Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-31.1
vmi-ex311_20190330.htm
EX-31.2
vmi-ex312_20190330.htm
EX-32.1
vmi-ex321_20190330.htm
Valmont Industries Earnings 2019-03-30
VMI 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 vmi-20190330x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
Form 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2019
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to
Commission file number 1-31429
_____________________________________
Valmont Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization)
47-0351813 (I.R.S. Employer Identification No.)
One Valmont Plaza, Omaha, Nebraska (Address of Principal Executive Offices)
68154-5215 (Zip Code)
(402) 963-1000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non‑accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
21,856,613
Outstanding shares of common stock as of April 26, 2019
Less: Earnings attributable to noncontrolling interests
(974
)
(1,199
)
Net earnings attributable to Valmont Industries, Inc.
$
36,481
$
39,281
Earnings per share:
Basic
$
1.67
$
1.74
Diluted
$
1.66
$
1.72
See accompanying notes to condensed consolidated financial statements.
3
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Thirteen Weeks Ended
March 30, 2019
March 31, 2018
Net earnings
$
37,455
$
40,480
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments:
Unrealized translation gain
2,266
6,804
Gain (loss) on hedging activities:
Net investment hedges
69
(789
)
Amortization cost included in interest expense
(16
)
19
Commodity hedges
—
(93
)
Cross currency swaps
2,261
—
Other comprehensive income
4,580
5,941
Comprehensive income
42,035
46,421
Comprehensive income attributable to noncontrolling interests
(1,109
)
(4,747
)
Comprehensive income attributable to Valmont Industries, Inc.
$
40,926
$
41,674
See accompanying notes to condensed consolidated financial statements.
4
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
March 30, 2019
December 29, 2018
ASSETS
Current assets:
Cash and cash equivalents
$
211,237
$
313,210
Receivables, net
512,852
483,963
Inventories
395,799
383,566
Contract asset - costs and profits in excess of billings
119,886
112,525
Prepaid expenses and other assets
54,379
42,800
Refundable income taxes
4,747
4,576
Total current assets
1,298,900
1,340,640
Property, plant and equipment, at cost
1,196,633
1,160,865
Less accumulated depreciation and amortization
669,304
646,873
Net property, plant and equipment
527,329
513,992
Goodwill
416,996
385,207
Other intangible assets, net
192,897
175,956
Other assets
209,865
114,479
Total assets
$
2,645,987
$
2,530,274
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt
$
764
$
779
Notes payable to banks
19,816
10,678
Accounts payable
219,460
218,115
Accrued employee compensation and benefits
63,425
79,291
Accrued expenses
129,161
91,942
Dividends payable
8,213
8,230
Total current liabilities
440,839
409,035
Deferred income taxes
46,440
43,489
Long-term debt, excluding current installments
741,629
741,822
Defined benefit pension liability
133,761
143,904
Operating lease liabilities
88,492
—
Deferred compensation
49,615
46,107
Other noncurrent liabilities
13,996
10,394
Shareholders’ equity:
Preferred stock of $1 par value -
Authorized 500,000 shares; none issued
—
—
Common stock of $1 par value -
Authorized 75,000,000 shares; 27,900,000 issued
27,900
27,900
Retained earnings
2,049,438
2,027,596
Accumulated other comprehensive loss
(298,740
)
(303,185
)
Treasury stock
(700,333
)
(692,549
)
Total Valmont Industries, Inc. shareholders’ equity
1,078,265
1,059,762
Noncontrolling interest in consolidated subsidiaries
52,950
75,761
Total shareholders’ equity
1,131,215
1,135,523
Total liabilities and shareholders’ equity
$
2,645,987
$
2,530,274
See accompanying notes to condensed consolidated financial statements.
5
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Thirteen Weeks Ended
March 30, 2019
March 31, 2018
Cash flows from operating activities:
Net earnings
$
37,455
$
40,480
Adjustments to reconcile net earnings to net cash flows from operations:
Depreciation and amortization
20,253
21,178
Noncash loss on trading securities
87
71
Impairment of property, plant and equipment
—
1,145
Stock-based compensation
3,670
2,775
Defined benefit pension plan benefit
(132
)
(594
)
Contribution to defined benefit pension plan
(13,943
)
(731
)
Gain on sale of property, plant and equipment
(227
)
(280
)
Deferred income taxes
9,662
4,819
Changes in assets and liabilities:
Receivables
(25,424
)
29,794
Inventories
(7,616
)
(1,201
)
Prepaid expenses and other assets
(7,310
)
(4,489
)
Contract asset - costs and profits in excess of billings
(7,361
)
(27,536
)
Accounts payable
(704
)
(29,449
)
Accrued expenses
4,585
(6,407
)
Other noncurrent liabilities
(234
)
440
Income taxes refundable
(4,848
)
3,033
Net cash flows from operating activities
7,913
33,048
Cash flows from investing activities:
Purchase of property, plant and equipment
(21,109
)
(16,248
)
Proceeds from sale of assets
422
714
Acquisitions, net of cash acquired
(57,106
)
(4,800
)
Settlement of net investment hedges
—
(863
)
Other, net
(1,667
)
(1,782
)
Net cash flows from investing activities
(79,460
)
(22,979
)
Cash flows from financing activities:
Proceeds from short-term agreements
9,327
219
Proceeds from long-term borrowings
10,000
—
Principal payments on long-term borrowings
(10,194
)
(249
)
Dividends paid
(8,213
)
(8,510
)
Dividends to noncontrolling interest
(838
)
(1,281
)
Purchase of noncontrolling interest
(23,082
)
(5,510
)
Purchase of treasury shares
(9,421
)
(14,790
)
Proceeds from exercises under stock plans
1,174
2,972
Purchase of common treasury shares—stock plan exercises
(747
)
(1,504
)
Net cash flows from financing activities
(31,994
)
(28,653
)
Effect of exchange rate changes on cash and cash equivalents
1,568
5,442
Net change in cash and cash equivalents
(101,973
)
(13,142
)
Cash, cash equivalents, and restricted cash—beginning of year
313,210
492,805
Cash, cash equivalents, and restricted cash—end of period
$
211,237
$
479,663
See accompanying notes to condensed consolidated financial statements.
