Valmont Industries, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Valmont Industries, Inc. filed an unaudited Form 10-Q for the thirteen weeks ended March 27, 2021, compared with the thirteen weeks ended March 28, 2020. The company operates through Utility Support Structures, Engineered Support Structures, Coatings, and Irrigation. All manufacturing facilities were open and fully operational at quarter-end, and the company continued monitoring COVID-19 effects on demand, supply chains, employees, and customers.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $774.9 million | $674.2 million | 14.9% increase |
| Gross profit | $204.6 million | $186.2 million | 9.9% increase |
| Gross margin | 26.4% | 27.6% | 120 basis-point decrease |
| Operating income | $77.2 million | $66.9 million | 15.4% increase |
| Operating margin | 10.0% | 9.9% | 10 basis-point increase |
| Net earnings attributable to Valmont | $55.0 million | $42.9 million | 28.2% increase |
| Diluted EPS | $2.57 | $1.99 | 29.1% increase |
| Operating cash flow | $33.2 million | $62.4 million | Decrease |
| Capital expenditures | $27.6 million | $23.6 million | Increase |
The effective tax rate declined to 21.9% from 25.2%, primarily due to an incremental tax benefit from employee stock option exercises. Net interest expense was $9.7 million, compared with $9.0 million. Net earnings included a $360,000 loss from nonconsolidated subsidiaries.
Segment net sales and operating income were: Utility, $252.7 million and $21.7 million; Engineered Support Structures, $222.2 million and $19.9 million; Coatings, $71.6 million and $12.9 million; and Irrigation, $228.4 million and $38.7 million.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $391.5 million at March 27, 2021, including approximately $197.1 million held by non-U.S. subsidiaries.
- Total interest-bearing debt was $772.9 million, consisting primarily of $450 million of 5.00% senior unsecured notes due 2044 and $305 million of 5.25% unsecured notes due 2054.
- No borrowings were outstanding under the revolving credit agreement. Available capacity was $585.4 million after standby letters of credit. Additional short-term bank lines totaled $152.5 million, of which $114.5 million was unused.
- The company was in compliance with its debt covenants. Last-four-quarter leverage was 2.10x versus a 3.5x limit, and the interest coverage ratio was 8.95x versus a 2.5x minimum.
- Net working capital increased to $928.3 million from $881.3 million at December 26, 2020, primarily because of higher inventories.
- Shareholders’ equity increased to $1.25 billion from $1.21 billion at December 26, 2020.
Material changes versus the prior comparable period
- Revenue growth was led by Irrigation, where sales increased 47.1% and operating income increased 63.3%, supported by stronger North American and international volumes, the Egypt project, improved agricultural commodity prices, technology adoption, and the Solbras acquisition.
- Utility sales increased 13.4%, but operating income declined 21.7% because rapid steel cost inflation was not fully recovered through pricing. Gross profit declined 9.2%.
- Engineered Support Structures sales declined 2.3%, primarily because of lower lighting, traffic, and highway safety volumes. Operating income nevertheless increased 25.2% through pricing, improved telecommunications performance, and lower SG&A.
- Coatings sales increased 4.4% and operating income increased 16.2%, supported by pricing and favorable currency translation.
- Consolidated gross margin declined because of higher raw material costs and sales mix, while SG&A as a percentage of sales improved to 16.4% from 17.7%.
- Operating cash flow fell by $29.2 million, primarily because of increased inventory and higher incentive compensation payments. Lower pension contributions partially offset the decline.
- Financing cash outflows decreased to $10.7 million from $79.0 million, mainly because the prior-year period included purchases of noncontrolling interests.
Guidance, outlook, risks, and unusual items
- Management expected fiscal 2021 capital expenditures of approximately $115 million and stated that available liquidity and positive operating cash flows should meet business needs.
- Backlog was approximately $1.3 billion at March 27, 2021, up from approximately $1.1 billion at December 26, 2020. Two North American Utility orders totaling approximately $220 million accounted for much of the increase; most backlog was expected to be fulfilled within 12 months, except for these orders.
- Management highlighted risks from COVID-19, raw material availability and pricing, supply-chain disruptions, customer demand, government policies, foreign currency movements, competitive conditions, and cyclical markets.
- Steel and zinc cost inflation pressured margins. The company entered into steel hot-rolled-coil forward contracts with a $23.8 million notional amount covering 30,500 short tons of purchases from May through December 2021.
- The 2020 restructuring program was completed by year-end 2020; the remaining $12.7 million of restructuring liabilities were paid during the first quarter of 2021.
- The company repurchased 50,147 shares for approximately $11.1 million and had approximately $136.8 million remaining under its repurchase authorization.
- The filing reported no material changes to previously disclosed risk factors, off-balance-sheet arrangements, financial commitments, critical accounting policies, or market risk.
Important facts for investors to verify
- Whether steel, zinc, freight, and other input-cost inflation can be recovered through customer pricing, particularly in Utility.
- The timing, profitability, and execution risk associated with the approximately $220 million of new Utility backlog orders.
- Whether Irrigation volume strength, the Egypt project, agricultural conditions, and technology adoption remain sustainable.
- The effect of COVID-19, project delays, government funding decisions, and supply-chain constraints on ESS and Coatings demand.
- Working-capital requirements, especially the $64.0 million quarter-over-quarter inventory increase and the decline in operating cash flow.
- Compliance with debt covenants and preservation of investment-grade credit ratings as capital expenditures and share repurchases continue.