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2: EX-31.1 Certification -- §302 - SOA'02 HTML 22K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 22K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 22K
11: R1 Cover Page HTML 71K
12: R2 Condensed Consolidated Statements of Earnings HTML 106K
13: R3 Condensed Consolidated Statements of Comprehensive HTML 62K
Income
14: R4 Condensed Consolidated Balance Sheets HTML 133K
15: R5 Condensed Consolidated Balance Sheets HTML 24K
(Parenthetical)
16: R6 Condensed Consolidated Statements of Cash Flows HTML 121K
17: R7 Condensed Consolidated Statements of Shareholders' HTML 97K
Equity
18: R8 Condensed Consolidated Statements of Shareholders' HTML 42K
Equity (Parenthetical)
19: R9 Summary of Significant Accounting Policies HTML 216K
20: R10 Acquisitions HTML 25K
21: R11 Restructuring Activities HTML 75K
22: R12 Goodwill and Intangible Assets HTML 117K
23: R13 Cash Flow Supplementary Information HTML 26K
24: R14 Earnings Per Share HTML 60K
25: R15 Derivative Financial Instruments HTML 73K
26: R16 Business Segments HTML 139K
27: R17 Summary of Significant Accounting Policies HTML 92K
(Policies)
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(Tables)
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35: R25 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 32K
Inventories (Details)
36: R26 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 52K
Impact of Change from LIFO to FIFO on Statement of
Earnings (Details)
37: R27 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 32K
Impact of Change from LIFO to FIFO on Balance
Sheet (Details)
38: R28 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 27K
Income Taxes (Details)
39: R29 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 31K
Pension Benefits (Details)
40: R30 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Stock HTML 39K
Plans (Details)
41: R31 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Fair HTML 39K
Value (Details)
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Comprehensive Income (Details)
43: R33 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 58K
Revenues (Details)
44: R34 ACQUISITIONS - Narrative (Details) HTML 77K
45: R35 RESTRUCTURING ACTIVITIES - Restructuring HTML 68K
Activities - Restructuring Expenses and Related
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For The Restructuring Plan (Details)
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Derivatives (Details)
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Derivatives (Details)
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Notional Amounts Outstanding (Details)
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(Exact name of registrant as specified in its charter)
iDelaware
i47-0351813
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
iOne Valmont Plaza,
iOmaha,
iNebraska
i68154-5215
(Address of Principal Executive Offices)
(Zip Code)
(i402) i963-1000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name
of each exchange on which registered
iCommon Stock $1.00 par value
iVMI
iNew
York Stock Exchange
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. iYesx 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). iYesx 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non‑accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
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 i☐
No x
i21,361,581
Outstanding shares of common stock as of July 23, 2020
(1) The
retained earnings balance has been revised from the amounts previously reported as a result of the change in inventory valuation method from LIFO to FIFO. Refer to Note 1 for additional information.
See accompanying notes to the condensed consolidated financial statements.
(1) The
retained earnings balance has been revised from the amounts previously reported as a result of the change in inventory valuation method from LIFO to FIFO. Refer to Note 1 for additional information.
See accompanying notes to the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(1) iSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
Condensed
Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of June 27, 2020, the Condensed Consolidated Statements of Earnings, Comprehensive Income, and Shareholders' Equity for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019, and the Condensed Consolidated Statements of Cash Flows for the twenty-six 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 June 27, 2020 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 28, 2019. 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 28, 2019 with the exception of the change in method of accounting for certain inventory, previously accounted for on the LIFO basis, so that now all inventory is valued on the
FIFO basis. In addition, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326)and early adopted Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities as released by the Securities and Exchange Commission that are discussed further at the end of footnote 1. The results of operations for the period ended June 27, 2020 are not necessarily indicative of the operating results for the full year.
iInventories
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.
Effective
December 29, 2019, the first day of fiscal 2020, the Company changed its method of accounting for certain of its inventory, previously accounted for on the LIFO basis, so that now all inventory is valued on the FIFO basis. The Company believes this change is preferable as it provides a better matching of costs with the physical flow of goods, more accurately reflects the current value of inventory presented on the Company’s Condensed Consolidated Balance Sheets, and standardizes the Company’s inventory valuation methodology.
In
accordance with ASC 250, Accounting Changes and Error Corrections, this change in method of accounting for certain inventories has been retrospectively applied to the earliest period presented. As a result of the retrospective change, the cumulative effect to retained earnings as of December 29, 2018 and December 28, 2019 was an increase of $i40,215 and $i32,854,
respectively. This change did not affect the Company's previously reported cash flows from operating, investing, or financing activities.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
i
The
impact of the change from LIFO to FIFO on the Company’s Condensed Consolidated Statements of Earnings and Comprehensive Income for the thirteen and twenty-six weeks ended June 29, 2019 is as follows:
Thirteen
weeks ended
Twenty-six weeks ended
(in 000's, except earnings per share)
As Previously Reported
Retrospectively Adjusted
Adjustment
As Previously Reported
Retrospectively Adjusted
Adjustment
Cost of sales
i520,457
i522,695
i2,238
i1,047,467
i1,050,207
i2,740
Operating
income
i63,712
i61,474
(i2,238)
i118,816
i116,076
(i2,740)
Income
tax expense
i13,961
i13,401
(i560)
i26,388
i25,703
(i685)
Net
earnings attributed to Valmont Industries, Inc
i41,397
i39,719
(i1,679)
i77,878
i75,823
(i2,055)
Comprehensive
(loss) income
i38,048
i36,370
(i1,679)
i80,083
i78,028
(i2,055)
Net
earnings per diluted share
i1.90
i1.82
(i0.08)
i3.56
i3.46
(i0.10)
The Company applied this change retrospectively to the earliest period presented. The resulting impact to the Condensed Consolidated Balance Sheet as of December 28, 2019 is as follows:
Earnings before income taxes for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019, were as follows:
Thirteen
weeks ended
Twenty-six weeks ended
2020
2019
2020
2019
United States
$
i54,237
$
i45,031
$
i107,737
$
i86,780
Foreign
(i18,621)
i9,038
(i14,695)
i16,669
$
i35,616
$
i54,069
$
i93,042
$
i103,449
/
i
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
experience as well as current facts and circumstances. An actuarial analysis is used to measure
the expense and liability associated with pension benefits.