6
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock
Noncontrolling interest in consolidated subsidiaries
Total shareholders’ equity
Balance at December 29, 2017
$
27,900
$
—
$
1,954,344
$
(279,022
)
$
(590,386
)
$
38,959
$
1,151,795
Net earnings
—
—
39,281
—
—
1,199
40,480
Other comprehensive income (loss)
—
—
—
2,393
—
3,548
5,941
Cash dividends declared ($0.375 per share)
—
—
(8,493
)
—
—
—
(8,493
)
Dividends to noncontrolling interests
—
—
—
—
—
(1,281
)
(1,281
)
Cumulative impact of ASC 606 adoption
—
—
9,771
—
—
—
9,771
Addition of noncontrolling interest
—
—
—
—
—
3,200
3,200
Purchase of noncontrolling interest
—
—
—
—
—
(5,510
)
(5,510
)
Purchase of treasury shares; 101,387 shares acquired
—
—
—
—
(14,790
)
—
(14,790
)
Stock plan exercises; 9,548 shares acquired
—
—
—
—
(1,504
)
—
(1,504
)
Stock options exercised; 27,904 shares issued
—
(2,545
)
1,571
—
3,946
—
2,972
Tax benefit from stock option exercises
—
—
—
—
—
—
Stock option expense
—
1,090
—
—
—
—
1,090
Stock awards; 1,840 shares issued
—
1,455
—
—
230
—
1,685
Balance at March 31, 2018
$
27,900
$
—
$
1,996,474
$
(276,629
)
$
(602,504
)
$
40,115
$
1,185,356
Balance at December 29, 2018
$
27,900
$
—
$
2,027,596
$
(303,185
)
$
(692,549
)
$
75,761
$
1,135,523
Net earnings
—
—
36,481
—
—
974
37,455
Other comprehensive income (loss)
—
—
—
4,445
—
135
4,580
Cash dividends declared ($0.375 per share)
—
—
(8,213
)
—
—
—
(8,213
)
Dividends to noncontrolling interests
—
—
—
—
—
(838
)
(838
)
Purchase of noncontrolling interest
—
—
—
—
—
(23,082
)
(23,082
)
Impact of ASC 842 adoption
—
—
(8,886
)
—
—
—
(8,886
)
Purchase of treasury shares; 70,406 shares acquired
—
—
—
—
(9,421
)
—
(9,421
)
Stock plan exercises; 5,451 shares acquired
—
—
—
—
(747
)
—
(747
)
Stock options exercised; 12,995 shares issued
—
(2,667
)
2,460
—
1,381
—
1,174
Stock option expense
—
728
—
—
—
—
728
Stock awards; 7,635 shares issued
—
1,939
—
—
1,003
—
2,942
Balance at March 30, 2019
$
27,900
$
—
$
2,049,438
$
(298,740
)
$
(700,333
)
$
52,950
$
1,131,215
See accompanying notes to condensed consolidated financial statements.
7
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of March 30, 2019, the Condensed Consolidated Statements of Earnings and Comprehensive Income for the thirteen weeks ended March 30, 2019 and March 31, 2018, and the Condensed Consolidated Statements of Cash Flows and Shareholders' Equity for the thirteen week periods then ended have been prepared by the Company, without audit. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) have been made to present fairly the financial statements as of March 30, 2019 and for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2018. The accounting policies and methods of computation followed in these interim financial statements are the same as those followed in the financial statements for the year ended December 29, 2018 with the exception of the lease accounting policy which changed from adopting ASU 2016-02 and is discussed in footnote 9. The results of operations for the period ended March 30, 2019 are not necessarily indicative of the operating results for the full year.
Inventories
Approximately 37% of inventory is valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market as of March 30, 2019 and December 29, 2018. All other inventory is valued at the lower of cost, determined on the first-in, first-out (FIFO) method or market. Finished goods and manufactured goods inventories include the costs of acquired raw materials and related factory labor and overhead charges required to convert raw materials to manufactured and finished goods. The excess of replacement cost of inventories over the LIFO value is approximately $53,118 and $53,619 at March 30, 2019 and December 29, 2018, respectively.
Inventories consisted of the following:
March 30, 2019
December 29, 2018
Raw materials and purchased parts
$
194,396
$
190,115
Work-in-process
31,091
35,566
Finished goods and manufactured goods
223,430
211,504
Subtotal
448,917
437,185
Less: LIFO reserve
53,118
53,619
$
395,799
$
383,566
8
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Earnings before income taxes for the thirteen weeks ended March 30, 2019 and March 31, 2018, were as follows:
Thirteen Weeks Ended
2019
2018
United States
$
42,251
$
41,765
Foreign
7,631
11,247
$
49,882
$
53,012
Pension Benefits
The Company incurs expenses in connection with the Delta Pension Plan ("DPP"). The DPP was acquired as part of the Delta plc acquisition in fiscal 2010 and has no members that are active employees. In order to measure expense and the related benefit obligation, various assumptions are made including discount rates used to value the obligation, expected return on plan assets used to fund these expenses and estimated future inflation rates. These assumptions are based on historical experience as well as current facts and circumstances. An actuarial analysis is used to measure the expense and liability associated with pension benefits.
The components of the net periodic pension (benefit) expense for the thirteen weeks ended March 30, 2019 and March 31, 2018 were as follows:
Thirteen Weeks Ended
Net periodic (benefit) expense:
2019
2018
Interest cost
$
4,345
$
4,716
Expected return on plan assets
(5,135
)
(6,114
)
Amortization of actuarial loss
658
804
Net periodic expense (benefit)
$
(132
)
$
(594
)
Stock Plans
The Company maintains stock‑based compensation plans approved by the shareholders, which provide that the Human Resource Committee of the Board of Directors may grant incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, and bonuses of common stock. At March 30, 2019, 1,410,405 shares of common stock remained available for issuance under the plans.
Under the plans, the exercise price of each option equals the closing market price at the date of the grant. Options vest beginning on the first anniversary of the grant in equal amounts over three to six years or on the grant's fifth anniversary. Expiration of grants is from seven years from the date of grant. Restricted stock units and awards generally vest in equal installments over three years beginning on the first anniversary of the grant.
The Company's compensation expense (included in selling, general and administrative expenses) and associated income tax benefits related to stock options and restricted stock for the thirteen weeks ended March 30, 2019 and March 31, 2018, respectively, were as follows:
9
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Thirteen Weeks Ended
2019
2018
Compensation expense
$
3,670
$
2,775
Income tax benefits
918
694
Fair Value
The Company applies the provisions of Accounting Standards Codification 820, Fair Value Measurements (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 apply to other accounting pronouncements that require or permit fair value measurements. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
ASC 820 establishes a three‑level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value.
