Business Context and Reporting Period
Valmont Industries, Inc. reported unaudited results for the thirteen and twenty-six weeks ended July 1, 2023, compared with June 25, 2022. The company operates primarily through Infrastructure, which serves utility, solar, lighting, transportation, telecommunications, and coatings markets, and Agriculture, which serves irrigation and precision-agriculture markets.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | First Half 2023 | First Half 2022 |
|---|---|---|---|---|
| Net sales | $1,046.3 million | $1,135.5 million | $2,108.8 million | $2,116.4 million |
| Gross profit | $329.4 million | $292.6 million | $638.0 million | $541.8 million |
| Gross margin | 31.5% | 25.8% | 30.3% | 25.6% |
| Operating income | $133.7 million | $118.7 million | $252.2 million | $213.6 million |
| Operating margin | 12.8% | 10.5% | 12.0% | 10.1% |
| Net earnings attributable to Valmont | $89.4 million | $76.1 million | $163.9 million | $138.4 million |
| Diluted EPS | $4.21 | $3.53 | $7.67 | $6.43 |
| Operating cash flow | Not separately provided | Not separately provided | $109.5 million | $68.0 million |
Net sales declined 7.9% in the quarter and 0.4% year to date, while gross profit increased 12.6% and 17.8%, respectively. SG&A increased 12.5% in the quarter and 17.6% year to date. Net interest expense rose to $14.4 million in the quarter and $26.6 million year to date, reflecting higher borrowings and interest rates. Effective tax rates were 26.4% for the quarter and 28.2% year to date.
Segment Performance
- Infrastructure: Net sales increased 4.5% in the quarter to $768.2 million and 7.6% year to date to $1.50 billion. Operating income increased 37.8% in the quarter and 29.4% year to date, supported by higher selling prices, favorable input costs, and improved margins.
- Agriculture: Net sales decreased 25.8% in the quarter to $278.1 million and 10.3% year to date to $608.5 million. Quarterly operating income fell 15.2% to $49.3 million, primarily because lower volumes outweighed higher prices; year-to-date operating income increased 7.4% to $102.6 million.
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents were $166.9 million at July 1, 2023, compared with $185.4 million at December 31, 2022.
- Total interest-bearing debt was $955.4 million at July 1, 2023, compared with $878.0 million at year-end 2022. Long-term debt, excluding current installments, was $952.7 million.
- The company had $222.7 million outstanding under its $800 million revolving credit facility and approximately $577.1 million of borrowing capacity after standby letters of credit.
- The leverage ratio was 1.39 versus a covenant maximum of 3.50. The company stated that it was in compliance with all debt covenants.
- First-half investing cash outflows were $34.0 million, including $45.4 million of capital expenditures and $6.4 million of divestiture proceeds. Financing cash outflows were $94.2 million, including $135.1 million of treasury-share purchases and $24.4 million of dividends.
- Accounts payable included $42.5 million of obligations under the supplier finance program.
Material Changes and Unusual Items
- Margin expansion reflected higher average selling prices, customer pricing mechanisms, and lower average consumed steel costs, despite lower volumes in several businesses.
- Infrastructure SG&A included higher employment costs, $2.2 million of incremental ConcealFab expenses, and additional bad-debt reserves, including approximately $2.7 million related to an insolvent telecommunications customer.
- The company recorded a $3.0 million pretax gain on the April 2023 sale of Torrent Engineering and Equipment.
- The prior-year comparison included the Other segment, which was eliminated following the November 2022 divestiture of Valmont SM, an offshore wind structures business.
- Foreign currency translation reduced operating income by approximately $1.2 million in the quarter and $2.0 million year to date.
- The company repurchased 85,300 shares for $25.1 million during the first half and had approximately $346.3 million remaining under its repurchase authorization at July 1, 2023. The quarterly dividend was increased to $0.60 per share.
Outlook, Risks, and Contingencies
- Backlog was approximately $1.5 billion at July 1, 2023, down from approximately $1.7 billion at December 31, 2022.
- Fiscal 2023 capital expenditures are expected to be $105 million to $115 million.
- In July 2023, the company agreed to acquire HR Products, an Australian irrigation-parts supplier, for approximately A$60 million, or about US$40 million, subject to working-capital adjustments. Closing was expected in the third quarter and was expected to be funded with cash on hand.
- Management cited inflation, supply-chain disruption, foreign-exchange movements, rising interest rates, labor shortages, geopolitical conditions including the Russia-Ukraine conflict, and changing economic conditions as ongoing risks.
- Agriculture demand was affected by growers delaying capital investments because of economic uncertainty, higher rates, inflation, and recession concerns. The filing states that there were no material changes to previously disclosed risk factors.
- The company stated that it had adequate liquidity based on cash, available credit facilities, senior notes, and historically positive operating cash flow. Forward-looking statements remain subject to market, operating, commodity, currency, customer, and government-policy risks.
Important Facts for Investors to Verify
- Whether Agriculture volumes and growers’ delayed capital spending improve in the second half of fiscal 2023.
- Whether Infrastructure pricing and input-cost benefits are sustainable as steel prices, volumes, and customer demand change.
- Execution, funding, and contribution from the planned HR Products acquisition.
- Interest-rate effects on revolving-credit borrowings and the company’s ability to maintain its investment-grade ratings and debt covenants.
- Backlog conversion, including the decline from approximately $1.7 billion to $1.5 billion.
- Exposure to customer credit losses, foreign exchange, commodity prices, labor costs, and supply-chain disruption.