Valmont Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Valmont Industries, Inc. designs and manufactures infrastructure and agricultural products and provides coatings services through four global segments: Engineered Support Structures, Utility Support Structures, Coatings, and Irrigation. This unaudited report covers the thirteen weeks and thirty-nine weeks ended September 26, 2020, compared with the corresponding periods ended September 28, 2019.
All manufacturing facilities were open and fully operational at quarter-end, although certain international facilities were temporarily closed during the first half of 2020 because of COVID-19-related government mandates.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | Year-to-date 2020 | Year-to-date 2019 |
|---|---|---|---|---|
| Net sales | $734.0 million | $690.3 million | $2,097.0 million | $2,083.4 million |
| Gross profit | $190.7 million | $173.3 million | $560.9 million | $516.1 million |
| Gross margin | 26.0% | 25.1% | 26.7% | 24.8% |
| Operating income | $61.5 million | $61.1 million | $171.8 million | $177.1 million |
| Operating margin | 8.4% | 8.9% | 8.2% | 8.5% |
| Net earnings attributable to Valmont | $39.3 million | $38.0 million | $104.9 million | $113.9 million |
| Diluted EPS | $1.84 | $1.75 | $4.89 | $5.22 |
- Q3 net sales increased 6.3%, while year-to-date sales increased 0.7%.
- Q3 net earnings attributable to Valmont increased 3.4%; year-to-date earnings declined 7.9%.
- Year-to-date operating results included $16.6 million of goodwill and trade-name impairment charges and $8.5 million of restructuring expenses. The filing separately reports $16.6 million of impairment in the earnings statement.
- Net interest expense was $10.0 million in Q3 and $28.6 million year-to-date, compared with $9.0 million and $27.2 million, respectively, in the prior comparable periods.
- Effective tax rates were 23.0% for Q3 and 26.9% year-to-date, compared with 24.5% and 24.7% in 2019.
Segment Trends
| Segment | Q3 sales change | Q3 operating income change | Key drivers |
|---|---|---|---|
| Engineered Support Structures | Down 4.3% | Up 16.4% | Lower volumes, but improved raw-material costs and no recurrence of approximately $7.0 million of project losses recorded in Q3 2019. |
| Utility Support Structures | Up 33.4% | Up 27.6% | Higher steel, concrete, solar-tracking, and complex-structure volumes, including large projects. |
| Coatings | Down 10.7% | Down 10.8% | Lower industrial activity and COVID-19-related volume declines in North America and Asia. |
| Irrigation | Down 3.4% | Down 19.2% | Unfavorable foreign-currency translation and higher product-development spending. |
Year-to-date Utility sales increased 10.3% and operating income increased 22.6%. Coatings sales and operating income declined 12.4% and 13.8%, respectively. ESS sales declined 2.8% and operating income declined 16.3%, while Irrigation sales declined 1.1% and operating income increased 1.3%.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Operating cash flow was $273.0 million year-to-date, compared with $239.2 million in 2019.
- Capital expenditures were $71.0 million, compared with $72.0 million in 2019. Management expects fiscal 2020 capital expenditures of $85 million to $95 million.
- Cash and cash equivalents were $443.1 million at September 26, 2020, up from $353.5 million at December 28, 2019. Approximately $221.7 million was held by non-U.S. subsidiaries.
- Total interest-bearing debt was $795.9 million, compared with $787.5 million at year-end 2019. Long-term debt excluding current installments was $779.8 million.
- The revolving credit facility had $41.9 million outstanding and approximately $542.6 million available after letters of credit. Additional short-term bank lines totaled $134.2 million, of which $120.0 million was unused.
- Debt covenants were satisfied. The last-four-quarter leverage ratio was 2.31x versus a 3.5x limit, and the interest coverage ratio was 8.46x versus a 2.5x minimum.
- Credit ratings were Baa3 from Moody’s, BBB- from Fitch, and BBB+ from S&P.
- The company repurchased 251,136 shares for approximately $28.0 million year-to-date. Approximately $176.4 million remained available under the authorization at quarter-end.
Material Changes Versus the Prior Comparable Period
- Gross margin improved by 90 basis points in Q3 and 190 basis points year-to-date, primarily from lower raw-material costs, improved pricing in infrastructure businesses, and better operating leverage.
- Year-to-date operating income declined despite higher sales and gross profit because of impairment charges, restructuring costs, lower Coatings volumes, higher SG&A, and foreign-currency effects.
- The company changed certain inventory valuation from LIFO to FIFO effective December 29, 2019 and retrospectively adjusted prior periods. The change increased December 28, 2019 retained earnings by $32.9 million and did not affect historical cash flows.
- The company acquired the remaining 49% of AgSense, acquired an additional 16% of Convert Italia, and acquired 55% of Solbras, a Brazilian solar-energy solutions provider for agriculture.
- The company acquired noncontrolling interests for $55.9 million during the first three quarters, compared with $27.8 million in the prior comparable period.
Guidance, Outlook, Risks, and Unusual Items
- Management expects operating cash flow, net of capital expenditures, to exceed net earnings for fiscal 2020 and believes available liquidity is adequate.
- Management expects fiscal 2020 capital expenditures of $85 million to $95 million.
- The 2020 restructuring plan permits up to $20 million of costs across the segments. Pre-tax restructuring expenses recognized in the first nine months totaled $8.5 million, with $0.8 million of related liabilities remaining at quarter-end.
- Access Systems goodwill was impaired by $12.6 million in the second quarter following lower projected sales, operating income, and cash flows, particularly in connection with lower oil prices and revised Australian market expectations. A separate $3.9 million trade-name impairment was also recognized in fiscal 2020. The annual goodwill test otherwise found no impairment.
- COVID-19 remains a significant uncertainty affecting demand, supply chains, customer activity, facility operations, cash balances, and borrowing availability. Management identified raw-material availability and pricing, foreign exchange, cyclical markets, competition, governmental actions, and market acceptance of products as additional risks.
- There were no material changes to previously disclosed risk factors, market risks, financial commitments, or off-balance-sheet arrangements.
Investor Verification Checklist
- Verify whether Utility project volumes and large solar-tracking projects remain sustainable after the unusually strong Q3 contribution.
- Assess whether COVID-19-related weakness in Coatings, ESS access systems, and international Irrigation markets persists.
- Monitor the remaining restructuring costs and the operational benefits expected from the 2020 Plan.
- Review the sensitivity of goodwill and trade-name valuations to oil prices, Australian demand, foreign exchange, and projected cash flows.
- Confirm cash availability, foreign-cash repatriation considerations, debt maturities, covenant compliance, and the company’s ability to preserve its investment-grade ratings.
- Reconcile the retrospective LIFO-to-FIFO adjustments when comparing 2020 results with previously issued 2019 financial information.