Trading Securities: The assets and liabilities recorded for the investments held in the Valmont Deferred Compensation Plan of $40,796 ($37,516 at December 29, 2018) represent mutual funds, invested in debt and equity securities, classified as trading securities in accordance with Accounting Standards Codification 320, Accounting for Certain Investments in Debt and Equity Securities, considering the employee's ability to change investment allocation of their deferred compensation at any time. The Company's ownership of shares in Delta EMD Pty. Ltd. (JSE:DTA) is also classified as trading securities. The shares are valued at $2,410 and $2,508 as of March 30, 2019 and December 29, 2018, respectively, which is the estimated fair value. Quoted market prices are available for these securities in an active market and therefore categorized as a Level 1 input.
Derivative Financial Instruments: The fair value of foreign currency and commodity forward contracts, and cross currency contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate.
10
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value Measurement Using:
Carrying Value March 30, 2019
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets:
Trading Securities
$
43,206
$
43,206
$
—
$
—
Derivative financial instruments, net
13,743
—
13,743
—
Fair Value Measurement Using:
Carrying Value December 29, 2018
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets:
Trading Securities
$
40,024
$
40,024
$
—
$
—
Derivative financial instruments, net
9,147
—
9,147
—
Long-Lived Assets
The Company's other non-financial assets include goodwill and other intangible assets, which are classified as Level 3 items. These assets are measured at fair value on a non-recurring basis as part of annual impairment testing. Note 5 to these condensed consolidated financial statements contain additional information related to goodwill and intangible asset impairments.
Comprehensive Income
Comprehensive income includes net earnings, currency translation adjustments, certain derivative-related activity and changes in net actuarial gains/losses from a pension plan. Results of operations for foreign subsidiaries are translated using the average exchange rates during the period. Assets and liabilities are translated at the exchange rates in effect on the balance sheet dates. Accumulated other comprehensive income (loss) consisted of the following at March 30, 2019 and December 29, 2018:
Foreign Currency Translation Adjustments
Gain/(Loss) on Hedging Activities
Defined Benefit Pension Plan
Accumulated Other Comprehensive Loss
Balance at December 29, 2018
$
(230,261
)
$
11,171
$
(84,095
)
$
(303,185
)
Current-period comprehensive income (loss)
2,131
2,314
—
4,445
Balance at March 30, 2019
$
(228,130
)
$
13,485
$
(84,095
)
$
(298,740
)
11
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The Company determines the appropriate revenue recognition for our contracts by analyzing the type, terms and conditions of each contract or arrangement with a customer. Contracts with customers for all businesses are fixed-price with sales tax excluded from revenue, and do not include variable consideration. Discounts included in contracts with customers, typically early pay discounts, are recorded as a reduction of net sales in the period in which the sale is recognized. Contract revenues are classified as product when the performance obligation is related to the manufacturing of goods. Contract revenues are classified as service when the performance obligation is the performance of a service. Service revenue is primarily related to the Coatings segment.
Customer acceptance provisions exist only in the design stage of our products and acceptance of the design by the customer is required before the project is manufactured and delivered to the customer. The Company is not entitled to any compensation solely based on design of the product and does not recognize revenue associated with the design stage. There is one performance obligation for revenue recognition. No general rights of return exist for customers once the product has been delivered and the Company establishes provisions for estimated warranties. The Company does not sell extended warranties for any of its products.
Shipping and handling costs associated with sales are recorded as cost of goods sold. The Company elected to use the practical expedient of treating freight as a fulfillment obligation instead of a separate performance obligation and ratably recognize freight expense as the structure is being manufactured, when the revenue from the associated customer contract is being recognized over time. With the exception of the Utility segment and the wireless communication structures product line, the Company’s inventory is interchangeable for a variety of each segment’s customers. The Company elected the practical expedient to not disclose the partially satisfied performance obligation at the end of the period when the contract has an original expected duration of one year or less. In addition, the Company elected the practical expedient to not adjust the amount of consideration to be received in a contract for any significant financing component if payment is expected within twelve months of transfer of control of goods or services; the Company expects all consideration to be received in one year or less at contract inception.
Segment and Product Line Revenue Recognition
The global Utility segment revenues are derived from manufactured steel and concrete structures for the North America utility industry and offshore and other complex structures used in energy generation and distribution outside of the United States. Steel and concrete utility structures are engineered to customer specifications resulting in limited ability to sell the structure to a different customer if an order is canceled after production commences. The continuous transfer of control to the customer is evidenced either by contractual termination clauses or by our rights to payment for work performed to-date plus a reasonable profit as the products do not have an alternative use to the Company. Since control is transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment. For our steel and concrete utility and wireless communication structure product lines, we generally recognize revenue on an inputs basis, using total production hours incurred to-date for each order as a percentage of total hours estimated to produce the order. The completion percentage is applied to the order’s total revenue and total estimated costs to determine reported revenue, cost of goods sold and gross profit. Production of an order, once started, is typically completed within three months. Revenue from the offshore and other complex structures business is also recognized using an inputs method, based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. External sales agents are used in certain sales of steel and concrete structures; the Company has chosen to use the practical expedient to expense estimated commissions owed to third parties by recognizing them proportionately as the goods are manufactured.
The global ESS segment revenues are derived from the manufacture and distribution of engineered metal, composite structures and components for lighting and traffic and roadway safety, engineered access systems, and wireless communication. For the lighting and traffic and roadway safety product lines, revenue is recognized upon shipment or delivery of goods to the customer depending on contract terms, which is the same point in time that the customer is billed. For Access Systems, revenue is generally recognized upon delivery of goods to the customer which is the same point in time that the customer is billed. The wireless communication product line has large regional customers who have unique product
12
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
specifications for communication structures. When the customer contract includes a cancellation clause that would require them to pay for work completed plus a reasonable margin if an order was canceled, revenue is recognized over time based on hours worked as a percent of total estimated hours to complete production. For the remaining wireless communication product line customers which do not provide a contractual right to bill for work completed on a canceled order, revenue is recognized upon shipment or delivery of the goods to the customer which is the same point in time that the customer is billed.
The global Coatings segment revenues are derived by providing coating services to customers’ products, which include galvanizing, anodizing, and powder coating. Revenue is recognized once the coating service has been performed and the goods are ready to be picked up or delivered to the customer which is the same time that the customer is billed.
The global Irrigation segment revenues are derived from the manufacture of agricultural irrigation equipment and related parts and services for the agricultural industry and tubular products for industrial customers. Revenue recognition for the irrigation segment is generally upon shipment of the goods to the customer which is the same point in time that the customer is billed. The remote monitoring subscription services are primarily billed annually and revenue is recognized on a straight-line basis over the subsequent twelve months.
