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VALMONT INDUSTRIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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. 36-------------------------------------------------------------------------------- Table of Contents Results of Operations Dollars in millions, except per share amounts Thirteen Weeks Ended Thirty-nine Weeks Ended September 27, September 28, % Incr. September 27, September 28, % Incr. 2014 2013 (Decr.) 2014 2013 (Decr.) Consolidated Net sales $ 765.7 $ 778.0 (1.6 )% $ 2,360.0 $ 2,476.3 (4.7 )% Gross profit 199.5 225.6 (11.6 )% 627.0 722.4 (13.2 )% as a percent of sales 26.1 % 29.0 % 26.6 % 29.2 % SG&A expense 111.7 115.7 (3.5 )% 335.5 350.0 (4.1 )% as a percent of sales 14.6 % 14.9 % 14.2 % 14.1 % Operating income 87.8 109.9 (20.1 )% 291.4 372.4 (21.8 )% as a percent of sales 11.5 % 14.1 % 12.3 % 15.0 % Net interest expense 7.2 6.6 9.1 % 20.4 19.6 4.1 % Refinancing costs 38.7 - NM 38.7 - NM Effective tax rate 36.0 % 42.8 % 34.6 % 35.6 % Net earnings $ 23.6 $ 56.5 (58.2 )% $ 143.5 $ 223.6 (35.8 )% Diluted earnings per share $ 0.92 $ 2.10 (56.2 )% $ 5.43 $ 8.31 (34.7 )% Engineered Infrastructure Products Net sales $ 284.2 $ 235.3 20.8 % $ 779.3 $ 658.0 18.4 % Gross profit 76.9 67.6 13.8 % 205.3 186.0 10.4 % SG&A expense 43.7 41.9 4.3 % 129.8 125.0 3.8 % Operating income 33.2 25.7 29.2 % 75.5 61.0 23.8 % Utility Support Structures Net sales $ 180.6 $ 228.9 (21.1 )% $ 606.8 $ 696.1 (12.8 )% Gross profit 36.5 61.8 (40.9 )% 134.5 189.8 (29.1 )% SG&A expense 19.5 20.3 (3.9 )% 58.4 60.0 (2.7 )% Operating income 17.0 41.5 (59.0 )% 76.1 129.8 (41.4 )% Coatings Net sales $ 73.6 $ 75.3 (2.3 )% $ 211.2 $ 229.6 (8.0 )% Gross profit 26.7 28.7 (7.0 )% 75.3 80.9 (6.9 )% SG&A expense 9.1 8.9 2.2 % 28.0 24.1 16.2 % Operating income 17.6 19.8 (11.1 )% 47.3 56.8 (16.7 )% Irrigation Net sales $ 174.3 $ 175.1 (0.5 )% $ 606.9 $ 690.0 (12.0 )% Gross profit 49.1 52.9 (7.2 )% 176.7 216.3 (18.3 )% SG&A expense 22.3 21.7 2.8 % 65.2 66.4 (1.8 )% Operating income 26.8 31.2 (14.1 )% 111.5 149.9 (25.6 )% Other Net sales $ 53.0 $ 63.4 (16.4 )% $ 155.8 $ 202.6 (23.1 )% Gross profit 10.3 14.9 (30.9 )% 35.0 49.2 (28.9 )% SG&A expense 4.1 4.9 (16.3 )% 11.9 15.4 (22.7 )% Operating income 6.2 10.0 (38.0 )% 23.1 33.8 (31.7 )% Net corporate expense Gross profit $ - $ (0.1 ) NM $ 0.2 $ 0.2 NM SG&A expense 13.0 18.1 (28.2 )% 42.3 59.1 (28.4 )% Operating loss (13.0 ) (18.2 ) 28.6 % (42.1 ) (58.9 ) 28.5 % NM=Not meaningful 37 -------------------------------------------------------------------------------- Table of Contents 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: Third quarter Total EIP Utility Coatings Irrigation Other Sales-2013 $ 778.0 $ 235.3 $ 228.9 $ 75.3 $ 175.1 $ 63.4 Volume (26.1 ) (1.0 ) (22.0 ) (5.1 ) 0.9 1.1 Pricing/mix (21.7 ) 4.4 (26.4 ) 3.4 (2.0 ) (1.1 ) Acquisitions/Divestiture 33.6 43.9 - - 0.6 (10.9 ) Currency translation 1.9 1.6 0.1 - (0.3 ) 0.5 Sales-2014 $ 765.7 $ 284.2 $ 180.6 $ 73.6 $ 174.3 $ 53.0 Year-to-date Total EIP Utility Coatings Irrigation Other Sales-2013 $ 2,476.3 $ 658.0 $ 696.1 $ 229.6 $ 690.0 $ 202.6 Volume (126.3 ) 8.3 (38.1 ) (15.4 ) (75.0 ) (6.1 ) Pricing/mix (48.0 ) 4.3 (49.7 ) 3.7 (1.4 ) (4.9 ) Acquisitions/Divestiture 88.5 117.0 - - 0.6 (29.1 ) Currency translation (30.5 ) (8.3 ) (1.5 ) (6.7 ) (7.3 ) (6.7 ) Sales-2014 $ 2,360.0 $ 779.3 $ 606.8 $ 211.2 $ 606.9 $ 155.8 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: Total EIP Utility Coatings Irrigation Other Corporate Third quarter $ 0.1 $ 0.1 $ - $ - $ - $ - $ - Year-to-date $ (3.7 ) $ (0.8 ) $ (0.3 ) $ (0.8 ) $ (1.3 ) $ (0.9 ) $ 0.4 38 -------------------------------------------------------------------------------- Table of Contents 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: º • º decreased employee incentive accruals of $6.8 million and $22.1 million, respectively, due to lower operating results; º • º lower expenses associated with the Delta Pension Plan of $1.0 million and $2.9 million, respectively; and º • º EMD was deconsolidated in December 2013, which resulted in reduced expenses of $1.1 million and $3.5 million, respectively. The above reductions in SG&A were partially offset by the following: º • º the sale of one of our galvanizing facilities in Australia resulted in a gain of $4.6 million in the second quarter of 2013, which was reported as a reduction of SG&A expense, and; º • º the acquisition of AgSense in August 2014, Valmont SM in March 2014, and Armorflex in December 2013 included combined expenses in the third quarter and first three quarters of fiscal 2014 of $4.0 million and $9.9 million, respectively. 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: º • º Cash prepayment expenses of approximately $41.2 million; less º • º Recognition of $4.4 million of the proportionate unamortized premium originally recorded upon the issuance of the 2020 notes; plus º • º Recognition of approximately $2.0 million of expense comprised of the proportionate amount of the write-offs of unamortized loss on cash flow hedge and deferred financing costs. 