i
The components of the net periodic pension (benefit) expense for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019 were as follows:
Thirteen
weeks ended
Twenty-six weeks ended
Net periodic (benefit) expense:
2020
2019
2020
2019
Interest cost
$
i3,160
$
i4,182
$
i6,284
$
i8,527
Expected
return on plan assets
(i5,664)
(i4,943)
(i11,262)
(i10,078)
Amortization
of actuarial loss
i720
i634
i1,431
i1,292
Net
periodic (benefit) expense
$
(i1,784)
$
(i127)
$
(i3,547)
$
(i259)
/
iStock
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 June 27, 2020, i1,187,679
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 ithree years to isix
years or on the grant's fifth anniversary. Expiration of grants is iseven years from the date of grant. Restricted stock units and awards generally vest in equal installments over ithree
years beginning on the first anniversary of the grant.
i
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 twenty-six weeks ended June
27, 2020 and June 29, 2019, respectively, were as follows:
Thirteen weeks ended
Twenty-six weeks ended
2020
2019
2020
2019
Compensation
expense
$
i2,346
$
i2,700
$
i5,671
$
i6,370
Income
tax benefits
i587
i675
i1,418
i1,593
/i
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
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 at June 27, 2020 of $i37,035
($i36,290 at December 28, 2019) represent mutual funds, invested in debt and equity securities, classified as trading securities in accordance with Accounting Standards Codification ("ASC") 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 $i170 and $i210 as of June 27,
2020 and December 28, 2019, 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
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 4 to these condensed consolidated financial statements contain additional information related to goodwill and
intangible asset impairments recognized in fiscal 2020.
iComprehensive Income (Loss)
Comprehensive income (loss) 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. iAccumulated other comprehensive income (loss) consisted of the following at June 27, 2020 and December 28, 2019:
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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
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.
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. iA breakdown by segment of revenue recognized over time and at a point in time for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019 is as follows:
respectively. Both steel and concrete utility customers are generally invoiced upon shipment or delivery of the goods to the customer's specified location with few customers that make 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 June 27, 2020 and December 28, 2019, the contract liability for revenue recognized over time was $i138,820
and $i117,945, respectively. During the thirteen and twenty-six weeks ended June 27, 2020, the Company recognized $i21,037
and$i39,277 of revenue that was included in the liability as of December 28, 2019. In the thirteen and twenty-six weeks ended June 29, 2019, the Company recognized $i897
and $i1,928 of revenue that was included in the liability as of December 29, 2018. The revenue recognized was due to applying advance payments received for projects completed during the period.
i
Recently
Adopted Accounting Pronouncements and Guarantors Disclosures
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update was intended to provide financial statement users with more decision-useful information about the expected credit losses. The Company adopted this ASU in the first quarter of 2020. The adoption of the ASU No. 2016-13 did not have a significant impact on the condensed consolidated financial statements.
The
Company early adopted Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities rules as released by the Securities and Exchange Commission on March 2, 2020, which simplify the disclosure requirements related to the Company’s registered debt
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
(Unaudited)
securities, guaranteed by certain of its subsidiaries, under Rule 3-10 and Rule 13-01 of Regulation S-X. The final rules permit the simplified disclosures to be provided either in a footnote to the Company’s consolidated financial statements or in management’s discussion and analysis of financial condition and results of operations. The Company has elected to provide the simplified disclosure within Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(2)
iACQUISITIONS
OnMay 29, 2020, the Company acquired i55%
of Energia Solar do Brasil ("Solbras") for $i4,308. Approximately $i646 of the purchase price is contingent on seller
representations and warranties that will be settled within 12 months of the acquisition date. Solbras is a leading provider of solar energy solutions for agriculture. In the preliminary purchase price allocation, goodwill of $i3,341 and customer relationships of $i3,718
were recorded and the remainder is net working capital. Goodwill is not deductible for tax purposes and the customer relationship will be amortized over i8 years. The acquisition of Solbras, located in Brazil, allows the Company to expand its product offerings in the Irrigation segment to include not only pivots, but also a sustainable and low-cost energy source to provide electricity to the units. The
Company expects to finalize the purchase price allocation in the fourth quarter of 2020. Proforma disclosures were omitted as this business does not have a significant impact on the Company's financial results.
