Valmont Industries, Inc. — Fiscal 2022 Third-Quarter Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 24, 2022, compared with September 25, 2021. Financial statements are unaudited. Valmont reports two segments: Infrastructure and Agriculture; prior-period segment results were recast following the 2022 management realignment.
Business Context and Key Metrics
Valmont manufactures infrastructure products and provides coatings services for utility, renewable energy, lighting, transportation, and telecommunications markets. Its Agriculture segment manufactures irrigation equipment and provides precision-agriculture technology solutions.
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $1,097.4 million | $868.8 million | $3,213.7 million | $2,538.3 million |
| Gross profit | $285.5 million | $227.4 million | $827.3 million | $661.6 million |
| Gross margin | 26.0% | 26.2% | 25.7% | 26.1% |
| Operating income | $110.0 million | $76.2 million | $323.5 million | $236.0 million |
| Operating margin | 10.0% | 8.8% | 10.1% | 9.3% |
| Net earnings attributable to Valmont | $72.1 million | $51.7 million | $210.5 million | $168.8 million |
| Diluted EPS | $3.34 | $2.40 | $9.77 | $7.86 |
| Net interest expense | $11.1 million | $10.6 million | $33.3 million | $30.6 million |
| Effective tax rate | 27.6% | 23.4% | 27.3% | 21.3% |
Segment Performance
- Infrastructure: Q3 net sales increased 22.3% to $773.2 million and operating income increased 31.1% to $93.6 million. Nine-month sales increased 23.3% to $2.212 billion and operating income increased 36.4% to $255.7 million.
- Agriculture: Q3 net sales increased 37.1% to $324.1 million and operating income increased 55.8% to $43.3 million. Nine-month sales increased 34.6% to $1.002 billion and operating income increased 27.9% to $138.8 million.
Cash Flow, Liquidity, and Debt
| Metric | 9M 2022 | 9M 2021 |
|---|---|---|
| Operating cash flow | $183.7 million | $61.8 million |
| Investing cash flow | $(106.4) million | $(389.5) million |
| Financing cash flow | $(79.1) million | $101.0 million |
| Capital expenditures | $67.1 million | $80.5 million |
| Cash and equivalents at period-end | $166.2 million | $169.8 million |
- Total interest-bearing debt was $942.2 million at September 24, 2022, compared with $965.4 million at December 25, 2021. Long-term debt was $935.1 million, excluding current installments.
- The revolving credit facility provides $800 million of committed capacity, with $205.6 million outstanding and $594.4 million available at quarter-end after standby letters of credit.
- Short-term bank lines totaled $130.1 million, of which $125.1 million was unused.
- Adjusted EBITDA for the last four quarters was $544.8 million, and the covenant leverage ratio was 1.52x versus a 3.50x maximum, or 3.75x following certain material acquisitions. The company reported compliance with all debt covenants.
- Net working capital was $981.9 million, compared with $946.9 million at year-end 2021. Foreign subsidiaries held approximately $136.6 million of cash.
Material Changes Versus the Prior Comparable Period
- Sales increased 26.3% in Q3 and 26.6% for the first nine months, primarily from higher selling prices, favorable demand, and increased volumes in selected markets. Pricing mechanisms and pricing actions generally offset elevated steel and other input costs.
- Operating income grew faster than sales, increasing 44.4% in Q3 and 37.1% year to date. SG&A increased 16.1% in Q3 and 18.4% year to date, reflecting higher incentive compensation, merit increases, travel, research and development, and Prospera-related costs.
- Gross margin declined modestly despite higher gross profit, while operating margin improved because SG&A grew more slowly than revenue.
- The effective tax rate increased because of geographic mix, changes related to foreign tax credits, and the absence of a favorable U.K. tax-rate item recorded in 2021.
- Operating cash flow improved substantially, partly because 2021 working-capital investment was unusually high. The improvement was partially offset by an approximately $17 million pension contribution.
- Valmont acquired approximately 51% of ConcealFab for $39.3 million in cash on June 1, 2022. The company provides 5G infrastructure and passive-intermodulation mitigation solutions. The preliminary allocation included $42.5 million of goodwill.
- Valmont acquired the remaining interests in two subsidiaries for an aggregate amount of approximately $7.3 million and repurchased $20.5 million of treasury stock during the first nine months.
- Other comprehensive loss increased to $67.0 million year to date, primarily because of foreign-currency translation losses.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fiscal 2022 capital expenditures of approximately $95 million to $105 million.
- Backlog was approximately $2.0 billion at September 24, 2022, up from approximately $1.6 billion at December 25, 2021. Approximately $1.8 billion was expected to be fulfilled within the following 12 months. The increase included approximately $200 million of renewable-energy orders and $135 million of transmission, distribution, and substation orders.
- Management cited inflation, volatile steel prices, supply-chain disruptions, labor shortages, foreign-exchange movements, the Russia-Ukraine conflict, COVID-19 developments, geopolitical conditions, and changes in government policy as key risks.
- Foreign-currency translation reduced operating income by approximately $1.9 million in Q3 and $1.8 million year to date.
- First-nine-month comparability included Prospera-related intangible amortization of $3.6 million and stock-based compensation of $5.0 million. The comparable 2021 period included $5.5 million of receivable write-off charges, $1.6 million of restructuring charges, and $1.1 million of acquisition costs.
- No goodwill or trade-name impairment was recorded during fiscal 2022 through the reporting date. No material changes to previously disclosed risk factors, market risk, financial commitments, or critical accounting policies were reported.
- The quarterly dividend was increased to $0.55 per share, or $2.20 annualized, representing a 10% increase from the prior quarterly dividend. The company also continued its authorized share-repurchase program.
Important Facts for Investors to Verify
- Assess whether higher pricing can continue to offset steel, labor, freight, and other inflationary costs without weakening demand or margins.
- Review the composition, timing, cancellation terms, and profitability of the $2.0 billion backlog, particularly the large renewable-energy and utility-structure projects.
- Monitor foreign-exchange exposure, accumulated other comprehensive losses, and the effect of the stronger U.S. dollar on international results.
- Verify debt covenant calculations, revolving-credit availability, interest-rate exposure, and refinancing requirements for the 2044 and 2054 senior notes.
- Evaluate the integration and performance of ConcealFab and the ongoing costs and benefits of the Prospera technology business.
- Track working-capital requirements, contract assets, inventories, pension contributions, and the sustainability of operating cash flow.
- Consider the higher effective tax rate and potential tax effects of repatriating foreign cash.