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 6. Exhibits
Exhibits
EX-31.1
vmi-ex311_20180929x10q.htm
EX-31.2
vmi-ex312_20180929x10q.htm
EX-32.1
vmi-ex321_20180929x10q.htm
Valmont Industries Earnings 2018-09-29
VMI 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 vmi-20180929x10q.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 September 29, 2018
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
(Do not check if a smaller reporting company)
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
22,088,480
Outstanding shares of common stock as of October 25, 2018
Less: Earnings attributable to noncontrolling interests
(2,543
)
(1,458
)
(5,462
)
(4,098
)
Net earnings attributable to Valmont Industries, Inc.
$
4,448
$
35,208
$
76,689
$
119,851
Earnings per share:
Basic
$
0.20
$
1.56
$
3.42
$
5.33
Diluted
$
0.20
$
1.55
$
3.40
$
5.28
Cash dividends declared per share
$
0.375
$
0.375
$
1.125
$
1.125
Weighted average number of shares of common stock outstanding - Basic (000 omitted)
22,215
22,527
22,421
22,505
Weighted average number of shares of common stock outstanding - Diluted (000 omitted)
22,352
22,751
22,574
22,717
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
Thirty-nine Weeks Ended
September 29, 2018
September 30, 2017
September 29, 2018
September 30, 2017
Net earnings
$
6,991
$
36,666
$
82,151
$
123,949
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments:
Unrealized translation gain (loss)
(10,632
)
19,530
(50,781
)
60,471
Realized loss on divestiture of grinding media business recorded in earnings
—
—
9,203
—
Gain (loss) on hedging activities:
Net investment hedges
1,223
(740
)
2,830
(1,816
)
Realized loss on net investment hedge for grinding media business recorded in earnings
—
—
1,215
—
Amortization cost included in interest expense
395
19
439
56
Deferred loss on interest rate hedges
—
—
(2,467
)
—
Commodity hedges
226
—
1,571
—
Realized gain on commodity hedges recorded in earnings
(717
)
—
(717
)
—
Cross currency swaps
(2,037
)
—
(2,037
)
—
Other comprehensive income (loss)
(11,542
)
18,809
(40,744
)
58,711
Comprehensive income (loss)
(4,551
)
55,475
41,407
182,660
Comprehensive loss (income) attributable to noncontrolling interests
(2,389
)
(2,570
)
(8,250
)
(4,552
)
Comprehensive income attributable to Valmont Industries, Inc.
$
(6,940
)
$
52,905
$
33,157
$
178,108
See accompanying notes to condensed consolidated financial statements.
4
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
September 29, 2018
December 30, 2017
ASSETS
Current assets:
Cash and cash equivalents
$
295,622
$
492,805
Receivables, net
500,406
503,677
Inventories
399,905
420,948
Contract asset - costs and profits in excess of billings
112,620
16,165
Prepaid expenses and other assets
40,655
27,478
Refundable income taxes
13,182
11,492
Total current assets
1,362,390
1,472,565
Property, plant and equipment, at cost
1,153,843
1,165,687
Less accumulated depreciation and amortization
646,122
646,759
Net property, plant and equipment
507,721
518,928
Goodwill
389,594
337,720
Other intangible assets, net
178,693
138,599
Other assets
124,680
134,438
Total assets
$
2,563,078
$
2,602,250
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt
$
829
$
966
Notes payable to banks
3,328
161
Accounts payable
200,468
227,906
Accrued employee compensation and benefits
80,843
84,426
Accrued expenses
106,929
81,029
Dividends payable
8,310
8,510
Total current liabilities
400,707
402,998
Deferred income taxes
45,076
34,906
Long-term debt, excluding current installments
736,185
753,888
Defined benefit pension liability
179,877
189,552
Deferred compensation
48,174
48,526
Other noncurrent liabilities
19,311
20,585
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
2,022,538
1,954,344
Accumulated other comprehensive loss
(322,554
)
(279,022
)
Treasury stock
(670,667
)
(590,386
)
Total Valmont Industries, Inc. shareholders’ equity
1,057,217
1,112,836
Noncontrolling interest in consolidated subsidiaries
76,531
38,959
Total shareholders’ equity
1,133,748
1,151,795
Total liabilities and shareholders’ equity
$
2,563,078
$
2,602,250
See accompanying notes to condensed consolidated financial statements.
