LONG - Valmont Industries Inc - VMI 6 7/8 5/1/2014

BUSINESS:

Valmont designs and manufactures poles, towers, and structures for lighting, communication, and utility markets and provides protective coating services for infrastructure.  The Company also manufactures and distributes industrial and agricultural irrigation products in addition to a wide variety of fabricated products for commercial and industrial applications.

Valmont has demonstrated constant margin improvements over the last five years and obviously may likely not continue to grow at the same pace going forward. Its diversified business segments remained strong during the current global macroeconomic downturn and seem to be almost uncoupled since earnings continued to grow until the latest quarter. Weaknesses in certain business segments have been compensated by other seemingly uncorrelated segments each with somewhat discrete business cycles. They hold a leadership positions in all their segments, accounting for half the industry revenues in the irrigation segment. Competitors include Lindsay Corp (LNN US) and Thomas & Betts (TNB US).

Segment revenues (75% of which are done in the US):

Utility Support Structures              41%
Engineered Support Structures      33%
Irrigation segment                      21%
Coatings segment                        5%

VALMONT has a diverse customer base with its largest client accounting for less than 10% and its 10 largest clients for less than 20% of its revenues. Customers include governments, utilities, telecoms, contractors and agriculture. Most important raw materials are steel, aluminum and zinc and the company seems to have a strong ability to pass cost increases on to its customers. So far Valmont has not benefited to a large extend from stimulus related infrastructure spending which may pick up in the near future together with increased spending on electricity grid by utility companies over the next years. 

Lighting and Traffic Poles was weak in the US but picked up somewhat in Europe and Africa. In general we would expect long term stable demand for most segments or in other words at least not seeing the business falling apart to an extend which should concern a 2014 bondholder.  

FINANCIAL POLICY

The company has paid a stable dividend in the 8 to 14MM range annually over the last 5 years and frequently does small acquisitions (4 in 2008, 1 in 2007). Valmont shows strong credit measures, a strong liquidity position, unencumbered assets and covenant headroom and as long as they don't show any signs of leaving the path of conservative financial policies and start to do aggressive acquisitions we see plenty of downside protection as represented by the large equity market cap cushion. The company is publicly held with its founder and former CEO (retired in 2004) being the largest shareholder with 19.58%.

The company produced high and stable cash flows especially compared to its relatively small debt load in the past and is expected to produce about 75MM-80MM over the next year. Currently it holds USD 96MM in cash and has USD 164 million available under its revolver. Availability is expected to fall somewhat due to WC needs and small acquisition but to remain at a comfortable level. 

Bonds were issued by Valmont Industries, Inc. and are subordinated to the USD 280MM senior unsecured credit facility due 2013 (there are unencumbered assets).

RISK

• change in financial policies

• segments may start to correlate

• adversity in revenue mix 

• everything else which we can't see today