Disaggregation of revenue by product line is disclosed in the Segment footnote. A breakdown by segment of revenue recognized over time and at a point in time for the thirteen weeks ended March 30, 2019 and March 31, 2018 is as follows:
Point in Time
Over Time
Point in Time
Over Time
Thirteen weeks ended March 30, 2019
Thirteen weeks ended March 30, 2019
Thirteen weeks ended March 31, 2018
Thirteen weeks ended March 31, 2018
Utility Support Structures
$
30,292
$
212,966
$
—
$
209,859
Engineered Support Structures
218,980
8,989
207,194
8,722
Coatings
70,231
—
68,458
—
Irrigation
147,858
2,823
183,234
2,818
Other
—
—
18,399
—
Total
$
467,361
$
224,778
$
477,285
$
221,399
Both steel and concrete utility customers are generally invoiced upon shipment or delivery of the goods to the customer's specified location and there are normally no up-front or progress payments. The offshore and complex steel structures business invoices customers a number of ways including advanced billings, progress billings, and billings upon shipment.
At March 30, 2019 and December 29, 2018, the contract liability for revenue recognized over time was $6,420 and $4,906, respectively. The contract liability is included in Accrued Expenses on the condensed consolidated balance sheets. During the thirteen weeks ended March 30, 2019 and March 31, 2018, the Company recognized $1,030 and $2,824 of revenue that was included in the liability as of December 29, 2018 and December 30, 2017, respectively. The revenue recognized was due to applying advance payments received for projects completed during the period.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which provides revised guidance on leases requiring lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The Company implemented a lease management tool to support the new reporting requirements and adopted the ASU on the first day of fiscal 2019. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet for all classes of underlying assets. The Company elected to not recast its comparative periods in transition
13
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(the "Comparatives Under 840 Option") as allowed under ASU 2018-11. The new standard did not have an impact in the condensed consolidated statements of earnings; footnote 9 provides the impact on the condensed consolidated balance sheet including the transition adoption adjustment recorded to retained earnings.
2) ACQUISITIONS
On February 11, 2019, the Company acquired the outstanding shares of United Galvanizing ("United"), a provider of coatings services for $26,000 in cash. The agreed upon purchase price was $28,000, with $2,000 being held back for seller representations and warranties that will be settled within 12 months of the acquisition date. The acquisition of United, located in Houston, Texas further expands the Company's galvanizing footprint in North America and will be reported in the Coatings segment. The preliminary fair values assigned were $15,720 for goodwill, $3,092 for customer relationships, trade name of $894, $7,216 for property, plant, and equipment, and the remainder is net working capital. Goodwill is not deductible for tax purposes and the customer relationship will be amortized over 10 years. The trade name has an indefinite life. The Company expects the purchase price allocation to be finalized in the fourth quarter of 2019, once the hold back payment is settled and management reviews are complete.
On December 31, 2018, the Company acquired the assets of Larson Camouflage ("Larson"), an industry leading provider of architectural and camouflage concealment solutions for the wireless telecommunication market for $31,106 in cash. The agreed upon purchase price was $34,562, with 10% being held back for seller representations and warranties and will be settled within 12 months of the acquisition date. Larson was acquired to grow our product offerings in the wireless communication market and will be reported in the ESS segment. The preliminary fair values assigned were $17,050 for customer relationships, $14,494 for goodwill, $1,151 for property, plant, and equipment and the remainder is net working capital. Goodwill is deductible for tax purposes and the customer relationships will be amortized over 12 years. The Company expects the purchase price allocation to be finalized in the fourth quarter of 2019, once the hold back payment is settled and management reviews are complete.
On October 18, 2018, the Company acquired CSP Coatings Systems of Auckland, New Zealand, a provider of a wide range of coatings services for $17,711 in cash. The acquisition further strengthens the Company's Asia-Pacific market position and is reported in the Coatings segment. The preliminary fair values assigned were $7,373 to property, plant, and equipment, $3,113 for customer relationships, $5,120 for goodwill, with the remainder net working capital. Goodwill is not deductible for tax purposes and the customer relationships will be amortized over 10 years. The Company expects the purchase price allocation to be finalized in the second quarter of 2019.
On August 3, 2018, the Company purchased approximately 72% of the outstanding shares of Walpar, LLC ("Walpar") for $57,805 in cash. Walpar is an industry leader in the design, engineering and manufacturing of overhead sign structures for the North America transportation market. Walpar is located in Birmingham, Alabama and its operations are reported in the ESS segment. The transaction was funded with cash on hand. The acquisition of Walpar was completed to expand the Company's product offering in the sign structure market. The preliminary fair value measurement disclosed below is subject to management reviews and completion of the fair value measurements of the assets acquired and liabilities assumed. Customer relationships will be amortized over 14 years and the trade name has an indefinite life. Goodwill is not deductible for tax purposes.
In January 2019, the 28% non-controlling interest shares of Walpar, LLC were acquired for $23,082. The Company expects the purchase price allocation to be finalized in the second quarter of 2019.
14
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
2) ACQUISITIONS (Continued)
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed of Walpar as of the date of acquisition:
At August 3, 2018
Current assets
$
13,210
Customer relationships
32,000
Trade name
4,300
Goodwill
42,216
Total fair value of assets acquired
$
91,726
Current liabilities
2,185
Deferred taxes
8,654
Total fair value of liabilities assumed
$
10,839
Non-controlling interest
23,082
Net assets acquired
$
57,805
On August 3, 2018, the Company acquired 75% of the outstanding shares of Convert Italia SpA ("Convert") for $43,504 in cash. Additional purchase price will be paid contingent on Convert realizing specific EBITDA and revenue targets in calendar years 2018 and 2020. The Company recorded $11,608 in estimated contingent consideration liability. Convert is a designer and provider of engineered solar tracker solutions that is headquartered in Italy, with offices in Brazil and Argentina. The Company acquired Convert to grow market adjacencies in the Utility Support Structures segment.