5
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Thirty-nine Weeks Ended
September 29, 2018
September 30, 2017
Cash flows from operating activities:
Net earnings
$
82,151
$
123,949
Adjustments to reconcile net earnings to net cash flows from operations:
Depreciation and amortization
62,018
63,500
Noncash (gain) loss on trading securities
(62
)
395
Impairment of property, plant and equipment
4,197
—
Impairment of goodwill & intangible assets
15,780
—
Loss on divestiture of grinding media business
6,084
—
Stock-based compensation
8,076
7,300
Defined benefit pension plan expense (benefit)
(1,713
)
481
Contribution to defined benefit pension plan
(1,555
)
(26,064
)
Gain on sale of property, plant and equipment
(353
)
(732
)
Deferred income taxes
814
79
Changes in assets and liabilities:
Receivables
(612
)
(39,584
)
Inventories
(33,004
)
(41,545
)
Prepaid expenses and other assets
(18,486
)
(12,331
)
Contract asset - costs and profits in excess of billings
(33,029
)
695
Accounts payable
(19,069
)
28,895
Accrued expenses
7,288
20,157
Other noncurrent liabilities
(1,249
)
(1,627
)
Income taxes refundable
(9,223
)
(1,732
)
Net cash flows from operating activities
68,053
121,836
Cash flows from investing activities:
Purchase of property, plant and equipment
(48,919
)
(39,898
)
Proceeds from sale of assets
64,786
1,575
Acquisitions, net of cash acquired
(125,309
)
(5,362
)
Settlement of net investment hedges
(1,621
)
5,123
Other, net
(2,371
)
(3,462
)
Net cash flows from investing activities
(113,434
)
(42,024
)
Cash flows from financing activities:
Proceeds/(payments) under short-term agreements
3,217
(549
)
Proceeds from long-term borrowings
236,936
—
Principal payments on long-term borrowings
(252,952
)
(658
)
Settlement of financial derivatives
(2,467
)
—
Debt issuance costs
(2,322
)
—
Dividends paid
(25,415
)
(25,386
)
Dividends to noncontrolling interest
(5,737
)
(3,895
)
Purchase of noncontrolling interest
(5,510
)
—
Purchase of treasury shares
(86,919
)
—
Proceeds from exercises under stock plans
6,376
12,446
Purchase of common treasury shares—stock plan exercises
(1,914
)
(3,929
)
Net cash flows from financing activities
(136,707
)
(21,971
)
Effect of exchange rate changes on cash and cash equivalents
(15,095
)
23,133
Net change in cash and cash equivalents
(197,183
)
80,974
Cash, cash equivalents, and restricted cash—beginning of year
492,805
412,516
Cash, cash equivalents, and restricted cash—end of period
$
295,622
$
493,490
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 31, 2016
$
27,900
$
—
$
1,874,722
$
(346,359
)
$
(612,781
)
$
39,104
$
982,586
Net earnings
—
—
119,851
—
—
4,098
123,949
Other comprehensive income (loss)
—
—
—
58,257
—
454
58,711
Cash dividends declared
—
—
(25,417
)
—
—
—
(25,417
)
Dividends to noncontrolling interests
—
—
—
—
—
(3,895
)
(3,895
)
Stock plan exercises; 24,672 shares acquired
—
—
—
—
(3,929
)
—
(3,929
)
Stock options exercised; 106,351 shares issued
—
(7,300
)
5,445
—
14,301
—
12,446
Stock option expense
—
3,868
—
—
—
—
3,868
Stock awards; 6,034 shares issued
—
3,432
—
—
844
—
4,276
Balance at September 30, 2017
$
27,900
$
—
$
1,974,601
$
(288,102
)
$
(601,565
)
$
39,761
$
1,152,595
Balance at December 30, 2017
$
27,900
$
—
$
1,954,344
$
(279,022
)
$
(590,386
)
$
38,959
$
1,151,795
Net earnings
—
—
76,689
—
—
5,462
82,151
Other comprehensive income (loss)
—
—
—
(43,532
)
—
2,788
(40,744
)
Cash dividends declared
—
—
(25,204
)
—
—
—
(25,204
)
Dividends to noncontrolling interests
—
—
—
—
—
(5,737
)
(5,737
)
Purchase of noncontrolling interests
—
—
—
—
—
(5,510
