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 June 30, 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting 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
22,408,197
Outstanding shares of common stock as of July 25, 2018


VALMONT INDUSTRIES, INC.

INDEX TO FORM 10-Q
 
 
Page No.
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
weeks ended June 30, 2018 and July 1, 2017
 
 
 
and twenty-six weeks ended June 30, 2018 and July 1, 2017
 
Condensed Consolidated Balance Sheets as of June 30, 2018 and December 30,
 
 
2017
 
Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended
 
 
June 30, 2018 and July 1, 2017
 
Condensed Consolidated Statements of Shareholders' Equity for the twenty-six
 
 
weeks ended June 30, 2018 and July 1, 2017
 
Notes to Condensed Consolidated Financial Statements
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
 
 
 
 
 
 
 
 
 


2



VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
(Unaudited)
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Product sales
$
598,642

 
$
632,507

 
$
1,219,128

 
$
1,205,459

Services sales
83,763

 
80,230

 
161,961

 
144,751

Net sales
682,405

 
712,737

 
1,381,089

 
1,350,210

Product cost of sales
453,021

 
477,174

 
929,285

 
904,021

Services cost of sales
54,385

 
52,283

 
107,565

 
98,304

Total cost of sales
507,406

 
529,457

 
1,036,850

 
1,002,325

Gross profit
174,999


183,280


344,239


347,885

Selling, general and administrative expenses
111,329

 
104,830

 
216,609

 
204,779

Operating income
63,670

 
78,450

 
127,630

 
143,106

Other income (expenses):
 
 
 
 
 
 
 
Interest expense
(11,791
)
 
(10,818
)
 
(22,865
)
 
(22,122
)
Interest income
1,446

 
967

 
2,713

 
1,894

Loss from divestiture of grinding media business
(6,084
)
 
—

 
(6,084
)
 
—

Other
1,844

 
(192
)
 
703

 
853

 
(14,585
)
 
(10,043
)
 
(25,533
)
 
(19,375
)
Earnings before income taxes
49,085

 
68,407

 
102,097

 
123,731

Income tax expense (benefit):
 
 
 
 
 
 
 
Current
16,724

 
27,803

 
24,437

 
29,101

Deferred
(2,319
)
 
(6,718
)
 
2,500

 
7,347

 
14,405

 
21,085

 
26,937

 
36,448

Net earnings
34,680

 
47,322

 
75,160

 
87,283

Less: Earnings attributable to noncontrolling interests
(1,720
)
 
(1,658
)
 
(2,919
)
 
(2,640
)
Net earnings attributable to Valmont Industries, Inc.
$
32,960

 
$
45,664

 
$
72,241

 
$
84,643

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.47

 
$
2.03

 
$
3.21

 
$
3.76

Diluted
$
1.46

 
$
2.01

 
$
3.18

 
$
3.73

Cash dividends declared per share
$
0.375

 
$
0.375

 
$
0.750

 
$
0.750

Weighted average number of shares of common stock outstanding - Basic (000 omitted)
22,438

 
22,517

 
22,523

 
22,494

Weighted average number of shares of common stock outstanding - Diluted (000 omitted)
22,573

 
22,740

 
22,684

 
22,700

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
 
Twenty-six Weeks Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
Net earnings
$
34,680

 
$
47,322

 
$
75,160

 
$
87,283

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
Unrealized translation gain (loss)
(46,953
)
 
21,551

 
(40,149
)
 
40,941

     Realized loss on divestiture of grinding media business recorded in earnings
9,203

 
—

 
9,203

 
—

         Gain (loss) on hedging activities:
 
 
 
 
 
 
 
      Net investment hedges
2,396

 
(550
)
 
1,607

 
(1,076
)
Realized loss on net investment hedge for grinding media business recorded in earnings
1,215

 
—

 
1,215

 
—

Amortization cost included in interest expense
25

 
18

 
44

 
37

     Loss (deferred) on interest rate hedges
(2,467
)
 
—

 
(2,467
)
 
—

     Commodity hedges
1,438

 
—

 
1,345

 
—

Other comprehensive income (loss)
(35,143
)
 
21,019

 
(29,202
)
 
39,902

Comprehensive income
(463
)
 
68,341

 
45,958

 
127,185

Comprehensive loss (income) attributable to noncontrolling interests
(1,114
)
 
(2,223
)
 
(5,861
)
 
(1,982
)
Comprehensive income attributable to Valmont Industries, Inc.
$
(1,577
)
 
$
66,118

 
$
40,097

 
$
125,203















See accompanying notes to condensed consolidated financial statements.

