Valmont Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. filed an unaudited Form 10-Q for the thirteen and thirty-nine weeks ended September 25, 2021, compared with September 26, 2020. The company operates through Utility Support Structures, Engineered Support Structures, Coatings, and Irrigation segments. Its products and services support utility infrastructure, communications, transportation, coatings, agriculture, and precision-irrigation technology.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | First 39 weeks 2021 | First 39 weeks 2020 |
|---|---|---|---|---|
| Net sales | $868.8 million | $734.0 million | $2.538 billion | $2.097 billion |
| Gross profit | $227.4 million | $190.7 million | $661.6 million | $560.9 million |
| Gross margin | 26.2% | 26.0% | 26.1% | 26.7% |
| Operating income | $76.2 million | $61.5 million | $236.0 million | $171.8 million |
| Operating margin | 8.8% | 8.4% | 9.3% | 8.2% |
| Net earnings attributable to Valmont | $51.7 million | $39.3 million | $168.8 million | $104.9 million |
| Diluted EPS | $2.40 | $1.84 | $7.86 | $4.89 |
First-three-quarter operating cash flow was $61.8 million, down from $273.0 million in the comparable period, primarily because of a $211.3 million increase in inventories. Capital expenditures were $80.5 million, and acquisition spending was $312.5 million. Cash and cash equivalents were $169.8 million at September 25, 2021, compared with $400.7 million at December 26, 2020.
Total interest-bearing debt was $916.1 million, including $168.1 million drawn under the revolving credit agreement. The company reported $415.6 million of remaining borrowing capacity under the revolver after standby letters of credit and $126.6 million of unused short-term bank lines. The reported leverage ratio was 1.85x versus a 3.50x covenant limit, and the company stated that it was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Third-quarter sales increased 18.4%; first-three-quarter sales increased 21.0%.
- First-three-quarter net earnings attributable to Valmont rose 60.9%, while diluted EPS increased 60.7%.
- Irrigation sales increased 68.5% year to date and operating income increased 78.7%, reflecting stronger volumes, pricing, international project deliveries, and contributions from acquisitions.
- Engineered Support Structures operating income increased 86.6% year to date, supported by pricing actions, improved Access Systems performance, and the absence of the $16.6 million goodwill and trade-name impairment recorded in 2020.
- Utility operating income decreased 18.7% year to date because steel-cost inflation was not fully recovered through pricing and because of lower offshore and solar-tracker volumes. The segment also recorded a $5.5 million receivable write-off following arbitration.
- Consolidated first-three-quarter gross margin declined to 26.1% from 26.7%, primarily because raw-material cost inflation outpaced pricing recovery.
- SG&A increased 9.4% year to date, including higher incentives, stock compensation, acquisition-related expenses, and approximately $8.5 million of SG&A from Prospera and PivoTrac.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected fiscal 2021 capital expenditures of approximately $110 million to $120 million.
- Backlog was approximately $1.5 billion at September 25, 2021, compared with $1.1 billion at December 26, 2020. Management expected substantially all backlog to be fulfilled within 12 months, except approximately $175 million primarily related to three large Utility orders.
- On May 12, 2021, Valmont acquired Prospera for $300.0 million in cash, and on April 20, 2021, acquired PivoTrac for $12.5 million in cash. These transactions added approximately $280.7 million of goodwill in the Irrigation segment and remained subject to final purchase-price allocations.
- The company entered into a new corporate headquarters operating lease with a 25-year term, approximately $5.1 million of annual straight-line expense, and a 2% annual payment increase.
- The company monitored the outlook for Northern European wind energy. A further deterioration could require impairment testing for certain offshore and complex-steel-structure assets; no related impairment was recorded in the period.
- COVID-19 continued to create uncertainty regarding demand, supply chains, cash balances, and borrowing availability, although significant manufacturing facilities were open and operational at period end.
- On October 18, 2021, after quarter end, the revolving credit facility was amended to increase commitments from $600 million to $800 million, increase the accordion from $200 million to $300 million, extend maturity to October 18, 2026, replace LIBOR with SOFR, remove the interest-coverage covenant, and modify the leverage calculation.
- The company repurchased 103,056 shares for approximately $24.1 million during the first three quarters and had approximately $123.9 million remaining under its authorization at September 25, 2021.
Important facts for investors to verify
- Whether inventory levels, working-capital needs, and operating cash flow improve following the substantial year-to-date cash-flow decline.
- Whether steel, zinc, labor, and other input-cost inflation can be recovered through pricing without further margin pressure.
- The final purchase-price allocations and operating contribution of Prospera and PivoTrac.
- The sustainability of the Irrigation segment’s unusually strong growth and the timing of the large Egypt and North American Utility projects.
- Potential impairment exposure in the offshore and complex-steel-structures reporting unit if the Northern European wind-energy outlook weakens.
- Compliance with the amended revolving-credit agreement and the company’s investment-grade credit ratings as debt remains elevated after acquisitions.