)
(5,510
)
Cumulative impact of ASC 606 adoption
—
—
9,771
—
—
—
9,771
Impact of ASU 2016-16 adoption
—
—
1,038
—
—
—
1,038
Addition of noncontrolling interest
—
—
—
—
—
40,569
40,569
Purchase of treasury shares; 614,454 shares acquired
—
—
—
—
(86,919
)
—
(86,919
)
Stock plan exercises; 12,971 shares acquired
—
—
—
—
(1,914
)
—
(1,914
)
Stock options exercised; 52,404 shares issued
—
(7,172
)
5,900
—
7,648
—
6,376
Stock option expense
—
3,138
—
—
—
—
3,138
Stock awards; 7,774 shares issued
—
4,034
—
—
904
—
4,938
Balance at September 29, 2018
$
27,900
$
—
$
2,022,538
$
(322,554
)
$
(670,667
)
$
76,531
$
1,133,748
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 September 29, 2018, the Condensed Consolidated Statements of Earnings and Comprehensive Income for the thirteen and thirty-nine weeks ended September 29, 2018 and September 30, 2017, and the Condensed Consolidated Statements of Cash Flows and Shareholders' Equity for the thirty-nine 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 September 29, 2018 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 30, 2017. 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 30, 2017 with the exception of the revenue recognition accounting policy which changed from adopting ASU 2014-09 and is discussed later within this footnote. The results of operations for the period ended September 29, 2018 are not necessarily indicative of the operating results for the full year.
Inventories
Approximately 35% and 37% of inventory is valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market as of September 29, 2018 and December 30, 2017. 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 $49,239 and $43,727 at September 29, 2018 and December 30, 2017, respectively.
Inventories consisted of the following:
September 29, 2018
December 30, 2017
Raw materials and purchased parts
$
202,517
$
183,029
Work-in-process
24,046
30,671
Finished goods and manufactured goods
222,581
250,975
Subtotal
449,144
464,675
Less: LIFO reserve
49,239
43,727
$
399,905
$
420,948
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 and equity in earnings of nonconsolidated subsidiaries for the thirteen and thirty-nine weeks ended September 29, 2018 and September 30, 2017, were as follows:
Thirteen Weeks Ended
Thirty-nine Weeks Ended
2018
2017
2018
2017
United States
$
15,596
$
28,886
$
99,697
$
115,082
Foreign
486
21,675
18,482
59,210
$
16,082
$
50,561
$
118,179
$
174,292
The Company estimated and recognized provisional amounts at December 30, 2017 for the following aspect of the 2017 Tax Cuts and Jobs Act ("2017 Tax Act") and updated the amounts as of September 29, 2018:
•
Deemed Repatriation transition tax: The Deemed Repatriation transition tax (“Transition Tax”) is a tax on unremitted foreign earnings of certain foreign subsidiaries, which subjected the Company's unremitted foreign earnings of $393,962 to tax at certain specified rates less associated foreign tax credits, a decrease of $6,038 from the December 30, 2017 estimate. The Company recorded a provisional Transition Tax obligation of $9,436, a decrease of $454 from the December 30, 2017 estimate.
•
Indefinite reinvestment assertion: The Company's position remains that unremitted foreign earnings subject to the Transition Tax are not indefinitely reinvested. The Company recorded a provisional amount of the deferred income taxes for foreign withholding taxes and U.S. state income taxes of $10,713 and $1,300, respectively. This was an increase of $340 from the December 30, 2017 estimate related to foreign withholding taxes.