4


VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
 
June 30,
2018
 
December 30,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
722,588

 
$
492,805

Receivables, net
472,849

 
503,677

Inventories
381,971

 
420,948

Prepaid expenses and other assets
127,843

 
43,643

    Refundable income taxes
9,841

 
11,492

        Total current assets
1,715,092

 
1,472,565

Property, plant and equipment, at cost
1,132,074

 
1,165,687

Less accumulated depreciation and amortization
639,386

 
646,759

Net property, plant and equipment
492,688

 
518,928

Goodwill
321,362

 
337,720

Other intangible assets, net
124,549

 
138,599

Other assets
125,670

 
134,438

Total assets
$
2,779,361

 
$
2,602,250

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current installments of long-term debt
$
253,081

 
$
966

Notes payable to banks
271

 
161

Accounts payable
193,612

 
227,906

Accrued employee compensation and benefits
71,813

 
84,426

Accrued expenses
79,363

 
81,029

    Dividends payable
8,412

 
8,510

Total current liabilities
606,552

 
402,998

Deferred income taxes
34,492

 
34,906

Long-term debt, excluding current installments
736,302

 
753,888

Defined benefit pension liability
183,688

 
189,552

Deferred compensation
48,118

 
48,526

Other noncurrent liabilities
20,385

 
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
2,023,919

 
1,954,344

Accumulated other comprehensive loss
(311,166
)
 
(279,022
)
Treasury stock
(628,487
)
 
(590,386
)
Total Valmont Industries, Inc. shareholders’ equity
1,112,166

 
1,112,836

Noncontrolling interest in consolidated subsidiaries
37,658

 
38,959

Total shareholders’ equity
1,149,824

 
1,151,795

Total liabilities and shareholders’ equity
$
2,779,361

 
$
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)
 
Twenty-six Weeks Ended
 
June 30,
2018
 
July 1,
2017
Cash flows from operating activities:
 
 
 
Net earnings
$
75,160

 
$
87,283

Adjustments to reconcile net earnings to net cash flows from operations:
 
 
 
Depreciation and amortization
41,657

 
41,754

Noncash loss on trading securities
229

 
188

Impairment of property, plant and equipment
2,791

 
—

Loss on divestiture of grinding media business

6,084

 
—

Stock-based compensation
5,374

 
4,590

Defined benefit pension plan expense (benefit)
(1,159
)
 
314

Contribution to defined benefit pension plan
(731
)
 
(25,379
)
       (Gain)/loss on sale of property, plant and equipment
(287
)
 
(64
)
Deferred income taxes
2,500

 
7,347

Changes in assets and liabilities:
 
 
 
Receivables
10,664

 
(49,416
)
Inventories
(20,592
)
 
(24,963
)
Prepaid expenses and other assets
(34,096
)
 
(5,892
)
Accounts payable
(18,645
)
 
10,715

Accrued expenses
(10,523
)
 
5,252

Other noncurrent liabilities
(480
)
 
1,973

Income taxes refundable
(4,288
)
 
2,028

Net cash flows from operating activities
53,658

 
55,730

Cash flows from investing activities:
 
 
 
Purchase of property, plant and equipment
(31,816
)
 
(26,183
)
Proceeds from sale of assets
64,393

 
890

Acquisitions, net of cash acquired
(9,300
)
 
—

    Settlement of net investment hedges
(1,621
)
 
5,123

Other, net
2,404

 
(2,467
)
Net cash flows from investing activities
24,060

 
(22,637
)
Cash flows from financing activities:
 
 
 
Proceeds/(payments) under short-term agreements
130

 
(369
)
Proceeds from long-term borrowings
237,641

 
—

Principal payments on long-term borrowings
(495
)
 
(434
)
Settlement of financial derivatives
(2,467
)
 
—

Debt issuance costs
(2,322
)
 
—

Dividends paid
(17,003
)
 
