Valmont Industries, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Valmont is a global provider of infrastructure products and services and agricultural productivity solutions. The filing covers the unaudited thirteen weeks and thirty-nine weeks ended September 30, 2023, compared with the periods ended September 24, 2022. Reportable segments are Infrastructure and Agriculture.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Net sales | $1,050.3 million | $1,097.4 million | $3,159.1 million | $3,213.7 million |
| Gross profit | $315.1 million | $285.5 million | $953.1 million | $827.3 million |
| Gross margin | 30.0% | 26.0% | 30.2% | 25.7% |
| Operating income (loss) | $(24.2) million | $110.0 million | $228.0 million | $323.5 million |
| Operating margin | (2.3)% | 10.0% | 7.2% | 10.1% |
| Net earnings attributable to Valmont | $(49.0) million | $72.1 million | $114.9 million | $210.5 million |
| Diluted EPS | $(2.34) | $3.34 | $5.40 | $9.77 |
- Revenue: Q3 sales declined 4.3%; year-to-date sales declined 1.7%. Infrastructure sales were broadly stable in Q3 and increased 5.1% year to date, while Agriculture sales declined 8.5% in Q3 and 9.7% year to date.
- Gross profit: Increased despite lower sales, primarily because lower steel and other input costs more than offset lower volumes and pricing effects.
- Segment operating income: Infrastructure increased to $103.4 million in Q3 from $92.5 million. Agriculture reported a $99.7 million operating loss versus $43.3 million of operating income, principally due to impairment charges and lower volumes.
- Cash flow: Operating cash flow was $190.9 million for the first 39 weeks, compared with $183.7 million in the prior-year period. Capital expenditures were $71.2 million, and investing cash outflow was $89.3 million.
- Liquidity: Cash and cash equivalents were $172.6 million at September 30, 2023. Approximately $142.2 million was held by non-U.S. subsidiaries.
- Debt: Interest-bearing debt was $981.8 million on the balance sheet basis cited by management, compared with $878.0 million at December 31, 2022. Long-term debt was $977.3 million, and revolving-credit borrowings were $247.3 million.
- Leverage: Management reported a four-quarter Adjusted EBITDA of $642.2 million and a leverage ratio of 1.38, below the revolving-credit covenant maximum of 3.50. The company stated that it was in compliance with all debt covenants.
- Shareholder returns: The quarterly dividend was increased to $0.60 per share, or $2.40 annualized. The company repurchased 126,482 shares for $31.8 million during Q3 and $166.7 million during the first 39 weeks.
Material changes versus the prior comparable period
- Q3 operating results were significantly affected by $140.8 million of long-lived-asset impairment charges, including $120.0 million for Agriculture Technology goodwill, $17.3 million for a Prospera proprietary technology intangible asset, $1.9 million for India Structures goodwill, and $1.7 million for an Infrastructure trade name.
- The impairments were driven by a less favorable North American agriculture outlook, slower-than-expected adoption of agronomy software, higher discount rates, lower projected revenue growth, and revised working-capital assumptions.
- The company recorded $4.2 million of realignment charges in Q3 and authorized cash charges of up to $36.0 million for a workforce-reduction and early-retirement program expected to be completed by year-end 2023.
- SG&A increased 10.7% in Q3 and 15.2% year to date, reflecting higher compensation costs and, year to date, acquisition-related costs and higher bad-debt reserves, including approximately $2.7 million related to an insolvent Telecommunications customer.
- Interest expense increased year to date as a result of higher borrowings and interest rates. Net interest expense was $36.9 million year to date versus $33.3 million in the prior-year period.
- The effective tax rate was (44.6)% in Q3 and 41.4% year to date, compared with 27.6% and 27.3%, respectively, in the prior-year periods. The change was substantially affected by non-deductible goodwill impairment and a foreign-operation valuation allowance adjustment.
- Valmont acquired Australian irrigation supplier HR Products for approximately $36.5 million in cash, net of cash acquired, on August 31, 2023. The purchase-price allocation remains preliminary.
- The company’s offshore wind structures business was divested in late 2022, eliminating the prior-year Other-segment revenue and operating income.
Guidance, outlook, commentary, and risks
- Management expects fiscal 2023 capital expenditures of approximately $100 million to $110 million.
- Consolidated backlog was approximately $1.5 billion at September 30, 2023, down from approximately $1.7 billion at December 31, 2022. The decline was attributed to Agriculture; Infrastructure backlog remained comparable with year-end.
- Management expects North American Agriculture irrigation-equipment and aftermarket-part sales to remain below prior-year levels through the remainder of fiscal 2023 and into fiscal 2024, reflecting weaker grower capital spending and the loss of prior stimulus and disaster-relief benefits.
- Telecommunications sales are expected to remain lower until major carriers increase network-enhancement spending; management expects longer-term growth as global 5G deployment accelerates.
- Key risks include agricultural cyclicality, farm income and commodity prices, weather, inflation, raw-material costs, supply-chain disruptions, labor shortages, foreign-exchange movements, rising interest rates, geopolitical conflicts, customer credit risk, and possible additional impairment charges.
- Three reporting units had less than 5% excess fair value over carrying value, creating sensitivity to adverse changes in forecasts, discount rates, or operating performance.
- Management stated that liquidity is adequate based on cash, available credit facilities, senior notes, and historically positive operating cash flow. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the Agriculture downturn and weaker North American demand persist into fiscal 2024.
- Whether additional goodwill or intangible-asset impairments are required, particularly for reporting units with limited valuation cushion.
- The timing and total cash cost of the realignment program relative to the $36.0 million authorization.
- Execution and contribution of the HR Products acquisition and the final purchase-price allocation.
- Debt maturity, interest-rate exposure, revolving-credit utilization, and continued compliance with the 3.50 leverage covenant.
- Progress toward the stated $100 million to $110 million fiscal 2023 capital-expenditure range and the company’s ability to sustain dividends and share repurchases.
- Effects of steel-price changes, customer pricing mechanisms, currency translation, and the Telecommunications customer insolvency on future margins and cash flow.