On May 13, 2019, the Company acquired the assets of Connect-It Wireless, Inc. ("Connect-It") for $i6,034
in cash. Connect-It operates in Florida and is a manufacturer and distributor of wireless site components and safety products. In the purchase price allocation, goodwill of $i3,299 and customer relationships of $i828
were recorded and the remainder is net working capital. A portion of the goodwill is deductible for tax purposes. Connect-It is included in the ESS segment and was acquired to expand the Company's wireless component distribution network. The Company finalized the purchase price allocation in the fourth quarter of 2019.
On February 11, 2019, the Company acquired the outstanding shares of United Galvanizing ("United"), a provider of coatings services with an agreed upon purchase price of $i28,000,
with $i2,000 being contingent on seller representations and warranties that was settled in the first quarter of 2020 for $i1,522.
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 with an agreed upon purchase price of $i34,562, with i10%
being held back for seller representations and warranties that was settled in the first quarter of 2020 for $i3,481.
Acquisitions of Noncontrolling Interests
In February 2020, the Company acquired the remaining i49%
of AgSense that it did not own for $i43,983, which includes a holdback payment of $i2,200
that was made in the second quarter of 2020. The Company finalized the accounting for owning i100% of AgSense in the second quarter of 2020 which resulted in the recognition of a deferred tax asset of approximately $i7,700.
In the first quarter of 2020, the Company acquired i16% of the remaining i25%
that it did not own of Convert Italia for a cash payment of $i11,750. The purchase agreement also settled the escrow funds which the Company had paid at date of acquisition. In April 2019, the Company acquired the remaining i4.8%
of Valmont SM that it did not own for $i4,763.
As these transactions were for the acquisition of all or part of the remaining shares of a consolidated subsidiary with no change in control, they were recorded within shareholders' equity and as a financing activity in the Condensed Consolidated Statements of Cash Flows.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(3) iRESTRUCTURING ACTIVITIES
During
2020, the Company executed certain regional restructuring activities (the "2020 Plan") primarily in the ESS, Utility, and Coatings segments to reduce employment levels and exit under-performing locations.
iThe following pre-tax expenses were recognized during the second quarter of 2020:
ESS
Utility
Coatings
Corporate
Total
Severance
$
i399
$
i—
$
i135
$
i—
$
i534
Other
cash restructuring expenses
i48
i803
i32
i—
i883
Asset
impairments
i—
i2,258
i—
i—
i2,258
Total
cost of sales
i447
i3,061
i167
i—
i3,675
Severance
i242
i613
i55
i221
i1,131
Other
cash restructuring expenses
i773
i—
i0
i—
i773
Total
selling, general and administrative expenses
i1,015
i613
i55
i221
i1,904
Consolidated
total
$
i1,462
$
i3,674
$
i222
$
i221
$
i5,579
iLiabilities
recorded for the restructuring plans were as follows:
Amortization
expense for intangible assets for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019, respectively was as follows:
Thirteen weeks ended
Twenty-six weeks ended
2020
2019
2020
2019
$
i4,511
$
i4,632
$
i9,103
$
i9,022
/i
Estimated
annual amortization expense related to finite-lived intangible assets is as follows:
Estimated Amortization Expense
2020
$
i17,214
2021
i14,838
2022
i12,959
2023
i11,116
2024
i9,389
/
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.
Non-amortized intangible assets
Intangible assets with indefinite lives are not amortized and consist solely of trade names. iThe
carrying value of trade names at June 27, 2020 and December 28, 2019 are as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
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 2019. The values of each trade name was determined using the relief-from-royalty method. Based on this evaluation, ino trade names
were determined to be impaired. In conjunction with an interim second quarter 2020 goodwill impairment test, impairment indicators were noted for the Webforge and Locker trade names requiring an interim impairment test. As a result, an impairment charge of approximately $i3,900 was recognized against these itwo
trade names in fiscal 2020.
The
Company’s annual impairment test of goodwill was performed during the third quarter of 2019, using the discounted cash flow method. The estimated fair value of all of our reporting units exceeded their respective carrying value, so ino goodwill was impaired.
In April 2020, the price of a barrel of oil began a large decline and various economic forecasts show the lower price of oil will continue into the next few years. This lower price for oil and a revised assessment of the Australian market performed in conjunction with
the executed restructuring activities required the Company to re-assess the financial projections for the access systems reporting unit. This resulted in lower projected net sales, operating income, and cash flows for this reporting unit, resulting in the need for an interim impairment test. The results of the test showed that the reporting unit's carrying value was higher than its estimated fair value. Accordingly, the Company recorded a $i12,575
impairment of access system's goodwill in the second quarter of 2020.
(5) iCASH 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. iCash payments for interest and income taxes (net of refunds) for the twenty-six weeks ended June 27, 2020 and June 29, 2019 were as follows:
Net earnings attributable to Valmont Industries, Inc.
$
i75,823
$
i—
$
i75,823
Weighted
average shares outstanding (000's)
i21,810
i87
i21,897
Per
share amount
$
i3.48
$
(i0.02)
$
i3.46
/
At
June 27, 2020 and June 29, 2019, there were i296,490 and i297,170
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(7)
iDERIVATIVE FINANCIAL INSTRUMENTS
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.
iGains
(losses) on derivatives recognized in the condensed consolidated statements of earnings for the thirteen and twenty-six weeks ended June 27, 2020 and June 29, 2019 are as follows:
In 2019, 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. The forward contracts had a notional amount of $i12,128 for the
purchase of i3,500 short tons for each month from May 2019 to September 2019. The gain/(loss) realized upon settlement is recorded in product cost of sales in the condensed consolidated statements of earnings over average inventory turns. The forward contracts were closed out in the third quarter of 2019.