(16,913
)
Dividends to noncontrolling interest
(4,852
)
 
(2,889
)
Purchase of noncontrolling interest
(5,510
)
 
—

Purchase of treasury shares
(43,999
)
 
—

Proceeds from exercises under stock plans
5,711

 
10,168

Purchase of common treasury shares—stock plan exercises
(1,769
)
 
(3,056
)
Net cash flows from financing activities
165,065

 
(13,493
)
Effect of exchange rate changes on cash and cash equivalents
(13,000
)
 
16,106

Net change in cash and cash equivalents
229,783

 
35,706

Cash, cash equivalents, and restricted cash—beginning of year
492,805

 
412,516

Cash, cash equivalents, and restricted cash—end of period
$
722,588

 
$
448,222

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
—

 
—

 
84,643

 
—

 
—

 
2,640

 
87,283

Other comprehensive income (loss)
—

 
—

 
—

 
40,560

 
—

 
(658
)
 
39,902

Cash dividends declared
—

 
—

 
(16,939
)
 
—

 
—

 
—

 
(16,939
)
Dividends to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(2,889
)
 
(2,889
)
Stock plan exercises; 19,086 shares acquired
—

 
—

 
—

 
—

 
(3,056
)
 
—

 
(3,056
)
Stock options exercised; 84,432 shares issued
—

 
(4,590
)
 
3,448

 
—

 
11,310

 
—

 
10,168

Stock option expense
—

 
2,578

 
—

 
—

 
—

 
—

 
2,578

Stock awards; 5,677 shares issued
—

 
2,012

 
—

 
—

 
801

 
—

 
2,813

Balance at July 1, 2017
$
27,900

 
$
—

 
$
1,945,874

 
$
(305,799
)
 
$
(603,726
)
 
$
38,197

 
$
1,102,446

Balance at December 30, 2017
$
27,900

 
$
—

 
$
1,954,344

 
$
(279,022
)
 
$
(590,386
)
 
$
38,959

 
$
1,151,795

Net earnings
—

 
—

 
72,241

 
—

 
—

 
2,919

 
75,160

Other comprehensive income (loss)
—

 
—

 
—

 
(32,144
)
 
—

 
2,942

 
(29,202
)
Cash dividends declared
—

 
—

 
(16,893
)
 
—

 
—

 
—

 
(16,893
)
Dividends to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(4,852
)
 
(4,852
)
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
—

 
—

 
—

 
—

 
—

 
3,200

 
3,200

Purchase of treasury shares; 305,256 shares acquired
—

 
—

 
—

 
—

 
(43,999
)
 
—

 
(43,999
)
Stock plan exercises; 11,938 shares acquired
—

 
—

 
—

 
—

 
(1,769
)
 
—

 
(1,769
)
Stock options exercised; 46,213 shares issued
—

 
(4,459
)
 
3,418

 
—

 
6,752

 
—

 
5,711

Stock option expense
—

 
2,151

 
—

 
—

 
—

 
—

 
2,151

Stock awards; 7,692 shares issued
—

 
2,308

 
—

 
—

 
915

 
—

 
3,223

Balance at June 30, 2018
$
27,900

 
$
—

 
$
2,023,919

 
$
(311,166
)
 
$
(628,487
)
 
$
37,658

 
$
1,149,824










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 June 30, 2018, the Condensed Consolidated Statements of Earnings and Comprehensive Income for the thirteen and twenty-six weeks ended June 30, 2018 and July 1, 2017, and the Condensed Consolidated Statements of Cash Flows and Shareholders' Equity 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 30, 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 June 30, 2018 are not necessarily indicative of the operating results for the full year.
Inventories
Approximately 37% and 37% of inventory is valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market as of June 30, 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 $46,459 and $43,727 at June 30, 2018 and December 30, 2017, respectively.
Inventories consisted of the following:
 
June 30,
2018
 
December 30,
2017
Raw materials and purchased parts
$
191,918

 
$
183,029

Work-in-process
19,500

 
30,671

Finished goods and manufactured goods
217,012

 
250,975

Subtotal
428,430

 
464,675

Less: LIFO reserve
46,459

 
43,727

 
$
381,971

 
$
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 twenty-six weeks ended June 30, 2018 and July 1, 2017, were as follows:
    