•
Adjustments to these 2017 Tax Act amounts, as discussed above, were recognized during the third quarter of 2018. However, the Company may adjust these provisional amounts in the fourth quarter of 2018 after assessing additional implementation guidance as it becomes available.
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 and thirty-nine weeks ended September 29, 2018 and September 30, 2017 were as follows:
Thirteen Weeks Ended
Thirty-nine Weeks Ended
Net periodic (benefit) expense:
2018
2017
2018
2017
Interest cost
$
4,400
$
4,676
$
13,602
$
13,475
Expected return on plan assets
(5,704
)
(5,277
)
(17,633
)
(15,208
)
Amortization of actuarial loss
750
768
2,318
2,214
Net periodic expense (benefit)
$
(554
)
$
167
$
(1,713
)
$
481
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)
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 September 29, 2018, 1,683,908 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 to ten 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 and thirty-nine weeks ended September 29, 2018 and September 30, 2017, respectively, were as follows:
Thirteen Weeks Ended
Thirty-nine Weeks Ended
2018
2017
2018
2017
Compensation expense
$
2,702
$
2,710
$
8,076
$
7,300
Income tax benefits
676
1,043
2,019
2,811
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 $39,521 ($39,091 at December 30, 2017) represent mutual funds, invested in debt and equity securities, classified as trading securities in accordance with Accounting Standards Codification 320, Accounting for Certain
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)
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 $1,954 and $1,951 as of September 29, 2018 and December 30, 2017, 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.
Fair Value Measurement Using:
Carrying Value September 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
$
41,475
$
41,475
$
—
$
—
Fair Value Measurement Using:
Carrying Value December 30, 2017
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets:
Trading Securities
$
41,042
$
41,042
$
—
$
—
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 September 29, 2018 and December 30, 2017:
Foreign Currency Translation Adjustments
Gain/(Loss) on Hedging Activities
Defined Benefit Pension Plan
Accumulated Other Comprehensive Loss
Balance at December 30, 2017
$
(171,399
)
$
6,357
$
(113,980
)
$
(279,022
)
Current-period comprehensive income (loss)
(53,569
)
(381
)
—
(53,950
)
Divestiture of grinding media business
9,203
1,215
—
10,418
Balance at September 29, 2018
$
(215,765
)
$
7,191
$
(113,980
)
$
(322,554
)
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)
Subsequent Events
On October 18, 2018, the Company acquired CSP Coating Systems of Auckland, New Zealand, to further strengthen the Company's Asia-Pacific market position. CSP Coating Systems provides a wide range of coating services. The acquisition was funded with cash on hand and will be included in the Coatings segment.
Revenue Recognition
On December 31, 2017, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The Company elected to use the modified retrospective approach for the adoption of the new revenue standard. The cumulative effect of initially applying the new revenue standard was recorded as an adjustment to the opening balance of retained earnings, which impacted the Condensed Consolidated Balance Sheet as follows:
Balance Sheet
December 30, 2017
ASC 606 Adjustments
December 31, 2017
Assets
Inventories
$
420,948
$
(36,243
)
$
384,705
Contract asset - costs & profits in excess of billings
16,165
51,507
67,672
Liabilities and shareholders' equity
Accrued expenses
81,029
2,043
83,072
Deferred income taxes
34,906
3,450
38,356
Retained earnings
1,954,344
9,771
1,964,115
The adoption of ASC 606 had the following impact on the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Earnings for the thirteen and thirty-nine weeks ended September 29, 2018:
Balance Sheet
As Reported
Balance Excluding ASC 606 Effects
Change
Assets
Inventories
$
399,905
$
463,184
$
(63,279
)
Contract asset - costs & profits in excess of billings
112,620
26,369
86,251
Liabilities and shareholders' equity
Accrued expenses
106,929
101,878
5,051
Deferred income taxes
45,076
40,451
4,625
Retained earnings
2,022,538
2,009,242
13,296
Thirteen Weeks Ended September 29, 2018
Thirty-nine Weeks Ended September 29, 2018
Statement of Earnings
As Reported
Balance Excluding ASC 606 Effects
Change
As Reported
Balance Excluding ASC 606 Effects
Change
Net Sales
678,692
$
666,095
$
12,597
2,059,781
$
2,024,921
$
34,860
Operating Income
38,360
$
35,697
$
2,663
165,990
$
161,289
$
4,701
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
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)
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 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.