In May 2020, a Brazilian subsidiary with a Real functional currency entered into foreign currency
forward contracts to mitigate foreign currency risk related to a customer order with components purchased in Euros. The forward contract, which qualifies as a cash flow hedge, has a final maturity date of December 2020 and a notional amount to buy i4,500 euros in exchange for a stated amount of Brazilian Real. In March 2020, a subsidiary with a Euro functional currency entered into foreign currency
forward contracts to mitigate foreign currency risk related to a large customer order denominated in U.S. dollars. The forward contract, which qualifies as a cash flow hedge, has a final maturity date of June 2021 and a notional amount to sell $i27,500 in exchange for a stated amount of Euros.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
In the second quarter of 2020, the Company early settled their Australian dollar denominated forward currency contracts and received proceeds of $i11,983. In
the second quarter of 2019, all existing net investment hedges were early settled and the Company received proceeds of $i11,184. The proceeds/gain from these settlements will remain in Other Comprehensive Income (OCI) until either the sale or substantially complete liquidation of the related subsidiaries.
In
the second quarter of 2019, the Company entered into itwo fixed-for-fixed cross currency swaps (“CCS”), swapping U.S. dollar principal and interest payments on a portion of its i5.00%
senior unsecured notes due 2044 for Danish krone (DKK) and Euro denominated payments. The CCS were entered into in order to mitigate foreign currency risk on the Company's Euro and DKK investments and to reduce interest expense. Interest is exchanged twice per year on April 1 and October 1.
The
Company designated the full notional amount of the two CCS ($i130,000) 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
(8)
iBUSINESS SEGMENTS
The Company has ifour
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 and distribution 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, substations, and renewable energy generation equipment;
COATINGS: This segment consists of galvanizing, painting, and anodizing services to preserve and protect metal products; and
IRRIGATION: This segment consists of the manufacture of agricultural irrigation equipment, parts, services and tubular products, water management solutions, and technology for precision agriculture.
The Company evaluates the performance of its business segments based upon operating income and invested capital. The
Company does not allocate interest expense, non-operating income and deductions, or income taxes to its business segments.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that management has made in light of experience in the industries in which the Company operates, as well as management’s perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond the Company’s control) and assumptions. Management
believes that these forward-looking statements are based on reasonable assumptions. Many factors could affect the Company’s actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include, among other things, the continuing and developing effects of COVID-19 including the effects of the outbreak on the general economy and the specific effects on the Company's business and that of its customers and suppliers, risk factors described from time to time in the Company’s reports to the Securities and Exchange Commission, as well as future economic and market circumstances, industry conditions, company performance and financial results, operating efficiencies,
availability and price of raw materials, availability and market acceptance of new products, product pricing, domestic and international competitive environments, and actions and policy changes of domestic and foreign governments.
This discussion should be read in conjunction with the financial statements and notes thereto, and the management's discussion and analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2019. Segment net sales in the table below and elsewhere are presented net of intersegment sales. See Note 8 of our condensed consolidated financial statements for additional information on segment sales and intersegment sales.
24
Results
of Operations (Dollars in millions, except per share amounts)
(1) The second quarter and first half of 2020 include impairment of goodwill and intangible assets.
25
Overview
On a consolidated basis, net sales were lower in the second quarter of 2020 compared to 2019 due to lower sales in ESS, Coatings, and Irrigation segments that were partially offset by increased sales for the Utility segment. Excluding the effect from foreign currency translation, second quarter 2020 sales for ESS and Irrigation were similar to 2019. In the first half of 2020, as compared to 2019, sales decreased due to lower sales in the ESS and Coatings segments. The change in net sales in the second quarter and first half of fiscal 2020, as compared with the same periods in 2019, is as follows:
Second
quarter
Total
ESS
Utility
Coatings
Irrigation
Sales - 2019
$
700.9
$
257.5
$
209.1
$
81.1
$
153.2
Volume
(2.1)
(5.8)
14.3
(13.9)
3.3
Pricing/mix
0.8
2.0
3.6
(2.8)
(2.0)
Acquisition/(divestiture)
2.9
1.2
1.8
—
(0.1)
Currency
translation
(13.7)
(6.1)
(0.3)
(1.7)
(5.6)
Sales - 2020
$
688.8
$
248.8
$
228.5
$
62.7
$
148.8
Year-to-date
Total
ESS
Utility
Coatings
Irrigation
Sales
- 2019
$
1393.0
$
485.5
$
452.3
$
151.3
$
303.9
Volume
(9.0)
(3.6)
(7.0)
(13.3)
14.9
Pricing/mix
0.6
3.2
5.3
(3.6)
(4.3)
Acquisition/(divestiture)
2.3
2.6
1.8
—
(2.1)
Currency
translation
(23.9)
(11.5)
(1.0)
(3.1)
(8.3)
Sales - 2020
$
1,363.0
$
476.2
$
451.4
$
131.3
$
304.1
Volume
effects are estimated based on a physical production or sales measure. Since products we sell are not uniform in nature, pricing and mix relate to a combination of changes in sales prices and the attributes of the product sold. Accordingly, pricing and mix changes do not necessarily result in operating income changes.
Average steel prices for both hot rolled coil and plate were lower in North America and China in the second quarter and first half of 2020, as compared to 2019, contributing to lower cost of sales and improved gross profit.