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
2018
 
2017
 
2018
 
2017
United States
$
42,336

 
$
50,773

 
$
84,101

 
$
86,197

Foreign
6,749

 
17,634

 
17,996

 
37,534

 
$
49,085

 
$
68,407

 
$
102,097

 
$
123,731

The Company estimated and recognized provisional amounts at December 30, 2017 for the following aspect of the 2017 Tax Act:
•
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 approximately $400,000 to tax at certain specified rates less associated foreign tax credits. The Company recorded a provisional Transition Tax obligation of $9,890.
•
Indefinite reinvestment assertion: The Company's position is 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 $10,373 and $1,300, respectively. The Company also continues to gather additional information to determine its permanently reinvested position with respect to future foreign earnings.
•
No adjustments to these 2017 Tax Act amounts were recognized during the first half of 2018. However, the Company may adjust these provisional amounts in future quarters 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 twenty-six weeks ended June 30, 2018 and July 1, 2017 were as follows:
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
Net periodic (benefit) expense:
2018
 
2017
 
2018
 
2017
Interest cost
$
4,486

 
$
4,478

 
$
9,202

 
$
8,799

Expected return on plan assets
(5,815
)
 
(5,054
)
 
(11,929
)
 
(9,931
)
Amortization of actuarial loss
764

 
736

 
1,568

 
1,446

Net periodic expense (benefit)
$
(565
)
 
$
160

 
$
(1,159
)
 
$
314


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 June 30, 2018, 1,700,000 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 twenty-six weeks ended June 30, 2018 and July 1, 2017, respectively, were as follows:
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
2018
 
2017
 
2018
 
2017
Compensation expense
$
2,599

 
$
2,096

 
$
5,374

 
$
4,590

Income tax benefits
650

 
807

 
1,344

 
1,767

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 $39,508 ($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 $1,686 and $1,951 as of June 30, 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
June 30, 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
$
41,194

 
$
41,194

 
$
—

 
$
—

    
 
 
 
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

 
$
—

 
$
—

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 June 30, 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)
(43,091
)
 
529

 
—

 
(42,562
)
Divestiture of grinding media business
9,203

 
1,215

 
—

 
10,418

Balance at June 30, 2018
$
(205,287
)
 
$
8,101

 
$
(113,980
)
 
$
(311,166
)
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:


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)
Balance Sheet
December 30,
2017
 
ASC 606 Adjustments
 
December 31,
2017
Assets
 
 
 
 
 
Inventories
$
420,948

 
$
(36,243
)
 
$
384,705

Prepaid expenses and other current assets
43,643

 
51,507

 
95,150

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 weeks and twenty-six weeks ended June 30, 2018:
Balance Sheet
As Reported
 
Balance Excluding ASC 606 Effects
 
Change
Assets
 
 
 
 
 
Inventories
$
381,971

 
$
436,414

 
$
(54,443
)
Prepaid expenses and other assets
127,843

 
53,829

 
74,014

Liabilities and shareholders' equity
 
 
 
 
 
Accrued expenses
79,363

 
75,060

 
4,303

Deferred income taxes
34,492

 
30,535

 
3,957

Retained earnings
2,023,919

 
2,012,608

 
11,311

 
Thirteen Weeks Ended June 30, 2018
 
Twenty-six Weeks Ended June 30, 2018
Statement of Earnings
As Reported
 
Balance Excluding ASC 606 Effects
 
Change
 
As Reported
 
Balance Excluding ASC 606 Effects
 
Change
Net Sales
$
682,405

 
$
687,953

 
$
(5,548
)
 
$
1,381,089

 
$
1,358,827

 
$
22,262

Operating Income
$
63,670

 
$
66,707

 
$
(3,037
)
 
$
127,630

 
$
125,592

 
$
2,038

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.
    


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)
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.
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.
    

