Valmont Industries, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. manufactures engineered support structures, utility structures, coatings, irrigation equipment, and precision-agriculture technology. The unaudited filing covers the thirteen and twenty-six weeks ended June 26, 2021, compared with the periods ended June 27, 2020.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $894.6 million | $688.8 million | $1,669.5 million | $1,363.0 million |
| Gross profit | $229.6 million | $183.9 million | $434.2 million | $370.2 million |
| Gross margin | 25.7% | 26.7% | 26.0% | 27.2% |
| Operating income | $82.6 million | $43.4 million | $159.8 million | $110.3 million |
| Operating margin | 9.2% | 6.3% | 9.6% | 8.1% |
| Net earnings attributable to Valmont | $62.1 million | $22.6 million | $117.1 million | $65.5 million |
| Diluted EPS | $2.89 | $1.06 | $5.46 | $3.05 |
| Operating cash flow | Not separately provided | Not separately provided | $70.2 million | $150.7 million |
Q2 sales increased 29.9% and first-half sales increased 22.5%. Q2 net earnings attributable to Valmont increased 174.8%, while first-half earnings increased 78.8%. The effective tax rate declined to 19.0% in Q2 and 20.3% for the first half, compared with 35.4% and 29.1%, respectively.
Segment performance
- Utility Support Structures: Q2 sales increased 17.2% to $267.9 million, but operating income declined 31.3% to $15.0 million. Higher steel costs, which were not fully recovered through pricing, and a $5.5 million receivable write-off reduced profitability.
- Engineered Support Structures: Q2 sales increased 8.2% to $269.3 million and operating income rose to $31.9 million from $4.8 million. Results benefited from pricing, improved Access Systems performance, and the absence of a $16.6 million goodwill and trade-name impairment recorded in 2020.
- Coatings: Q2 sales increased 23.8% to $77.6 million and operating income increased 44.6% to $14.7 million, supported by pricing, volume, and favorable currency translation.
- Irrigation: Q2 sales increased 88.0% to $279.8 million and operating income increased 88.3% to $42.0 million. Higher global volumes, pricing, improved agricultural conditions, and technology adoption were key drivers.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $199.3 million at June 26, 2021, down from $400.7 million at December 26, 2020. Approximately $188.0 million was held outside the United States.
- Total interest-bearing debt was $896.0 million, compared with $766.3 million at year-end 2020. The increase primarily funded the Prospera acquisition.
- The company had $131.0 million outstanding under its revolving credit agreement and approximately $452.9 million of remaining borrowing capacity after standby letters of credit. Short-term bank lines totaled $141.8 million, of which $112.4 million was unused.
- Debt covenants required leverage of no more than 3.5 times adjusted EBITDA, or 3.75 times after certain material acquisitions, and an interest coverage ratio of at least 2.5 times. Actual leverage was 2.30 times and interest coverage was 9.42 times; the company was in compliance with all covenants.
- Capital expenditures were $48.8 million in the first half, and management expected approximately $115 million for fiscal 2021.
- The company repurchased 92,297 shares for $21.6 million during the first half and had approximately $126.4 million remaining under its repurchase authorization.
Material changes versus the prior comparable period
- Prospera, an Israeli artificial-intelligence and computer-vision company focused on agriculture, was acquired on May 12, 2021 for $300.0 million net of cash acquired.
- PivoTrac, an agricultural technology company focused on remote monitoring of irrigation equipment, was acquired in April 2021 for $12.5 million in cash, with an additional $1.5 million holdback.
- Acquisition spending totaled $312.5 million in the first half of 2021 versus $15.9 million in the prior-year period.
- Operating cash flow fell by $80.6 million year over year, primarily because of increased inventory and lower accrued employee compensation, despite higher customer advances and lower pension contributions.
- Inventory increased to $593.5 million from $448.9 million at year-end 2020, while receivables increased to $559.3 million from $511.7 million.
- A new 25-year corporate headquarters operating lease added an operating lease asset of $71.9 million and a long-term lease liability of $71.2 million.
Guidance, outlook, risks, contingencies, and unusual items
- Backlog was approximately $1.3 billion at June 26, 2021, compared with $1.1 billion at December 26, 2020. Management expected substantially all backlog to be fulfilled within twelve months, except approximately $175 million primarily related to two new utility orders.
- The filing does not provide explicit earnings or revenue guidance. It does provide expected fiscal 2021 capital expenditures of approximately $115 million.
- Management cited inflation in steel, zinc, and other raw materials, supply-chain conditions, pricing recovery, foreign currency movements, COVID-19 effects, customer demand, and government policies as significant uncertainties.
- The company is monitoring the Northern European wind-energy outlook. A further deterioration could require impairment testing of offshore and complex steel structures assets, including property, plant and equipment, the Valmont SM trade name, and customer relationships.
- COVID-19 continued to create uncertainty, although significant manufacturing facilities were open and operational at the reporting date.
- Commodity hedges generated significant other comprehensive income during the first half, including a $26.3 million gain related to commodity hedges. Results also included pension benefits and unrealized investment gains.
- The company reported no material changes to previously disclosed risk factors, market risk, or off-balance-sheet arrangements. Disclosure controls and procedures were effective, with no material changes in internal control over financial reporting.
Investor verification points
- Verify whether steel and other raw-material inflation can be recovered through customer pricing, particularly in Utility Support Structures.
- Assess the final purchase-price allocations, goodwill, intangible assets, and operating contribution from Prospera and PivoTrac.
- Monitor working-capital needs, especially the substantial increase in inventory and the decline in operating cash flow.
- Review debt covenant headroom and the impact of acquisition-related borrowing on leverage and the investment-grade ratings.
- Evaluate backlog conversion, including the timing and profitability of the approximately $220 million of new utility orders.
- Monitor the Northern European wind-energy market for potential long-lived-asset impairment.