Valmont Industries, Inc. 2020 Form 10-K Summary
Business context and reporting period
Valmont Industries is a diversified manufacturer and service provider serving infrastructure and agriculture markets through four reportable segments: Engineered Support Structures, Utility Support Structures, Coatings, and Irrigation. Products include lighting, traffic, wireless and utility structures, coatings services, mechanized irrigation equipment, and precision-agriculture technology.
The filing covers the 52-week fiscal year ended December 26, 2020, compared primarily with the 52-week fiscal year ended December 28, 2019. Approximately 32% of 2020 net sales were sold in markets or produced at facilities outside North America. The Company operated more than 80 manufacturing plants on six continents and employed 10,844 people at year-end.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $2,895.4 million | $2,767.0 million | Up 4.6% |
| Gross profit | $765.5 million | $682.7 million | Up 12.1% |
| Gross margin | 26.4% | 24.7% | Up 170 basis points |
| Operating income | $226.0 million | $227.9 million | Down 0.9% |
| Operating margin | 7.8% | 8.2% | Down 40 basis points |
| Net earnings attributable to Valmont | $140.7 million | $146.4 million | Down 3.9% |
| Diluted EPS | $6.57 | $6.73 | Down 2.4% |
| Net cash from operating activities | $316.3 million | $307.6 million | Up 2.8% |
| Capital expenditures | $106.7 million | $97.4 million | Up 9.5% |
| Adjusted EBITDA | $353.6 million | $316.6 million | Up 11.7% |
Cash flow from operations exceeded capital expenditures by approximately $209.6 million. Cash and cash equivalents were $400.7 million at year-end, compared with $353.5 million in 2019. Working capital was $881.3 million, down from $918.4 million.
Total interest-bearing debt was $766.3 million, down from $787.5 million. The Company had $585.4 million of available borrowing capacity under its revolving credit facility after standby letters of credit and $109.7 million of unused short-term bank lines. The leverage ratio was 2.17x versus 2.49x in 2019, below the 3.50x covenant threshold. The interest coverage ratio was 8.61x versus a 2.50x minimum covenant. Management stated that liquidity was adequate for fiscal 2021 and beyond.
Long-term debt principally consisted of $450 million of 5.00% senior notes due 2044 and $305 million of 5.25% senior notes due 2054. The Company paid $36.9 million in dividends, declared $1.80 per share for 2020, and repurchased approximately 441,000 shares for $56.5 million during the year.
Material changes versus the prior comparable period
- Utility sales increased 13.2% to $1,002.2 million and operating income increased 14.8% to $100.9 million, driven by large solar-tracking, offshore, complex-steel, and North American utility projects.
- Irrigation sales increased 10.6% to $640.1 million and operating income increased 15.9% to $83.0 million. International sales benefited from deliveries on a multiyear Egypt project and strong Brazilian demand. Irrigation technology sales increased to $67.1 million from $56.7 million.
- ESS sales declined 1.9% to $983.5 million. Access Systems sales fell by approximately $26.1 million, partly because the Company exited its detention-center systems product line. Operating income was approximately flat after a $16.6 million impairment and restructuring charges.
- Coatings sales declined 10.3% to $269.6 million and operating income declined 15.7% to $43.0 million, primarily because of lower North American and Asian volumes and COVID-19-related industrial disruption.
- Gross margin improved because of lower raw-material costs, pricing discipline, and higher Irrigation volumes, but operating income and EPS declined because of higher SG&A, goodwill and tradename impairments, restructuring costs, and higher interest expense.
- The Company recorded $23.1 million of pre-tax restructuring costs, including a U.S. Coatings facility closure and a U.S. early-retirement program. It also recorded $16.6 million of goodwill and intangible-asset impairments, primarily related to Access Systems.
- Backlog increased to $1,139.1 million from $924.1 million. Irrigation backlog rose to $328.3 million from $55.0 million, while Utility backlog declined to $563.3 million from $615.0 million. Management expected most year-end 2020 backlog to be fulfilled in fiscal 2021.
- 2020 acquisitions included Solbras, a Brazilian provider of solar solutions for agriculture; Valmont Substations; the remaining interest in AgSense; and additional interests in Convert Italia and Torrent Engineering and Equipment.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a consolidated earnings or revenue forecast in the filing. It expects fiscal 2021 capital expenditures of approximately $110.0 million and believes the year-end backlog supports future activity. The Company also secured a $240 million multiyear order in Egypt, although timing and execution remain relevant to results.
COVID-19 caused temporary mandated closures at certain international facilities during the first half of 2020, although all manufacturing facilities were open and fully operational at year-end. Management stated that the ultimate effect of the pandemic remained uncertain, particularly regarding demand, supply-chain availability, logistics, facility operations, and government restrictions.
- Demand is cyclical and depends on infrastructure spending, utility capital budgets, construction activity, farm income, commodity prices, wireless-carrier investment, and oil and gas activity.
- Steel, aluminum, zinc, natural gas, and fuel prices can materially affect costs and margins. Steel represented approximately 50% of Utility segment sales costs on average; a hypothetical 20% steel-price change would have affected Utility sales by approximately $64 million based on the 2020 sales mix.
- International exposure creates foreign-exchange, political, trade, tariff, supply-chain, and regulatory risks. Approximately 33% of fiscal 2020 sales were in markets outside the United States.
- The Delta U.K. defined-benefit pension plan was underfunded by approximately £87.4 million, or $118.5 million, at year-end. Annual funding commitments were approximately $17.8 million for the shortfall plus $1.8 million for administrative expenses.
- Contractual cash obligations totaled approximately $2.19 billion, including debt principal and interest, pension contributions, operating leases, and purchase commitments. The filing also identified approximately $23.7 million of certain long-term liabilities for which payment timing could not be reliably estimated.
- Goodwill totaled $430.3 million. The Access Systems reporting unit recorded a $12.6 million goodwill impairment and certain trade names recorded a $3.9 million impairment. The annual impairment test found no additional goodwill impairment.
- Material risks include product warranties, complex utility-contract execution, potential guardrail-related litigation, environmental liabilities, cybersecurity incidents, skilled-labor shortages, acquisitions and integration, climate-related regulation, and changes in tax or pension assumptions.
The Company adopted the FIFO inventory method retrospectively for certain inventories beginning fiscal 2020. The change increased 2019 inventory by $43.8 million and reduced retrospectively adjusted 2019 net earnings attributable to Valmont by $7.4 million versus previously reported amounts. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Goodwill impairment valuation was identified as the critical audit matter.
Facts investors should verify
- Whether the $1.14 billion backlog, particularly the large Irrigation and Utility components, converts to revenue and cash flow on the expected schedule.
- Execution, customer funding, margin, and collection risks associated with the multiyear Egypt irrigation order and other large engineered projects.
- The sustainability of improved gross margins amid renewed steel, zinc, energy, freight, and labor-cost inflation.
- The pace of recovery in Coatings and ESS Access Systems following COVID-19 disruption, restructuring, and market exits.
- Future cash requirements for the $766.3 million debt balance, pension funding, leases, capital expenditures, dividends, and share repurchases.
- Potential additional goodwill or tradename impairments if oil prices, Australian demand, solar-tracking growth, or other reporting-unit assumptions weaken.
- The effect of COVID-19, foreign exchange, tariffs, supply-chain disruption, and infrastructure or agricultural policy changes on 2021 results.