•Connect-It Wireless, Inc. ("Connect-It") in the second quarter of 2019,
a domestic communication components business (ESS).
•In the first quarter of 2020, we acquired the remaining 49% of AgSense that the Company did not own(Irrigation).
•In the first quarter of 2020, we acquired 16% of the remaining 25% of Convert Italia that the Company did not own (Utility).
•Energia Solar Do Brasil ("Solbras") in the second quarter of 2020, a leading provider of solar energy solutions for agriculture (Irrigation).
COVID-19 Impact on Financial Results and Liquidity
We are considered an essential business because of the products and services that serve critical infrastructure sectors as defined by many governments around the world. Our manufacturing facilities in Argentina, France, Malaysia, New Zealand, Philippines, and South Africa closed late in the first quarter of 2020 due to government mandates, have all resumed
26
operations. All our manufacturing facilities are open and fully operational as of July 28, 2020. We continue to monitor incidence of COVID-19 on a continuous basis, particularly in areas reporting recent increases in infection. To protect the safety, health and well-being of employees, customers, suppliers
and communities, CDC and WHO guidelines are being followed in all facilities.
We generated positive cash flows from operating activities during the first half of 2020 and expect positive cash flows from operating activities for the full fiscal 2020 year. Our main focus is to maintain liquidity to support the working capital needs of our operations and maintain our investment grade credit rating.
•Our capital spending for the 2020 fiscal year has been reduced from the previously announced approximately $100 million to $125 million to approximately $80 to $90 million.
•We have suspended repurchase of shares to preserve financial liquidity until the COVID-19 impact is clearer.
As
a result of the evolving impact of COVID-19 on the global economy, we anticipate and are planning for slowdown in customer demand and business disruption, primarily in the Coatings and Irrigation segments. Consolidated operating income and specifically operating margin in the third quarter of 2020, is expected to be lower than the same period of 2019 as a result of the lower sales in these two segments. The ultimate magnitude of COVID-19, including the extent of its impact on the Company’s financial and operational results, cash balances and available borrowings on our line of credit, will be determined by the length of time the pandemic continues, its effect on the demand for the Company’s products and services and supply chain, as well as the effect of governmental regulations imposed in response
to the pandemic.
Currency Translation
In the second quarter and first half of 2020, we realized a decrease in operating profit, as compared with 2019, due in part to currency translation effects associated with a stronger U.S. dollar against most foreign currencies. The breakdown of this effect by segment was as follows:
Total
ESS
Utility
Coatings
Irrigation
Corporate
Second
quarter
$
(0.6)
$
(0.4)
$
0.2
$
(0.1)
$
(0.3)
$
—
Year-to-date
$
(1.2)
$
(0.6)
$
0.2
$
(0.3)
$
(0.6)
$
0.1
Gross
Profit, SG&A, and Operating Income
At a consolidated level, gross profit as a percent of sales was higher in the second quarter and first half of 2020, as compared with the same periods in 2019, due to lower raw material costs across the Company, improved selling prices across our infrastructure businesses, and improved volumes for the Irrigation segment and associated operating leverage of fixed costs. Gross profit improved for all operating segments, with the exception of Coatings that had lower sales volumes.
SG&A expenses increased in the second quarter and first half of 2020, as compared to the same periods in 2019. The increase was due to recording a partial impairment of goodwill and tradename for
the Access Systems business, higher compensation related costs including sales commissions for the North American infrastructure businesses, higher incentives due to improved operations, and salary merit increases. These increases were partially offset by lower travel costs, foreign currency translation effects, and reduced SG&A deferred compensation expense in the first half of 2020 (offset by an increase of the same amount in other expense).
In the second quarter and first half of 2020, as compared to the same periods in 2019, operating income was higher in the Utility and Irrigation segments and lower for the ESS and Coatings segments. The overall decrease in operating income in the second quarter and first half of 2020 can be attributed to the goodwill and tradename impairment for the Access Systems business, certain restructuring activities, and lower volumes for the Coatings business. The decrease
was offset by lower raw material costs, improved sales pricing for the infrastructure businesses, and improved sales volumes in the Irrigation segment.
Net Interest Expense and Debt
Net interest expense in the second quarter and first half of 2020 was similar to the same periods in 2019. Interest income was lower in the second quarter and first half of 2020, as compared to 2019, due to lower interest rates.
27
Other Income/Expenses
The change in other income/expenses in the second quarter and first half of 2020, as compared to 2019, was
due to the change in valuation of deferred compensation assets which resulted in additional other income of $1.0 million and reduced other income of $4.2 million, respectively. This amount is shown as Gain on investments (unrealized) on the condensed consolidated statements of earnings. The change related to deferred compensation assets are offset by an opposite change of the same amount in SG&A expense. The remaining change was due to fluctuations in foreign currency transaction gains/losses that was less favorable in 2020.
Income Tax Expense
Our effective income tax rate in the second quarter and first half of 2020 was 35.4% and 29.1%, compared to 24.8% and 24.9% in the second quarter and first half of 2019. The increase in the effective tax rate is a result of the partial impairment of goodwill and tradename for
the Access Systems business that is not fully tax deductible.
Earnings attributable to noncontrolling interests was lower in the second quarter and first half of 2020, as compared to 2019. The decrease can be attributed to the acquisition of the remaining noncontrolling interests of AgSense and partial acquisition of the noncontrolling interest of Convert in the first quarter of 2020.