The preliminary fair value measurements disclosed below are subject to management reviews and completion of the fair value measurements of the assets acquired and liabilities assumed. Patents and proprietary technology will be amortized over 15 years and the trade name has an indefinite life. Goodwill is not deductible for tax purposes. The Company expects the fair value measurement process and purchase price allocation will be finalized in the third quarter of 2019. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed of Convert as of the date of acquisition:
At August 3, 2018
Current assets
$
18,349
Other assets
3,166
Patent and Proprietary Technology
16,554
Trade name
8,701
Goodwill
34,280
Total fair value of assets acquired
$
81,050
Current liabilities
5,376
Contingent consideration liability
11,608
Deferred taxes
6,061
Total fair value of liabilities assumed
$
23,045
Non-controlling interest
14,501
Net assets acquired
$
43,504
15
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
2) ACQUISITIONS (Continued)
On August 1, 2018, the Company acquired the operational assets of Derit Infrastructure Pvt. Ltd. ("Derit") for $14,700 in cash, net of assumed liabilities. The Company acquired the net assets at fair value with no value assigned to intangible assets in the preliminary purchase price allocation. Derit has a manufacturing facility in India with production capabilities for steel lattice structures for power transmission, wireless communication, and a provider of zinc galvanizing services. Derit was acquired to provide the Company with lattice structure manufacturing capabilities and to further expand the geographic footprint of the galvanizing business. The majority of the business will be reported in the Utility Support Structures segment, while the galvanizing business will be reported in the Coatings segment. The purchase price allocation was finalized in the fourth quarter of 2018. Proforma disclosures for Derit were omitted as this business does not have a significant impact on the Company's financial results.
On January 26, 2018, the Company acquired 60% of the assets of Torrent Engineering and Equipment ("Torrent") for $4,800 in cash. Torrent operates in Indiana and is an integrator of prefabricated pump stations that involves designing high pressure water and compressed air process systems. Torrent has annual sales of approximately $9,000. In the purchase price allocation, goodwill of $3,922 and $4,020 of customer relationships and other intangible assets were recorded. A portion of the goodwill is deductible for tax purposes. Torrent is included in the Irrigation segment and was acquired to expand the Company's water management capabilities. The purchase price allocation was finalized in the second quarter of 2018.
The Company's condensed consolidated statements of earnings for the thirteen weeks ended March 30, 2019 and March 31, 2018 included net sales of $41,557 and $932 and net earnings of $647 and $86 resulting from the United, Larson, CSP Coatings, Walpar, Convert, and Torrent acquisitions. The proforma effect of these acquisitions on the first quarter of 2019 and 2018 is as follows:
Thirteen weeks ended March 30, 2019
Thirteen weeks ended March 31, 2018
Net sales
$
694,558
$
713,686
Net earnings
36,719
39,879
Earnings per share-diluted
1.67
1.75
Acquisitions of Noncontrolling Interests
In March 2018, the Company acquired the remaining 10% of Valmont Industria e Commercio Ltda. that it did not own for $5,510. As this transaction was for the acquisition of all of the remaining shares of a consolidated subsidiary with no change in control, it was recorded within shareholders' equity and as a financing activity in the Consolidated Statements of Cash Flows.
16
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(3) DIVESTITURE
On April 30, 2018, the Company completed the sale of Donhad, its grinding media business in Australia, reported in the Other segment. The business was sold because it did not fit the long-term strategic plans for the Company. The grinding media business historical annual sales, operating profit, and net assets are not significant for discontinued operations presentation. The grinding media business had an operating loss of $913 for the thirteen weeks ended March 31, 2018. The Company received Australian $82,500 (U.S. $62,518) in proceeds from the sale.
The pre-tax loss recorded during the second quarter of 2018 from the divestiture is reported in other income (expense). The loss is comprised of the proceeds from buyer, less deal-related costs, less the net assets of the business which resulted in a gain of $4,334. Offsetting this amount is a $(10,418) realized loss on foreign exchange translation adjustments and net investment hedges previously reported in shareholders' equity.
Pre-tax gain from divestiture, before recognition of currency translation loss
$
4,334
Recognition of cumulative currency translation loss and hedges (out of OCI)
(10,418
)
Net pre-tax loss from divestiture of the grinding media business
$
(6,084
)
The transaction did not result in a taxable capital gain as the cash proceeds were less than the tax carrying value of the business. There is an insignificant tax benefit from the tax deductibility of deal related expenses.
17
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(4) RESTRUCTURING ACTIVITIES
During 2018, the Company executed certain regional restructuring activities (the "2018 Plan") primarily in the ESS and Utility segments to transform its operational business model including exiting certain local markets. During the full year of 2018, the Company incurred $23,515 of cost of sales and $18,460 of selling, general, and administrative expense for the 2018 Plan.
The following pre-tax expense were recognized during the first quarter of 2018:
ESS
Utility
Total
Severance
$
423
$
—
$
423
Other cash restructuring expenses
—
772
772
Asset impairments/net loss on disposals
1,145
—
1,145
Total cost of sales
1,568
772
2,340
Severance
1,978
—
1,978
Other cash restructuring expenses
82
—
82
Total selling, general and administrative expenses
2,060
—
2,060
Consolidated total
$
3,628
$
772
$
4,400
Liabilities recorded for the restructuring plans and changes therein for the first thirteen weeks of 2019 were as follows:
Balance at December 29, 2018
Recognized Restructuring Expense
Costs Paid or Otherwise Settled
Balance at March 30, 2019
Severance
$
6,594
$
—
$
(2,620
)
$
3,974
Other cash restructuring expenses
3,462
—
(1,252
)
2,210
Total
$
10,056
$
—
$
(3,872
)
$
6,184
18
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(5) GOODWILL AND INTANGIBLE ASSETS
Amortized Intangible Assets
The components of amortized intangible assets at March 30, 2019 and December 29, 2018 were as follows:
March 30, 2019
Gross Carrying Amount
Accumulated Amortization
Weighted Average Life
Customer Relationships
$
240,786
$
136,961
13 years
Patents & Proprietary Technology
23,396
5,232
14 years
Other
7,918
6,887
5 years
$
272,100
$
149,080
December 29, 2018
Gross Carrying Amount
Accumulated Amortization
Weighted Average Life
Customer Relationships
$
219,508
$
132,180
13 years
Patents & Proprietary Technology
23,662
4,837
14 years
Other
7,971
6,891
5 years
$
251,141
$
143,908
Amortization expense for intangible assets for the thirteen weeks ended March 30, 2019 and March 31, 2018, respectively was as follows:
Thirteen Weeks Ended
2019
2018
$
4,390
$
3,883
Estimated annual amortization expense related to finite‑lived intangible assets is as follows:
Estimated Amortization Expense
2019
$
18,238
2020
17,404
2021
15,378
2022
13,228
2023
11,483
The useful lives assigned to finite‑lived intangible assets included consideration of factors such as the Company’s past and expected experience related to customer retention rates, the remaining legal or contractual life of the underlying arrangement that resulted in the recognition of the intangible asset and the Company’s expected use of the intangible asset.