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 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 revenue recognized at a point in time for the thirteen and thirty-nine weeks ended September 29, 2018 is as follows:
Point in Time
Over Time
Point in Time
Over Time
Thirteen weeks ended September 29, 2018
Thirteen weeks ended September 29, 2018
Thirty-nine weeks ended September 29, 2018
Thirty-nine weeks ended September 29, 2018
Utility Support Structures
$
6,090
$
211,853
$
6,090
$
618,243
Engineered Support Structures
235,948
12,483
680,863
29,525
Coatings
74,547
—
217,544
—
Irrigation
134,710
3,061
475,744
8,692
Other
—
—
23,080
—
Total
$
451,295
$
227,397
$
1,403,321
$
656,460
The Company's contract asset as of September 29, 2018 is $112,620. The contract assets attributable to the cumulative effect from the adoption of the new revenue recognition guidance was $51,507; the contract asset at December 30, 2017, attributable to the offshore and other complex structures product line, was $16,165. 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 September 29, 2018 and December 30, 2017, the contract liability for revenue recognized over time was $5,088 and $7,368. The contract liability is included in Accrued Expenses on the condensed consolidated balance sheets. During the thirty-nine weeks ended September 29, 2018, the Company recognized $4,456 of revenue that was included in the liability as of December 30, 2017. The revenue recognized was due to applying advance payments received for projects completed during the period.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-9, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") 605, Revenue Recognition. Effective December 31, 2017, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The Company elected the modified retrospective approach for the adoption of the new revenue standard, resulting in a credit to retained earnings being recognized for $9,771. The Company calculated the cumulative effect on revenue of approximately $51,507 with $13,121 of pre-tax operating income; these were customer orders for the steel utility, concrete utility, and wireless communication structures product lines at various stages of production at December 30, 2017.
14
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)
In March 2017, the FASB issued ASU 2017-07, Presentation of Net Periodic Benefit Cost Related to Defined Benefit Plans, which amends the income statement presentation requirements for the components of net periodic benefit cost for an entity's defined benefit pension and post-retirement plans. The Company adopted this ASU in the first quarter of 2018, recognizing the DPP net periodic pension expense within Other income (expense). The Company also reclassified $167 and $481 of DPP net periodic pension expense for third quarter and first three quarters of 2017 out of selling, general, and administrative expense and into Other expense.
In December 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents to be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows.
The Company adopted the ASU in the first quarter of 2018, recasting the beginning-of-period and end-of-period total cash and cash equivalent amounts on the statement of cash flows to include the £10,000 restricted cash account for the pension plan at December 31, 2016, thus reducing cash flows from operating activities by $12,568 in 2017. The Company did not have any restricted cash at September 29, 2018 or December 30, 2017.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 is effective for periods and fiscal years beginning after December 15, 2018. Early adoption is permitted for any interim period post issuance. The Company adopted this ASU in the first quarter of 2018, which did not have a material impact on the consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments in the Statement of Cash Flows, which provides more specific guidance on cash flow presentation for certain transactions. ASU 2016-15 is effective for interim periods and fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted this ASU in the first quarter of 2018, which did not have a material impact on the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other than Inventory, which requires the Company to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, as opposed to when it is sold to an outside party. The Company adopted this standard in 2018 and the result was an increase to retained earnings of $1,038.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, 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). ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect of adopting this new accounting guidance but expects the adoption will result in a significant increase in total assets and liabilities.