Cash Flows from Operations
Our cash flows provided by operations was $150.7 million in the first half of fiscal 2020, as compared with $113.4 million provided by operations in the first half of 2019. The increase in operating cash flow in the first half of 2020, as compared with 2019, was due to improved working capital management. The
lower working capital is primarily attributed to an increase in accounts payable and a larger contract liability for customer billings in excess of costs and earnings.
ESS segment
Net sales were lower in the second quarter and first half of 2020 as compared to 2019, primarily driven by unfavorable foreign currency translation effects of $6.1 million and $11.5 million, respectively. Lighting, traffic, and highway safety product sales were relatively flat in the second quarter of 2020 as compared to 2019, while communication product sales volumes were higher and sales volumes of access systems were lower. In the first half of 2020, sales were higher for the lighting, traffic, and highway safety product business and lower for communication products and access
systems.
Global lighting, traffic, and highway safety product sales in the second quarter and first half of 2020 was lower by $0.5 million and higher by $14.3 million, as compared to the same periods in fiscal 2019. Sales volumes improved in North America due to a strong backlog in transportation markets, while sales volumes were down slightly in commercial markets. Europe sales volumes were lower due to the ceasing of operations in Morocco, the temporary plant shutdowns in France and India due to COVID-19, and unfavorable foreign currency translation effects. In addition, COVID-19 contributed to tempered demand for other locations that contributed to the decrease in sales. Lighting, traffic, and highway safety product sales in the Asia-Pacific region decreased in the second quarter and first half of 2020, as compared to 2019, due primarily to temporary shutdowns in India due to COVID-19.
Communication
product line sales were higher by $3.4 million in the second quarter and lower by $1.2 million in the first half of 2020, as compared with 2019. In North America, communication structure sales volumes increased in the second quarter of 2020 due to improved demand and the acquisition of Connect-It. Communication product sales in Europe improved due to new project work and Asia-Pacific sales volumes decreased primarily due to lower market activity in China.
Access Systems product line net sales decreased in the second quarter and first half of 2020, as compared to 2019, by $8.2 million and $17.9 million. Sales volumes declines were driven by Australia engineering construction spending that remained subdued negatively impacting all product lines. The business also exited the detention center and portions of the industrial product line that contributed to the sales declined along with unfavorable foreign currency translation effects.
Gross
profit was higher in the second quarter and first half of 2020, as compared to 2019, due to lower cost of raw materials across the segment and sales volume improvements in the U.S. lighting and traffic businesses. SG&A spending was higher in the second quarter and first half of 2020 due to recording a partial goodwill and tradename impairment for the
28
Access Systems business of $16.6 million and higher sales commissions and incentives due to improved operations in North America. Operating income decreased due to the goodwill and tradename impairment of the Access Systems business partially offset by lower raw material costs for all businesses and sales volume improvements in North America.
Utility segment
In
the Utility segment, sales increased in the second quarter, as compared with 2019, due to improved sales volumes for steel and concrete structures in North America and an improved sales mix. Sales for the first half of 2020 were comparable to 2019. A number of our sales contracts in North America contain provisions that tie the sales price to published steel index pricing at the time our customer issues their purchase order but that did not result in a meaningful decrease to the average selling prices for our steel utility structures product line for the first half of 2020, as compared with 2019.
Offshore and Solar sales decreased in the second quarter and first half of 2020, as compared to 2019, due to lower volumes and unfavorable currency translation effects. The decrease for both businesses can be attributed to large projects
in the prior year that did not recur.
Gross profit increased in the second quarter and first half of 2020, as compared to 2019, due to an improved sales mix, higher sale volumes and its associated operating leverage of fixed costs, as well as lower costs of steel while average selling prices were similar to prior year. In addition, the business incurred approximately $3.0 million of inspection costs during 2019 to finalize the requirements from a 2015 commercial settlement that did not recur in 2020. Partially offsetting that was a $2.2 million impairment of a facility that is classified as an asset held for sale. SG&A expense was higher in the second quarter and first half of 2020, as compared with 2019, due to higher incentives due to improved operating results in North America and $0.6 million of restructuring expenses incurred for the offshore and other complex steel structures' product line. Operating income
increased due to an improved mix of product line sales and higher sales volumes.
Coatings segment
Coatings segment sales decreased in the second quarter and first half of 2020, as compared to the same periods in 2019, due to lower volumes in North America and Asia, reduced sales pricing attributed to lower zinc costs, and unfavorable foreign currency translation. Sales volumes decreased in North America in the second quarter and first half of 2020, as compared to 2019, due primarily to the slowdown caused by COVID-19. In Asia-Pacific region, sales volumes improved in Australia, but was more than offset by decreased volumes in Asia that were impacted by sites temporarily closed during second quarter 2020 due to COVID-19. Sales pricing also declined in Asia-Pacific due to lower zinc costs and customer mix.
SG&A
expense was lower in the second quarter and first half of 2020, as compared to 2019, due to one-time expenses associated with a legal settlement in 2019. Operating income was lower in the second quarter and first half of 2020, compared to the same periods in 2019, due to sales volume decreases in North America and Asia and the associated operating deleverage of fixed costs. The decrease was partially offset by a one-time expenses associated with a legal settlement in 2019.