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 39 -------------------------------------------------------------------------------- Table of Contents 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 40-------------------------------------------------------------------------------- Table of Contents 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 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 41-------------------------------------------------------------------------------- Table of Contents 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. Irrigation segment 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. Other 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 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: º • º lower employee incentives associated with reduced net earnings ($2.1 million and $9.7 million, respectively); º • º lower compensation and employee benefit costs ($1.4 million and $3.8 million, respectively); º • º decreased expenses associated with the Delta Pension Plan ($1.0 million and $2.9 million, respectively); and º • º decreased deferred compensation plan expense ($1.3 million and $1.3 million, respectively). The deferred compensation expense recorded within corporate expense has a corresponding offset by the same amount in other income (expense). 42 -------------------------------------------------------------------------------- Table of Contents 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 43-------------------------------------------------------------------------------- Table of Contents $199.8 million in aggregate principal amount of the 2020 notes. Our long-term debt principally consists of: º • º $250.2 million face value ($255.8 million carrying value) of senior unsecured notes that bear interest at 6.625% per annum and are due in April 2020. We are allowed to repurchase the notes at specified prepayment premiums. º • º $250 million face value ($248.8 million carrying value) of senior unsecured notes that bear interest at 5.00% per annum and are due in October 2044. We are allowed to repurchase the notes at specified prepayment premiums. º • º $250 million face value ($246.7 million carrying value) of unsecured notes that bear interest at 5.25% per annum and are due in October 2054. We are allowed to repurchase the notes at specified prepayment premiums. º • º All three tranches of these notes are guaranteed by certain of our subsidiaries. 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: º (a) º LIBOR (based on a 1, 2, 3 or 6 month interest period, as selected by us) plus 100 to 162.5 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.; or º (b) º the higher of º • º the prime lending rate, º • º the Federal Funds rate plus 50 basis points, and º • º LIBOR (based on a 1 month interest period) plus 100 basis points, 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 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. 44 -------------------------------------------------------------------------------- Table of Contents 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: º • º Interest-bearing debt is not to exceed 3.5X EBITDA of the prior four quarters; and º • º EBITDA over the prior four quarters must be at least 2.5X our interest expense over the same period. 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 $ 786,662 EBITDA-last four quarters 434,815 Leverage ratio 1.81 EBITDA-last four quarters $ 434,815 Interest expense-last four quarters 30,877 Interest earned ratio 14.08 The calculation of EBITDA-last four quarters (September 28, 2013 through September 27, 2014) is as follows: Net cash flows from operations $ 230,034 Interest expense 30,877 Income tax expense 110,038 Deconsolidation of subsidiary (12,011 ) Impairment of property, plant and equipment (12,161 ) Loss on investment (4,859 ) Debt refinancing expense 2,478 Acquisition earn-out release (4,300 ) Deferred income tax benefit 12,901 Noncontrolling interest (1,431 ) Equity in earnings of nonconsolidated subsidiaries 253 Stock-based compensation (6,958 ) Pension plan expense (3,702 ) Contribution to pension plan 19,109 Valmont SM EBITDA-Sept. 28, 2013-March 3, 2014 11,038 Changes in assets and liabilities 64,308 Other (799 ) EBITDA $ 434,815 Net earnings attributable to Valmont Industries, Inc. $ 198,383 Interest expense 30,877 Income tax expense 110,038 Depreciation and amortization expense 84,479 Valmont SM EBITDA-Sept. 28, 2013-March 3, 2014 11,038 EBITDA $ 434,815 45 -------------------------------------------------------------------------------- Table of Contents 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): Remaining After Contractual Obligations Total 2014 2015 - 2016 2017 - 2018 2018 Long-term debt $ 768.8 $ 0.2 $ 2.5 $ 2.1 $ 764 Interest 1,002.5 10.7 85.3 85.3 821.2 Delta pension plan contributions 136.8 - 36.2 36.2 64.4 Operating leases 97.9 6.9 40.0 22.1 28.9 Acquisition earn-out payments 4.7 - - 4.7 - Unconditional purchase commitments 82.0 22.0 60.0 - - Total contractual cash obligations $ 2,092.7 $ 39.8 $ 224.0 $ 150.4 $ 1,678.5 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-------------------------------------------------------------------------------- Table of Contents $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. |