19
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(5) GOODWILL AND INTANGIBLE ASSETS (Continued)
Non-amortized intangible assets
Intangible assets with indefinite lives are not amortized. The carrying values of trade names at March 30, 2019 and December 29, 2018 were as follows:
March 30, 2019
December 29, 2018
Year Acquired
Newmark
$
11,111
$
11,111
2004
Webforge
9,105
8,872
2010
Convert Italia S.p.A
8,414
8,580
2018
Valmont SM
7,999
8,155
2015
Ingal EPS/Ingal Civil Products
7,423
7,233
2010
Walpar
4,300
4,300
2018
Shakespeare
4,000
4,000
2014
Other
17,525
16,472
$
69,877
$
68,723
In its determination of these intangible assets as indefinite‑lived, the Company considered such factors as its expected future use of the intangible asset, legal, regulatory, technological and competitive factors that may impact the useful life or value of the intangible asset and the expected costs to maintain the value of the intangible asset. The Company expects that these intangible assets will maintain their value indefinitely. Accordingly, these assets are not amortized.
The Company’s trade names were tested for impairment in the third quarter of 2018. The values of each trade name was determined using the relief-from-royalty method. Based on this evaluation, the value of the offshore and other complex steel structures (Valmont SM) trade name was deemed to be impaired and the Company recorded a charge of $1,425 in the third quarter of 2018. No other trade names were determined to be impaired.
Goodwill
The carrying amount of goodwill by segment as of March 30, 2019 and December 29, 2018 was as follows:
Engineered Support Structures Segment
Utility Support Structures Segment
Coatings Segment
Irrigation Segment
Total
Gross Balance December 29, 2018
$
204,735
$
123,618
$
80,937
$
25,164
$
434,454
Accumulated impairment losses
(18,670
)
(14,355
)
(16,222
)
—
(49,247
)
Balance at December 29, 2018
186,065
109,263
64,715
25,164
385,207
Acquisitions
14,494
—
15,720
—
30,214
Foreign currency translation
1,930
(710
)
300
55
1,575
Balance at March 30, 2019
$
202,489
$
108,553
$
80,735
$
25,219
$
416,996
20
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(5) GOODWILL AND INTANGIBLE ASSETS (Continued)
The Company’s annual impairment test of goodwill was performed during the third quarter of 2018, using the discounted cash flow method. The Company previously highlighted significant, adverse challenges in the wind energy market in Northern Europe that impacts our offshore and other complex steel structures business. A lack of protective tariffs has led to an extremely competitive environment in that region. Lower near-term financial projections and an approximately 15% decline in the undiscounted terminal value, when compared to the 2017 annual impairment test, is a result of challenging onshore wind and energy transmission structures pricing that is difficult to predict when it will recover. This resulted in an estimated fair value of the offshore and other complex steel structures reporting unit below the Company’s investment in this business. As a result, a goodwill impairment was recorded in the third quarter of 2018 totaling $14,355, which represents all of the goodwill of the offshore and other complex steel reporting unit.
For the remaining reporting units, the Company determined that its goodwill was not impaired, as the valuation of the reporting units exceeded their respective carrying values.
(6) CASH FLOW SUPPLEMENTARY INFORMATION
The Company considers all highly liquid temporary cash investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash payments for interest and income taxes (net of refunds) for the thirteen weeks ended March 30, 2019 and March 31, 2018 were as follows:
2019
2018
Interest
$
586
$
439
Income taxes
2,852
2,912
(7) EARNINGS PER SHARE
The following table provides a reconciliation between Basic and Diluted earnings per share (EPS):
Basic EPS
Dilutive Effect of Stock Options
Diluted EPS
Thirteen weeks ended March 30, 2019
Net earnings attributable to Valmont Industries, Inc.
$
36,481
$
—
$
36,481
Weighted average shares outstanding (000's)
21,886
78
21,964
Per share amount
$
1.67
$
0.01
$
1.66
Thirteen Weeks Ended March 31, 2018
Net earnings attributable to Valmont Industries, Inc.
$
39,281
$
—
$
39,281
Weighted average shares outstanding (000's)
22,609
187
22,796
Per share amount
$
1.74
$
0.02
$
1.72
At March 30, 2019 and March 31, 2018, there were 297,412 and 147,554 outstanding stock options with exercise prices exceeding the market price of common stock that were excluded from the computation of diluted earnings per share, respectively.
21
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(8) HEDGING ACTIVITIES
The Company manages interest rate risk, commodity price risk, and foreign currency risk related to foreign currency denominated transactions and investments in foreign subsidiaries. Depending on the circumstances, the Company may manage these risks by utilizing derivative financial instruments. Some derivative financial instruments are marked to market and recorded in the Company's consolidated statements of earnings, while others may be accounted for as fair value, cash flow, or net investment hedges. Derivative financial instruments have credit and market risk. The Company manages these risks of derivative instruments by monitoring limits as to the types and degree of risk that can be taken, and by entering into transactions with counterparties who are recognized, stable multinational banks.
Fair value of derivative instruments at March 30, 2019 and December 29, 2018 are as follows:
Derivatives designated as hedging instruments:
Balance sheet location
March 30, 2019
December 29, 2018
Commodity forward contracts
Prepaid expenses and other assets
$
—
$
(285
)
Foreign currency forward contracts
Prepaid expenses and other assets
9,000
8,357
Cross currency swap contracts
Prepaid expenses and other assets
4,743
1,075
$
13,743
$
9,147
Gains (losses) on derivatives recognized in the condensed consolidated statements of earnings for the thirteen weeks ended March 30, 2019 and March 31, 2018 are as follows:
Thirteen Weeks Ended
Derivatives designated as hedging instruments:
Statements of earnings location
March 30, 2019
March 31, 2018
Foreign currency forward contracts
Other income (expenses)
552
—
Cross currency swap contracts
Interest expense
653
—
$
1,205
$
—
Cash Flow Hedges
In 2019 and 2018, the Company entered into steel hot rolled coil (HRC) forward contracts that qualified as a cash flow hedge of the variability in cash flows attributable to future steel purchases. In 2019, the forward contracts had a notional amount of $12,128 for the purchase of 3,500 short tons for each month from May 2019 to September 2019. In 2018, the forward contracts entered into had a notional amount of $8,469 for the purchase of 3,500 short tons for each month from July 2018 to September 2018 and a notional amount of $15,563 for the purchase of 6,500 short tons for each month from October 2018 to December 2018. The gain/(loss) realized upon settlement is recorded in product cost of sales in the condensed consolidated statements of earnings over average inventory turns.