Irrigation segment
The decrease in Irrigation segment net sales in the second quarter of 2020, as compared to 2019, is primarily due to unfavorable foreign currency translation effects that were partially offset by sales volume improvements in both North America and international markets. Brazil drove the sales volume improvements for international irrigation that were partially
offset by unfavorable currency translation effects from a weaker Brazil real and South African rand. Sales volumes increased in North America, primarily due to increased service part sales resulting from drier weather conditions in 2020. Sales increased slightly in the first half of 2020 as compared to 2019, due to higher sales volumes in North America and international markets that were offset by unfavorable foreign currency translation effects and lower sales pricing in our tubing business. Sales of technology-related products and services continue to increase, as growers are increasing adoption of technology to reduce costs and enhance profitability.
SG&A was higher in the second quarter and first half of 2020, as compared to 2019, due to higher product development expenses. Operating income for the segment increased in the second quarter and first half of 2020 over the same periods in 2019, as a result of
lower raw material costs and higher sales volumes in international markets.
Net corporate expense
Corporate SG&A expense was higher in the second quarter and first half of 2020, as compared to 2019. The increase the second quarter is attributed to a change in valuation of deferred compensation assets which resulted in higher expense of $1.0 million. In addition, there were higher incentive accruals related to improved business performance. The increase in the first half of 2020 is due to higher incentive, partially offset by the change in valuation of deferred compensation assets which
29
resulted in lower expense of $4.2 million. The change
in deferred compensation plan assets is offset by the same amount in other income/expenses.
Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows-Net working capital was $875.0 million at June 27, 2020, as compared to $918.4 million at December 28, 2019. The decrease in net working capital in 2020 is attributed to an increase in accounts payable of $43.3 million and contract liability for customer billings in excess of costs and earnings of
$20.9 million. Cash flow provided by operations was $150.7 million in the first half of 2020, as compared with $113.4 million in the first half of 2019. The increase in operating cash flows in the first half of 2020, as compared to 2019, was primarily the result of improved working capital management.
Investing Cash Flows-Capital spending in the second quarter of fiscal 2020 was $48.2 million, as compared to $49.3 million for the same period in 2019. The decrease in investing cash outflows in the second quarter of 2020, as compared to 2019, can be attributed to a reduction in cash paid for acquisitions.
Financing Cash Flows-Our total interest-bearing debt was $795.4 million at June 27, 2020 and $787.5 million at December 28, 2019. Financing
cash flows changed from an outflow of $55.7 million in the first half of 2019 to an outflow of $92.0 million for the first half of 2020. The increase in financing cash outflows in the first half of 2020, as compared to 2019, was due to the higher amounts paid to purchase noncontrolling interests.
Guarantor Summarized Financial Information
We are providing the following information in compliance with Rule 3-10 and Rule 13-01 of Regulation S-X with respect to our 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”). The Parent is the Issuer of the notes and consolidates all Guarantors.
The financial information of Issuer and Guarantors is presented on a combined basis with intercompany balances and transactions between Issuer and Guarantors eliminated. The Issuer’s or Guarantors' amounts due from, amounts due to, and transactions with non-guarantor subsidiaries are separately disclosed.
Combined financial information is as follows:
Supplemental
Combined Parent and Guarantors Financial Information
The Board of Directors authorized the purchase of $250 million of the Company's shares without an expiration date in
October 2018. The share purchases will be funded from available working capital and short-term borrowings and will be made subject to market and economic conditions. We are not obligated to make any share repurchases under the share repurchase program and we may discontinue the share repurchase program at any time. We acquired 190,491 treasury shares for approximately $20.5 million under our share repurchase program during the first half of 2020. As of June 27, 2020, we have approximately $184.0 million open under this authorization to repurchase shares in the future. We suspended repurchase of shares at the end of the first quarter to preserve financial liquidity until the COVID-19 impact is clearer.
Our capital allocation philosophy announcement included our intention to manage our capital structure to maintain our investment grade debt
rating. Our most recent ratings were Baa3 by Moody's Investors Services, Inc., BBB- rating by Fitch Rating Services, and BBB+ rating by Standard and Poor's Rating Services. We expect to maintain a leverage ratio which will support our current investment grade debt rating.
Our debt financing at June 27, 2020 is primarily long-term debt consisting of:
•$450 million face value ($436.5 million carrying value) of senior unsecured notes that bear interest at 5.00% per annum and are due in October 2044.
•$305 million face value ($297.6 million carrying value) of unsecured notes that bear interest at 5.25% per annum and are due in October 2054.
•We
are allowed to repurchase the notes at specified prepayment premiums. Both tranches of these notes are guaranteed by certain of our subsidiaries.
At June 27, 2020 and December 28, 2019, we had $40.4 million and $29.0 million outstanding borrowings under our revolving credit agreement, respectively. The revolving credit agreement contains certain financial covenants that may limit our additional borrowing capability under the agreement. At June 27, 2020, we had the ability to borrow $544.5 million under this facility, after consideration of standby letters of credit of $15.1 million associated with certain insurance obligations and international sales commitments.
We also maintain certain short-term bank lines of credit totaling $132.3 million, $117.8 million of which was unused at June 27, 2020.
Our senior unsecured notes and revolving credit agreement each contain cross-default provisions which permit the acceleration of our indebtedness to them if we default on other indebtedness that results in, or permits, the acceleration of such other indebtedness.
The debt agreements contain covenants that require us to maintain certain coverage ratios and may limit us with respect to certain business activities, including capital expenditures. The debt agreements allow us to add estimated EBITDA from acquired businesses for periods we did not own the acquired business. The debt agreements also provide for an adjustment to EBITDA, subject to certain limitations, for non-cash
charges or gains that are non-recurring in nature.
