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 twenty-six weeks ended June 25, 2022, compared with June 26, 2021. The company operates through two reportable segments: Infrastructure, serving utility, renewable energy, lighting, transportation, telecommunications, and coatings markets; and Agriculture, serving irrigation, tubular products, and precision-agriculture technology markets. Prior-period segment information was recast following a change in management structure.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Net sales | $1,135.5 million | $894.6 million | 26.9% |
| Gross profit | $292.6 million | $229.6 million | 27.4% |
| Gross margin | 25.8% | 25.7% | +0.1 percentage points |
| Operating income | $118.7 million | $82.6 million | 43.7% |
| Operating margin | 10.5% | 9.2% | +1.3 percentage points |
| Net earnings attributable to Valmont | $76.1 million | $62.1 million | 22.5% |
| Diluted EPS | $3.53 | $2.89 | 22.1% |
| Metric | First half 2022 | First half 2021 | Change |
|---|---|---|---|
| Net sales | $2,116.4 million | $1,669.5 million | 26.8% |
| Gross profit | $541.8 million | $434.2 million | 24.8% |
| Gross margin | 25.6% | 26.0% | -0.4 percentage points |
| Operating income | $213.6 million | $159.8 million | 33.7% |
| Operating margin | 10.1% | 9.6% | +0.5 percentage points |
| Net earnings attributable to Valmont | $138.4 million | $117.1 million | 18.2% |
| Diluted EPS | $6.43 | $5.46 | 17.8% |
Infrastructure second-quarter sales increased 23.7% to $760.8 million and operating income increased 37.3% to $84.6 million. Agriculture sales increased 34.0% to $374.8 million and operating income increased 38.1% to $58.0 million. Higher selling prices, particularly those linked to steel indices, were the principal driver of reported growth, with volume also improving in selected product lines.
For the first half, operating cash flow was $68.0 million versus $70.2 million in the prior-year period. Capital expenditures were $49.7 million, and investing cash outflows were $87.8 million, including the $39.3 million acquisition of ConcealFab. Cash declined to $154.6 million from $177.2 million at December 25, 2021.
At June 25, 2022, total interest-bearing debt was $1,003.1 million, including $995.6 million of long-term debt and $265.6 million outstanding under the revolving credit facility. The company reported $534.4 million of borrowing capacity under the revolver after standby letters of credit. The leverage ratio was 1.76x against a covenant limit of 3.50x, or 3.75x after certain material acquisitions, and the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue growth reflected higher steel and other input prices passed through to customers, as well as improved demand and selected volume increases.
- Operating margins improved because gross-profit growth exceeded SG&A growth, despite higher compensation, incentives, research and development, amortization, and acquisition-related costs.
- The effective tax rate rose to approximately 27.6% in the second quarter and 27.2% for the first half, compared with 19.0% and 20.3%, respectively, primarily due to geographic earnings mix, U.S. foreign-tax-credit regulations, and a prior-year U.K. tax benefit that did not recur.
- Interest expense increased because of borrowings under the revolving credit facility and higher debt levels.
- Working capital increased to $1,025.9 million from $946.9 million at year-end, driven mainly by higher inventory, receivables, and contract assets, partly offset by higher accounts payable.
- The company acquired approximately 51% of ConcealFab for $39.3 million in cash on June 1, 2022, adding 5G infrastructure and passive-intermodulation mitigation capabilities. Approximately $1.9 million of consideration remained contingent on seller representations and warranties.
- The company acquired the remaining 20% of Valmont West Coast Engineering Ltd. for $4.3 million and increased its quarterly dividend to $0.55 per share, or $2.20 annualized.
- Second-quarter 2021 included $5.5 million of receivable write-off charges, $1.6 million of restructuring charges, and $1.1 million of acquisition costs that did not recur in 2022.
Guidance, outlook, commentary, risks, and unusual items
Management expects fiscal 2022 capital expenditures of approximately $110 million to $120 million. Backlog was approximately $2.0 billion at June 25, 2022, up from approximately $1.6 billion at December 25, 2021; approximately $1.7 billion was expected to be fulfilled within the following twelve months. The backlog increase included approximately $200 million of renewable-energy orders and $135 million of transmission, distribution, and substation orders.
Management stated that pricing actions and contractual steel-price mechanisms continued to offset inflation in raw materials and preserve gross margins. The company also cited robust demand for irrigation equipment, continued 5G deployment opportunities, and growing adoption of agricultural technology.
Principal risks identified in the filing include COVID-19 effects, the Russia-Ukraine conflict, inflation, supply-chain disruptions, labor shortages, raw-material availability and pricing, foreign currency movements, geopolitical conditions, competitive pressures, market acceptance of new products, customer demand, and changes in government policies. The filing states that there were no material changes to previously disclosed risk factors or market-risk disclosures.
Other notable items included a $58.1 million second-quarter loss in other comprehensive income, primarily from foreign-currency translation and commodity-hedge effects. The company reported no goodwill impairments during fiscal 2022. Management concluded that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether higher customer pricing continues to offset steel, labor, freight, and other inflationary costs without weakening demand or margins.
- The timing, profitability, integration costs, and final purchase-price allocation for ConcealFab, including the contingent consideration.
- Conversion of the $2.0 billion backlog into revenue and cash flow, particularly the large renewable-energy and transmission projects.
- Working-capital requirements, especially inventory, receivables, and contract assets, and their effect on operating cash flow.
- Interest-rate exposure and the impact of revolving-credit borrowings on interest expense and covenant headroom.
- Foreign-currency translation and commodity-hedge volatility, including the effect on reported earnings and accumulated other comprehensive income.
- The sustainability of Agriculture growth and the contribution from Prospera, PivoTrac, and other technology-related businesses.
- Future effective tax rates and the potential effect of geographic earnings mix and foreign-tax-credit rules.