On June 19, 2018, the Company issued and sold $200,000 aggregate principal amount of the Company’s 5.00% senior notes due 2044 and $55,000 aggregate principal amount of the Company’s 5.25% senior notes due 2054. During the second quarter of 2018, the Company executed contracts to hedge the risk of potential fluctuations in the treasury rates on the 2044 Notes and 2054 Notes which would change the amount of net proceeds received from the debt offering. These contracts had a combined notional amount of $175,000. On June 8, 2018, these contracts were settled with the Company paying $2,467 to the counterparties which was recorded in Other Comprehensive Income ("OCI") and will be amortized as an increase to interest expense over the term of the debt. Due to the retirement of the 2020 bonds in July 2018, the Company wrote off the remaining $411 unamortized loss on the related cash flow hedge.
22
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(8) HEDGING ACTIVITIES (Continued)
Net Investment Hedges
The Company previously executed two six-month foreign currency forward contracts which qualified as net investment hedges, in order to mitigate foreign currency risk on the grinding media business that is denominated in both Australian dollars and British pounds. Due to the sale of the grinding media business in the second quarter of 2018, the Company reclassified the net investment hedge loss of $1,621 ($1,215 after tax) from OCI to loss from divestiture of grinding media business in the Statements of Earnings.
In the second quarter of 2018, the Company entered into two foreign currency forward contracts to mitigate foreign currency risk of the Company's investment in its Australian dollar and Euro denominated businesses. The forward contracts, which qualify as net investment hedges, have a maturity date of May 2020 and notional amounts to sell Australian dollars and Euro to receive $100,000 and $50,000, respectively.
Effective in the third quarter of 2018, the Company elected as an accounting policy to change its method of assessing effectiveness for all net investment hedges from the forward method to the spot method. As a result of this election, all existing and future net investment hedges will be accounted for under the spot method. As an additional accounting policy election to be applied to similar hedges under this new standard, the initial value of any component excluded from the assessment of effectiveness will be recognized in income or expense using a systematic and rational method over the life of the hedging instrument.
Due to the change in the method used to assess effectiveness from the forward to the spot method in the third quarter of 2018, the Euro and Australian dollar net investment hedges were de-designated. The forward contracts were then re-designated as net investment hedges under the spot method and the initial excluded component value related to the Australian dollar and Euro net investment hedges were $538 and $3,190, respectively, which the Company has elected to amortize in other income (expense) in the condensed consolidated statements of earnings using the straight-line method over the remaining term of the contracts.
On August 24, 2018, the Company entered into three fixed-for-fixed cross currency swaps (“CCS”), swapping U.S. dollar principal and interest payments on a portion of its 5.00% senior unsecured notes due 2044 for Danish krone (DKK) and Euro denominated payments. The CCS were entered into in order to mitigate foreign currency risk on the Company's Euro and DKK investments and to reduce interest expense. Interest is exchanged twice per year on April 1 and October 1.
Key terms of the three CCS are as follows:
Currency
Notional Amount
Termination Date
Swapped Interest Rate
Set Settlement Amount
Danish Kroner, DKK
$
60,000
October 1, 2023
2.52%
DKK 386,118
Euro
$
25,000
October 1, 2020
2.14%
€21,580
Euro
$
10,000
October 1, 2021
2.29%
€8,631
The Company designated the full notional amount of the three CCS ($95,000) as a hedge of the net investment in certain Danish and European subsidiaries under the spot method, with all changes in the fair value of the CCS that are included in the assessment of effectiveness (changes due to spot foreign exchange rates) are recorded as cumulative foreign currency translation within OCI, and will remain in OCI until either the sale or substantially complete liquidation of the related subsidiaries. Net interest receipts will be recorded as a reduction of interest expense over the life of the CCS.
23
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(9) LEASES
The Company has operating leases for plant locations, corporate offices, sales offices, and certain equipment. Outstanding leases at March 30, 2019 have remaining lease terms of one year to fifteen years, some of which include options to extend leases for up to five years. The Company does not have any financing leases. The Company elected practical expedients not to reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing leases, to not reassess initial direct costs for any existing leases, to use hindsight in determining the lease term and in assessing impairment of the right-of-use asset, and to not separate lease and non-lease components for all classes of underlying assets.
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, accrued expenses, and operating lease liabilities in our condensed consolidated balance sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make future lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on information available at the date of adoption in determining the present value of future lease payments. The operating lease ROU asset also includes any lease payments made and excludes any lease incentives and impairments. Some of the Company's facility leases include options to extend the lease when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.
Lease cost and other information related to the Company's operating leases are as follows:
Thirteen weeks ended March 30, 2019
Operating lease cost
$
5,296
Short-term lease cost
600
Total lease cost
$
5,896
Operating cash outflows from operating leases
$
6,046
ROU assets obtained in exchange for lease obligations
$
1,236
Weighted average remaining lease term
10 years
Weighted average discount rate
3.9
%
As part of the adoption of ASC 842, the Company evaluated at the historical and projected cash flow generation of the operations at each of its long-term leased facilities. One of those facilities, a galvanizing operation in Melbourne, Australia, will not generate sufficient cash flows on an undiscounted cash flow basis to recover the carrying value of the right of use asset. The Company then estimated a value for this operation using a discounted cash flow model. The result was an impairment of the right-of-use lease asset of approximately $12,063. The after-tax balance of $8,444 was recorded as a reduction to retained earnings for the transition adjustment of adoption.
24
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(9) LEASES (Continued)
Supplemental balance sheet information related to operating leases for the first quarter of 2019 is as follows:
Classification
March 30, 2019
Operating lease assets
Other assets
$
93,871
Operating lease short-term liabilities
Accrued expenses
15,145
Operating lease long-term liabilities
Operating lease liabilities
88,492
Total lease liabilities
$
103,637
Minimum lease payments under operating leases expiring subsequent to March 30, 2019 are as follows:
Fiscal year ending
2019 (excluding the three months ended March 30, 2019)
$
14,443
2020
17,190
2021
14,333
2022
11,894
2023
9,183
Subsequent
59,860
Total minimum lease payments
$
126,903
The below table as of December 29, 2018 is carried forward, including certain amounts that were historically included in the table as a result of the historical lease term conclusions but were not included in the initial ROU asset and lease liability measurement as of December 30, 2018 due to the Company's election of the hindsight practical expedient. The Company also determined one of its leases with escalating rent payments should be expensed using the straight-line method over a longer-term and the result was an additional reduction to retained earnings of $442 for a transition adjustment. Minimum lease payments for operating leases under ASC 840 expiring subsequent to December 29, 2018 are as follows:
Fiscal year ending
2019
$
18,757
2020
16,830
2021
13,992
2022
11,932
2023
8,866
Subsequent
76,438
Total minimum lease payments
$
146,815
25
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(10) BUSINESS SEGMENTS
The Company has four reportable segments based on its management structure. Each segment is global in nature with a manager responsible for segment operational performance and the allocation of capital within the segment. Net corporate expense is net of certain service‑related expenses that are allocated to business units generally on the basis of employee headcounts.