15
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
2) ACQUISITIONS
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 Engineered Support Structures segment. The transaction was funded with cash on hand and the purchase of the remaining 28% of the business will occur in January 2019. 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. The Company expects the purchase price allocation to be finalized in the second quarter of 2019.
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
$
14,729
Customer relationships
32,000
Trade name
4,300
Goodwill
40,919
Total fair value of assets acquired
$
91,948
Current liabilities
2,185
Deferred taxes
9,090
Total fair value of liabilities assumed
$
11,275
Non-controlling interests
22,868
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 $18,760 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 to 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:
16
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
2) ACQUISITIONS (Continued)
At August 3, 2018
Current assets
$
18,349
Other assets
3,166
Patent and Proprietary Technology
16,554
Trade name
8,701
Goodwill
41,432
Total fair value of assets acquired
$
88,202
Current liabilities
5,376
Contingent consideration liability
18,760
Deferred taxes
6,061
Total fair value of liabilities assumed
$
30,197
Non-controlling interests
14,501
Net assets acquired
$
43,504
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 preliminary fair value measurement is subject to management review and is expected to be finalized in the fourth quarter of 2018. Proforma disclosures 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.
On July 31, 2017, the Company purchased Aircon Guardrails Private Limited ("Aircon") for $5,362 in cash, net of cash acquired, plus assumed liabilities. Aircon produces highway safety systems including guardrails, structural metal products, and solar structural products in India with annual sales of approximately $10,000. In the purchase price allocation, goodwill of $3,327 and $2,109 of customer relationships and other intangible assets were recorded. Goodwill is not deductible for tax purposes. This business is included in the Engineered Support Structures segment and was acquired to expand the Company's geographic presence in the Asia-Pacific region. The purchase price allocation was finalized in the fourth quarter of 2017. Proforma disclosures were omitted as this business does not have a significant impact on the Company's financial results.
17
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
2) ACQUISITIONS (Continued)
The Company's condensed consolidated statements of earnings for the thirteen and thirty-nine weeks ended September 29, 2018 included net sales of $11,803 and $13,057 and net earnings of $1,198 and $1,055 resulting from the Walpar, Convert, and Torrent acquisitions. The proforma effect of these acquisitions on the third quarter and first three quarters of 2018 and 2017 is as follows:
Thirteen weeks ended September 29, 2018
Thirteen weeks ended September 30, 2017
Thirty-nine weeks ended September 29, 2018
Thirty-nine weeks ended September 30, 2017
Net sales
$
683,608
$
694,713
$
2,094,092
$
2,078,680
Net earnings
4,860
36,482
78,950
123,986
Earnings per share-diluted
0.22
1.60
3.50
5.46
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.
18
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 operating income/(loss) of ($913) for the thirty-nine weeks ended September 29, 2018, and $(217) and $3,728 for the thirteen and thirty-nine weeks ended September 30, 2017. The Company received Australian $82,500 (U.S. $62,518) but is subject to a working capital target settlement with the buyer that is expected to be finalized before the end of fiscal 2018.
The assets and liabilities of the grinding media business at closing on April 30, 2018 were as follows:
Receivables, net
$
9,848
Inventories
15,945
Net property, plant, and equipment
13,815
Goodwill and intangible assets
27,153
Other assets
1,388
Total assets
$
68,149
Accounts payable
$
7,125
Accrued expenses
2,484
Deferred income taxes
2,187
Total liabilities
$
11,796
Net assets
$
56,353
The pre-tax loss 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.
19
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 decided upon certain regional restructuring activities (the "2018 Plan") primarily in the ESS segment. The Company expects to incur $14,500 of pre-tax restructuring expenses in cost of sales and $12,500 of pre-tax restructuring expense in SG&A in 2018. Included in the $27,000 are expected pre-tax asset impairments of approximately $8,000.