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)
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 twenty-six weeks ended June 30, 2018 is as follows:
 
Point in Time
 
Over Time
 
Point in Time
 
Over Time
 
Thirteen weeks ended June 30, 2018
 
Thirteen weeks ended June 30, 2018
 
Twenty-six weeks ended June 30, 2018
 
Twenty-six weeks ended June 30, 2018
Utility Support Structures
$
—

 
$
196,531

 
$
—

 
$
406,390

Engineered Support Structures
237,720

 
8,321

 
444,914

 
17,043

Coatings
74,539

 
—

 
142,997

 
—

Irrigation
157,800

 
2,813

 
341,034

 
5,631

Other
4,681

 
—

 
23,080

 
—

  Total
$
474,740

 
$
207,665

 
$
952,025

 
$
429,064

The Company's contract asset as of June 30, 2018 is $92,585. This amount is included within prepaid expenses and other assets line item within current assets. 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 June 30, 2018 and December 30, 2017, the contract liability for revenue recognized over time was $4,669 and $7,368. The contract liability is included in Accrued Expenses on the Condensed Consolidated Balance Sheets. During the twenty-six weeks ended June 30, 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.
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 June 30, 2018 and December 30, 2017 are as follows:
Derivatives designated as hedging instruments:
Balance sheet location
 
June 30, 2018
 
December 30, 2017
Commodity forward contracts
Prepaid expenses and other assets
 
$
1,345

 
$
—

Foreign currency forward contracts
Prepaid expenses and other assets
 
2,005

 
—

Foreign currency forward contracts
Accrued expenses
 
—

 
(826
)
 
 
 
$
3,350

 
$
(826
)

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 the second quarter of 2016, the Company entered into a one-year foreign currency forward contract which qualified as a net investment hedge, in order to mitigate foreign currency risk on a portion of our investments denominated in British pounds. The forward contract had a notional amount to sell British pounds and receive $44,000, and matured in May 2017. The realized gain of $5,123 ($3,150 after tax) has been deferred in other comprehensive income (OCI) where it will remain until the Company's net investments in its British subsidiaries are divested.
In the third quarter of 2017, the Company entered into 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. The Company announced its intention to divest of this business in August 2017 and finalized the sale in the second quarter. The forward contracts had a maturity date of January 2018 and a notional amount to sell British pounds and Australian dollars to receive $24,059 and $21,222, respectively. As regulatory approval was still pending at maturity of the contracts, the Company chose to extend the Australian dollar contract through April 2018 which was the planned date of divestiture. 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 first quarter of 2018, the Company entered into a steel hot rolled coil forward contract which qualified as a cash flow hedge of the variability in the cash flows attributable to future steel purchases. The forward contract has a notional amount of $7,142 for the purchase of 1,500 short tons for each month from July 2018 to December 2018. During the second quarter of 2018, the Company entered into an additional steel hot rolled coil forward contract with a notional amount of $7,185 for an additional 2,000 short tons for each month from July to September 2018 and 1,000 short tons for each month from October to December 2018. The unrealized gain on the hedges of $1,345 is recorded in OCI. The gain/(loss) upon settlement will be recognized in earnings based on average inventory turns.
In the second quarter of 2018, the Company entered into a two foreign currency forward contracts which qualified as net investment hedges, each for a two year term, to mitigate foreign currency risk of the Company's investment in its Australian dollar and euro denominated businesses. The forward contracts have a maturity date of May 2020 and notional amounts to sell Australian dollars and euro to receive $100,000 and $50,000, respectively. The unrealized gain recorded in OCI for the Australian dollar and euro net investment hedges at June 30, 2018 are $857 and $1,148, respectively.
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 a contract to lock in the interest rate related to the issuance of the 2044 Notes and an additional contract to lock in the interest rate on the 2054 Notes. These contracts, with a combined notional amount of $175,000, were executed to hedge the risk of potential fluctuations in the treasury rates which would change the amount of net proceeds received from the debt offering. 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.






15

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)
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.
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 $160 and $314 of DPP net periodic pension expense for second quarter and first half 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 June 30, 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.

16

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


(2) ACQUISITIONS
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. Proforma disclosures were omitted as this business does not have a significant impact on the Company's financial results.
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.
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.


17

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 ($334) and ($913) for the thirteen and twenty-six weeks ended June 30, 2018, and $1,859 and $3,945 for the thirteen and twenty-six weeks ended July 1, 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.