Reportable segments are as follows:
ENGINEERED SUPPORT STRUCTURES: This segment consists of the manufacture of engineered metal and composite poles, towers, and components for global lighting, traffic, and wireless communication markets, engineered access systems, integrated structure solutions for smart cities, and highway safety products;
UTILITY SUPPORT STRUCTURES: This segment consists of the manufacture of engineered steel and concrete structures for the global utility transmission, distribution, and generation applications, renewable energy generation equipment, and inspection services;
COATINGS: This segment consists of galvanizing, painting, and anodizing services; and
IRRIGATION: This segment consists of the manufacture of agricultural irrigation equipment, parts, services, tubular products, water management solutions, and technology for precision agriculture.
In addition to these four reportable segments, the Company had other businesses and activities that individually are not more than 10% of consolidated sales, operating income or assets. This includes the manufacture of forged steel grinding media for the mining industry and is reported in the "Other" category.
The Company evaluates the performance of its business segments based upon operating income and invested capital. The Company does not allocate LIFO expense, interest expense, non-operating income and deductions, or income taxes to its business segments.
26
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(10) BUSINESS SEGMENTS (Continued)
Summary by Business
Thirteen Weeks Ended
March 30, 2019
March 31, 2018
SALES:
Engineered Support Structures segment:
Lighting, Traffic, and Highway Safety Products
$
157,184
$
160,444
Communication Products
42,865
34,113
Access Systems
30,239
30,397
Engineered Support Structures segment
230,288
224,954
Utility Support Structures segment:
Steel
159,760
163,983
Concrete
29,844
23,662
Engineered Solar Tracker Solutions
30,292
—
Offshore and Other Complex Steel Structures
24,026
22,217
Utility Support Structures segment
243,922
209,862
Coatings segment
86,779
84,947
Irrigation segment:
North America
108,477
109,854
International
44,339
78,099
Irrigation segment
152,816
187,953
Other
—
18,399
Total
713,805
726,115
INTERSEGMENT SALES:
Engineered Support Structures segment
2,319
9,038
Utility Support Structures segment
664
3
Coatings segment
16,548
16,489
Irrigation segment
2,135
1,901
Other
—
—
Total
21,666
27,431
NET SALES:
Engineered Support Structures segment
227,969
215,916
Utility Support Structures segment
243,258
209,859
Coatings segment
70,231
68,458
Irrigation segment
150,681
186,052
Other
—
18,399
Total
$
692,139
$
698,684
OPERATING INCOME:
Engineered Support Structures segment
$
12,445
$
6,947
Utility Support Structures segment
25,048
23,367
Coatings segment
10,140
11,867
Irrigation segment
20,134
33,887
Other
—
(579
)
Adjustment to LIFO inventory valuation method
502
(1,081
)
Corporate
(13,165
)
(10,448
)
Total
$
55,104
$
63,960
27
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
11) GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
The Company has two tranches of senior unsecured notes. All of the senior notes are guaranteed, jointly, severally, fully and unconditionally (subject to certain customary release provisions, including sale of the subsidiary guarantor, or sale of all or substantially all of its assets) by certain of the Company’s current and future direct and indirect domestic and foreign subsidiaries (collectively the “Guarantors”), excluding its other current domestic and foreign subsidiaries which do not guarantee the debt (collectively referred to as the “Non-Guarantors”). All Guarantors are 100% owned by the parent company.
Consolidated financial information for the Company ("Parent"), the Guarantor subsidiaries and the Non-Guarantor subsidiaries is as follows:
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Thirteen weeks ended March 30, 2019
Parent
Guarantors
Non- Guarantors
Eliminations
Total
Net sales
$
299,002
$
139,507
$
312,291
$
(58,661
)
$
692,139
Cost of sales
225,127
103,312
257,607
(59,036
)
527,010
Gross profit
73,875
36,195
54,684
375
165,129
Selling, general and administrative expenses
57,846
7,109
45,070
—
110,025
Operating income
16,029
29,086
9,614
375
55,104
Other income (expense):
Interest expense
(9,583
)
(3,541
)
(295
)
3,541
(9,878
)
Interest income
111
12
4,228
(3,541
)
810
Other
3,537
10
299
3,846
(5,935
)
(3,519
)
4,232
—
(5,222
)
Earnings before income taxes and equity in earnings of nonconsolidated subsidiaries
10,094
25,567
13,846
375
49,882
Income tax expense (benefit)
462
5,950
5,959
56
12,427
Earnings before equity in earnings of nonconsolidated subsidiaries
9,632
19,617
7,887
319
37,455
Equity in earnings of nonconsolidated subsidiaries
26,849
3,944
—
(30,793
)
—
Net earnings
36,481
23,561
7,887
(30,474
)
37,455
Less: Earnings attributable to noncontrolling interests
—
—
(974
)
—
(974
)
Net earnings attributable to Valmont Industries, Inc.
$
36,481
$
23,561
$
6,913
$
(30,474
)
$
36,481
28
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(11) GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Thirteen weeks ended March 31, 2018
Parent
Guarantors
Non- Guarantors
Eliminations
Total
Net sales
$
315,992
$
121,171
$
332,136
$
(70,615
)
$
698,684
Cost of sales
235,596
94,459
271,716
(72,327
)
529,444
Gross profit
80,396
26,712
60,420
1,712
169,240
Selling, general and administrative expenses
46,531
11,917
46,832
—
105,280
Operating income
33,865
14,795
13,588
1,712
63,960
Other income (expense):
Interest expense
(10,881
)
(3,880
)
(193
)
3,880
(11,074
)
Interest income
176
10
4,961
(3,880
)
1,267
Other
(106
)
12
(1,047
)
—
(1,141
)
(10,811
)
(3,858
)
3,721
—
(10,948
)
Earnings before income taxes and equity in earnings of nonconsolidated subsidiaries
23,054
10,937
17,309
1,712
53,012
Income tax expense (benefit)
8,360
2,677
1,358
137
12,532
Earnings before equity in earnings of nonconsolidated subsidiaries
14,694
8,260
15,951
1,575
40,480
Equity in earnings of nonconsolidated subsidiaries
24,587
2,729
—
(27,316
)
—
Net earnings
39,281
10,989
15,951
(25,741
)
40,480
Less: Earnings attributable to noncontrolling interests
—
—
(1,199
)
—
(1,199
)
Net earnings attributable to Valmont Industries, Inc.