont SM acquisition in the first quarter and $17.0 million paid for 51% of Agsense in the third quarter of 2014 and $53.2 million paid for the Locker acquisition in 2013.
Financing Cash Flows—Our total interest-bearing debt increased to $786.7 million at September 27, 2014 from $490.1 million at December 28, 2013 as a result of the issuance of $500 million face value of long-term unsecured notes and the repurchase by partial tender of $199.8 million of the 2020 senior notes. Financing cash flows changed from a use of approximately $12.2 million in the first three quarters of fiscal 2013 to a use of approximately $43.2 million in the first three quarters of fiscal 2014. In addition to the third quarter 2014 refinancing activities, the Company purchased $316.3 million of treasury shares in 2014 resulting from the recently announced share repurchase program.
Financing and Capital
On May 13, 2014, we announced a new capital allocation philosophy which covered both the quarterly dividend rate as well as a share repurchase program. Specifically, 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. The 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 repurchases and may discontinue the program at any time. As of September 27, 2014, we have acquired 2,126,392 shares for approximately $316.3 million under this share repurchase program. As of October 20, 2014, 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 2,425,892 shares for $356.4 million under the share repurchase program.This philosophy also authorizes dividends on common shares in the range of 15% of the prior year's fully diluted net earnings; the most recent quarterly dividend was $0.375 per share paid on October 15, 2014.
Our debt financing at September 27, 2014 consisted primarily of long-term debt. During the third quarter of 2014, the Company issued $500 million of new notes and repurchased by partial tender
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$199.8 million in aggregate principal amount of the 2020 notes. Our long-term debt principally consists of:
Our capital allocation philosophy is focused on maintaining 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.
On October 17, 2014, we entered into a First Amendment to our Credit Agreement with JPMorgan Chase Bank, as Administrative Agent, and the other lenders party thereto, dated as of August 15, 2012, which increased the committed unsecured revolving credit facility from $400 million to $600 million and extends the maturity date from August 15, 2017 to October 17, 2019. Under the Amended Credit Agreement, up to $25 million is available for swingline loans, up to $75 million is available for letters of credit and up to $200 million is available for borrowings in foreign currencies. We may increase the credit facility by up to an additional $200 million at any time, subject to lenders increasing the amount of their commitments. The interest rate on our borrowings will be, at our option, either:
At September 27, 2014 and December 28, 2013, we had no outstanding borrowings under the revolving credit agreement. The revolving credit agreement contains certain financial covenants that may limit our additional borrowing capability under the agreement. At October 21, 2014, we had the ability to borrow $582.4 million under this facility, after consideration of standby letters of credit of $17.6 million associated with certain insurance obligations and international sales commitments. We also maintain certain short-term bank lines of credit totaling $111.8 million, $94.8 million of which was unused at September 27, 2014.
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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:
At September 27, 2014, we were in compliance with all covenants related to the debt agreements. The key covenant calculations at September 27, 2014 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 (September 28, 2013 through September 27, 2014) is as follows:
Income tax expense
Deconsolidation of subsidiary
Impairment of property, plant and equipment
Debt refinancing expense
Acquisition earn-out release
Deferred income tax benefit
Noncontrolling interest
Pension plan expense
Contribution to pension plan
Valmont SM EBITDA—Sept. 28, 2013—March 3, 2014
Changes in assets and liabilities
EBITDA
Depreciation and amortization expense
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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 September 28, 2013 and September 27, 2014.
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 $608.9 million of undistributed earnings of our foreign subsidiaries, as we intend to reinvest those earnings. Of our cash balances at September 27, 2014, approximately $294.5 million is held in entities outside the United States with approximately $94 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 $94 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 $34.1 million in income taxes to repatriate that cash.
Financial Obligations and Financial Commitments
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 27, 2014 were as follows (in millions of dollars):
Delta pension plan contributions
Operating leases
Acquisition earn-out payments
Unconditional purchase commitments
Total contractual cash obligations
Long-term debt mainly consists of three tranches of senior unsecured notes. On September 22, 2014, the Company issued and sold $250.0 million aggregate principal amount of the Company's 5.00% senior notes due 2044 and $250.0 million 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 $199.8 million in aggregate principal amount of the company's 6.625% senior notes due 2020, and
46
$250.2 million of the notes remain outstanding following the conclusion of the tender offer. At September 27, 2014, we had no outstanding borrowings under our bank revolving credit agreement (which was amended on October 17, 2014 to extend the maturity to 2019 and increase potential borrowings to $600 million). Obligations under these agreements may be accelerated in event of non-compliance with debt covenants. The Delta pension plan contributions are related to the current cash funding commitments to the plan with the plan's trustees. Operating leases relate mainly to various production and office facilities and are in the normal course of business.
Acquisition earn-out payments relate to anticipated payments to the prior owners of Pure Metal Galvanizing (PMG) and Locker, as a portion of the consideration paid for these entities is contingent in nature. The earn-out arrangements generally relate to the meeting of certain profitability targets. Locker's target period ends in February 2015 and PMG's ends in December 2017. During 2014, the Company made payments of approximately $2.3 million to the sellers of Locker with respect to achievement of those targets. The Company determined during the third quarter of 2014 that the Locker gross profit target for the twelve months ending February 2015 would not be achieved and therefore the additional purchase price with respect to this target will not be paid. As such, approximately $4.3 milllion of this liability was reversed and recognized against cost of goods sold for the third quarter 2014.
Unconditional purchase commitments relate to purchase orders for zinc, aluminum and steel, all of which we plan to use within the next year, and certain capital investments planned for the next year. 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 27, 2014, we had approximately $44.4 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 38 in our Form 10-K for the fiscal year ended December 28, 2013.
Critical Accounting Policies
There have been no changes in our critical accounting policies as described on pages 39-43 in our Form 10-K for the fiscal year ended December 28, 2013 during the quarter ended September 27, 2014.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in the company's market risk during the quarter ended September 27, 2014. For additional information, refer to the section "Risk Management" in our Form 10-K for the fiscal year ended December 28, 2013.
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,
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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 29, 2014 to July 26, 2014
July 27, 2014 to August 30, 2014
August 31, 2014 to September 27, 2014
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 October, 2014.
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Index of Exhibits
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