31
Our key debt covenants are as follows:
•Leverage ratio - Interest-bearing debt is not to exceed 3.5X Adjusted EBITDA (or 3.75X Adjusted EBITDA after certain material acquisitions) of the prior four quarters; and
•Interest earned ratio - Adjusted EBITDA over the prior four quarters must be at least 2.5X our interest expense over the same period.
At June 27, 2020, we were in compliance with all covenants related to
the debt agreements. The key covenant calculations at June 27, 2020 were as follows (in 000's):
Interest-bearing debt
$
795,447
Adjusted EBITDA-last four quarters
339,824
Leverage ratio
2.34
Adjusted
EBITDA-last four quarters
$
339,824
Interest expense-last four quarters
40,270
Interest earned ratio
8.44
The calculation of Adjusted EBITDA-last four quarters (June 30, 2019 through June 27, 2020) is as follows. The last four quarters information ended June 27, 2020
is calculated by taking the full fiscal year ended December 28, 2019, subtracting the first two quarters ended June 27, 2019, and adding the first two quarters ended June 27, 2020.
Net cash flows from operations
$
344,921
Interest expense
40,270
Income tax expense
51,591
Impairment
of property, plant and equipment
(2,258)
Impairment of goodwill and intangible assets
(16,638)
Change in investment
163
Deferred income tax benefit
2,637
Noncontrolling interest
(3,713)
Stock-based
compensation
(10,888)
Pension plan expense
3,801
Contribution to pension plan
21,917
Changes in assets and liabilities
(115,865)
Other
1,669
EBITDA
317,607
Cash
restructuring expenses
3,321
Impairment of goodwill and intangible assets
16,638
Impairment of property, plant and equipment
2,258
Adjusted EBITDA
$
339,824
32
Net
earnings attributable to Valmont Industries, Inc.
$
143,482
Interest expense
40,270
Income tax expense
51,591
Depreciation and amortization expense
82,264
EBITDA
317,607
Cash
restructuring expenses
3,321
Impairment of goodwill and intangible assets
16,638
Impairment of property, plant, and equipment
2,258
Adjusted EBITDA
$
339,824
Our businesses are cyclical, but we have diversity in our markets from a product, customer and a geographical standpoint. We have demonstrated the ability to effectively manage through business cycles and maintain liquidity. We have consistently generated operating cash flows in excess of our capital expenditures. Based on our available credit facilities, recent issuance of senior unsecured notes and our history of positive operational cash flows, we believe that we have adequate liquidity to meet our needs.
We have cash balances of $353.3 million at June 27, 2020, approximately $169.7 million is held in our non-U.S. subsidiaries. If we distributed our foreign cash balances certain taxes would be applicable. At June 27, 2020, we have a liability
for foreign withholding taxes and U.S. state income taxes of $3.3 million and $0.7 million, respectively.
Financial Obligations and Financial Commitments
There have been no material changes to our financial obligations and financial commitments as described on page 34-35 in our Form 10-K for the fiscal year ended December 28, 2019.
Off Balance Sheet Arrangements
There have been no material changes in our off balance sheet arrangements as described on page 35 in our Form 10-K for the fiscal year ended December 28, 2019.
33
Critical
Accounting Policies
There were no changes in our critical accounting policies as described on pages 37-40 in our Form 10-K for the fiscal year ended December 28, 2019 during the three months ended June 27, 2020, with the exception of the change in method of accounting for certain inventory, previously accounted for on the LIFO basis, so that now all inventory is valued on the FIFO basis.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There were no material changes in the company's market risk during the quarter ended June 27,
2020. For additional information, refer to the section "Risk Management" in our Form 10-K for the fiscal year ended December 28, 2019.
Item 4. Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 is (1) accumulated and communicated to management, including the
Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
No changes in the Company's internal control over financial reporting occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
34
PART
II. OTHER INFORMATION
ITEM 1A – Risk Factors
There have been no material changes from risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K. See the discussion of the Company’s risk factors under Part I, Item 1A in each of the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019 and Quarterly Report on Form 10-Q for the quarter ended March 28, 2020.
35
PART
II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
Total
Number of Shares Purchased
Average Price paid per share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Maximum Number of Shares that may yet be Purchased under the Program (1)
(1) On
May 13, 2014, we announced a new capital allocation philosophy which included a share repurchase program. Specifically, the Board of Directors authorized the purchase of up to $500 million of the Company's outstanding common stock from time to time over twelve months at prevailing market prices, through open market or privately-negotiated transactions. On February 24, 2015 and again on October 31, 2018, the Board of Directors authorized an additional purchase of up to $250 million of the Company's outstanding common stock with no stated expiration date. As of June 27,
2020, we have acquired 6,112,945 shares for approximately $816.0 million under this share repurchase program.
List
of Issuer and Guarantor Subsidiaries. This document was filed as Exhibit 22.1 to the Company's Quarterly Report on Form 10-Q (Commission file number 001-31429) for the quarter ended March 28, 2020 and is incorporated herein by this reference.
Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
101
The following financial information from Valmont's Quarterly Report on Form 10-Q for the quarter ended June 27, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Earnings, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance
Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Shareholders' Equity, (vi) Notes to Condensed Consolidated Financial Statements and (vii) document and entity information.
104
Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101)
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf and by the undersigned hereunto duly authorized.