The following pre-tax expense were recognized during the third quarter of 2018:
ESS
Utility
Corporate
Total
Severance
$
1,706
$
—
$
—
$
1,706
Other cash restructuring expenses
326
497
—
823
Asset impairments/net loss on disposals
1,406
—
—
1,406
Total cost of sales
3,438
497
—
3,935
Severance
1,757
—
—
1,757
Other cash restructuring expenses
551
—
—
551
Asset impairments/net loss on disposals
—
—
—
—
Total selling, general and administrative expenses
2,308
—
—
2,308
Consolidated total
$
5,746
$
497
$
—
$
6,243
In the first nine-months of 2018, the Company recognized the following pre-tax restructuring expenses:
ESS
Utility
Corporate
Total
Severance
$
3,732
$
515
$
—
$
4,247
Other cash restructuring expenses
478
2,228
—
2,706
Asset impairments/net loss on disposals
3,812
—
—
3,812
Total cost of sales
8,022
2,743
—
10,765
Severance
5,268
—
—
5,268
Other cash restructuring expenses
1,118
—
126
1,244
Asset impairments/net loss on disposals
385
—
—
385
Total selling, general and administrative expenses
6,771
—
126
6,897
Consolidated total
$
14,793
$
2,743
$
126
$
17,662
Liabilities recorded for the restructuring plans and changes therein for the first nine-months of 2018 were as follows:
Balance at December 30, 2017
Recognized Restructuring Expense
Costs Paid or Otherwise Settled
Balance at September 29, 2018
Severance
$
—
$
9,515
$
(9,095
)
$
420
Other cash restructuring expenses
1,216
3,950
(3,983
)
1,183
Total
$
1,216
$
13,465
$
(13,078
)
$
1,603
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
Amortized Intangible Assets
The components of amortized intangible assets at September 29, 2018 and December 30, 2017 were as follows:
September 29, 2018
Gross Carrying Amount
Accumulated Amortization
Weighted Average Life
Customer Relationships
$
218,492
$
130,082
13 years
Patents & Proprietary Technology
23,846
4,440
14 years
Other
7,991
6,868
5 years
$
250,329
$
141,390
December 30, 2017
Gross Carrying Amount
Accumulated Amortization
Weighted Average Life
Customer Relationships
$
200,810
$
131,062
13 years
Patents & Proprietary Technology
6,693
3,999
11 years
Other
8,532
7,228
5 years
$
216,035
$
142,289
Amortization expense for intangible assets for the thirteen and thirty-nine weeks ended September 29, 2018 and September 30, 2017, respectively was as follows:
Thirteen Weeks Ended
Thirty-nine Weeks Ended
2018
2017
2018
2017
3,721
4,025
11,176
11,792
Estimated annual amortization expense related to finite‑lived intangible assets is as follows:
Estimated Amortization Expense
2018
$
15,264
2019
16,081
2020
14,969
2021
12,885
2022
10,740
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.
21
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 September 29, 2018 and December 30, 2017 were as follows:
September 29, 2018
December 30, 2017
Year Acquired
Newmark
$
11,111
$
11,111
2004
Valmont SM
8,283
9,973
2014
Webforge
9,105
9,432
2010
Convert Italia S.p.A
8,703
—
2018
Ingal EPS/Ingal Civil Products
7,424
7,690
2010
Shakespeare
4,000
4,000
2014
Other
21,128
22,647
$
69,754
$
64,853
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. No other trade names were determined to be impaired.
Goodwill
The carrying amount of goodwill by segment as of September 29, 2018 and December 30, 2017 was as follows:
Engineered Support Structures Segment
Utility Support Structures Segment
Coatings Segment
Irrigation Segment
Other
Total
Gross balance at December 30, 2017
$
170,076
$
90,248
$
76,696
$
19,778
$
15,814
$
372,612
Accumulated impairment losses
(18,670
)
—
(16,222
)
—
—
(34,892
)
Balance at December 30, 2017
151,406
90,248
60,474
19,778
15,814
337,720
Acquisitions
40,919
41,432
—
5,503
—
87,854
Asset impairment
—
(14,355
)
—
—
—
(14,355
)
Divestiture of grinding media
—
—
—
—
(15,814
)
(15,814
)
Foreign currency translation
(4,797
)
(489
)
(380
)
(145
)
—
(5,811
)
Balance at September 29, 2018
$
187,528
$
116,836
$
60,094
$
25,136
$
—
$
389,594
22
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 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 thirty-nine weeks ended September 29, 2018 and September 30, 2017 were as follows:
2018
2017
Interest
$
23,624
$
22,732
Income taxes
36,855
52,823
23
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(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 September 29, 2018:
Net earnings attributable to Valmont Industries, Inc.
$
4,448
$
—
$
4,448
Shares outstanding (000 omitted)
22,215
137
22,352
Per share amount
$
0.20
$
—
$
0.20
Thirteen weeks ended September 30, 2017:
Net earnings attributable to Valmont Industries, Inc.
$
35,208
$
—
$
35,208
Shares outstanding (000 omitted)
22,527
224
22,751
Per share amount
$
1.56
$
(0.01
)
$
1.55
Thirty-nine weeks ended September 29, 2018:
Net earnings attributable to Valmont Industries, Inc.
$
76,689
$
—
$
76,689
Shares outstanding (000 omitted)
22,421
153
22,574
Per share amount
$
3.42
$
(0.02
)
$
3.40
Thirty-nine weeks ended September 30, 2017:
Net earnings attributable to Valmont Industries, Inc.
$
119,851
$
—
$
119,851
Shares outstanding (000 omitted)
22,505
212
22,717
Per share amount
$
5.33
$
(0.05
)
$
5.28
Basic and diluted earnings per share in the third quarter and first three quarters of 2018 were impacted by the 2018 Restructuring Plan costs of $7,858, after-tax ($0.35 per share) and $17,478, after-tax ($0.77 per share), respectively. In the third quarter of 2018, the Company impaired the goodwill and trade name for its offshore and other complex steel structures business and paid off the 2020 bonds, resulting in a charge of $15,479, after tax ($0.69 per share) and $11,115, after tax ($0.50 per share), respectively. The Company incurred acquisition due diligence costs of $2,349, after tax ($0.11 per share) and $3,155, after tax ($0.14 per share) in the third quarter and first three quarters of 2018, respectively. The Company divested of its grinding media business in the second quarter of 2018 resulting in a loss of $5,455, after-tax ($0.24 per share).
At September 29, 2018 and September 30, 2017, there were 190,021 and 0 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.
24
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 September 29, 2018 and December 30, 2017 are as follows:
Derivatives designated as hedging instruments:
Balance sheet location
September 29, 2018
December 30, 2017
Commodity forward contracts
Prepaid expenses and other assets
$
854
$
—
Foreign currency forward contracts
Prepaid expenses and other assets
4,534
—
Foreign currency forward contracts
Accrued expenses
—
(826
)
Cross currency swap contracts
Prepaid expenses and other assets
206
—
Cross currency swap contracts
Accrued expenses
(2,715
)
—
$
2,879
$
(826
)
Gains (losses) on derivatives recognized in the condensed consolidated statements of earnings for the thirteen and thirty-nine weeks ended September 29, 2018 and September 30, 2017 are as follows:
Thirteen weeks ended
Thirty-nine weeks ended
Derivatives designated as hedging instruments:
Statements of earnings location
September 29, 2018
September 30, 2017
September 29, 2018
September 30, 2017
Commodity forward contracts
Product cost of sales
$
717
$
—
$
717
$
—
Foreign currency forward contracts
Other income (expense)
230
—
230
—
Interest rate hedges
Interest expense
(395
)
(19
)
(439
)
(56
)
Cross currency swap contracts
Interest expense
206
—
206
—
$
758
$
(19
)
$
714
$
(56
)
Cash Flow Hedges
In 2018, the Company entered into steel hot rolled coil (HRC) forward contracts which qualified as a cash flow hedge of the variability in the cash flows attributable to future steel purchases. The forward contracts have 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.
25
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(8) HEDGING ACTIVITIES (Continued)
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 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.
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, in conjunction with the adoption of recently issued hedging accounting guidance (see Note 1 for further information), 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