18

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


(4) RESTRUCTURING ACTIVITIES    
In February 2018, the Company decided upon certain regional restructuring activities (the "2018 Plan") of approximately $20,000, primarily in the ESS segment. The Company expects to incur $13,500 of pre-tax restructuring expenses in cost of sales and $6,500 of pre-tax restructuring expense in SG&A in 2018. Within the $20,000 are expected pre-tax asset impairments of approximately $5,000.

The following pre-tax expense were recognized during the second quarter of 2018:
 
 
ESS
 
Utility
 
Corporate
 
Total
Severance
 
$
1,603

 
$
515

 
$
—

 
$
2,118

Other cash restructuring expenses
 
152

 
959

 
—

 
1,111

Asset impairments/net loss on disposals
 
1,261

 
—

 
—

 
1,261

   Total cost of sales
 
3,016

 
1,474

 
—

 
4,490

 
 
 
 
 
 
 
 
 
Severance
 
1,533

 
—

 
—

 
1,533

Other cash restructuring expenses
 
485

 
—

 
126

 
611

Asset impairments/net loss on disposals
 
385

 
—

 
—

 
385

  Total selling, general and administrative expenses
 
2,403

 
—

 
126

 
2,529

      Consolidated total
 
$
5,419

 
$
1,474

 
$
126

 
$
7,019


In the first half of 2018, the Company recognized the following pre-tax restructuring expenses:
 
 
ESS
 
Utility
 
Corporate
 
Total
Severance
 
$
2,026

 
$
515

 
$
—

 
$
2,541

Other cash restructuring expenses
 
152

 
1,731

 
—

 
1,883

Asset impairments/net loss on disposals
 
2,406

 
—

 
—

 
2,406

   Total cost of sales
 
4,584

 
2,246

 
—

 
6,830

 
 
 
 
 
 
 
 
 
Severance
 
3,511

 
—

 
—

 
3,511

Other cash restructuring expenses
 
567

 
—

 
126

 
693

Asset impairments/net loss on disposals
 
385

 
—

 
—

 
385

  Total selling, general and administrative expenses
 
4,463

 
—

 
126

 
4,589

      Consolidated total
 
$
9,047

 
$
2,246

 
$
126

 
$
11,419

    
Liabilities recorded for the restructuring plans and changes therein for the first half of 2018 were as follows:
 
 
Balance at December 30, 2017
 
Recognized Restructuring Expense
 
Costs Paid or Otherwise Settled
 
Balance at June 30, 2018
Severance
 
$
—

 
$
6,052

 
$
(6,052
)
 
$
—

Other cash restructuring expenses
 
1,216

 
2,576

 
(2,609
)
 
1,183

   Total
 
$
1,216

 
$
8,628

 
$
(8,661
)
 
$
1,183


19

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


(5) GOODWILL AND INTANGIBLE ASSETS
Amortized Intangible Assets
The components of amortized intangible assets at June 30, 2018 and December 30, 2017 were as follows:
 
June 30, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Weighted
Average
Life
Customer Relationships
$
188,767

 
$
126,904

 
13 years
Proprietary Software & Database
3,589

 
3,075

 
8 years
Patents & Proprietary Technology
7,225

 
4,238

 
11 years
Other
4,496

 
3,789

 
3 years
 
$
204,077

 
$
138,006

 
 
 
December 30, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Weighted
Average
Life
Customer Relationships
$
200,810

 
$
131,062

 
13 years
Proprietary Software & Database
3,671

 
3,107

 
8 years
Patents & Proprietary Technology
6,693

 
3,999

 
11 years
Other
4,861

 
4,121

 
3 years
 
$
216,035

 
$
142,289

 
 
Amortization expense for intangible assets for the thirteen and twenty-six weeks ended June 30, 2018 and July 1, 2017, respectively was as follows:
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
2018
 
2017
 
2018
 
2017
3,572

 
3,903

 
7,455

 
7,767

Estimated annual amortization expense related to finite‑lived intangible assets is as follows:
 
Estimated
Amortization
Expense
2018
$
14,187

2019
12,903

2020
11,804

2021
9,748

2022
7,573

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.

20

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


(5) GOODWILL AND INTANGIBLE ASSETS (Continued)
Non-amortized intangible assets
Intangible assets with indefinite lives are not amortized. The carrying values of trade names at June 30, 2018 and December 30, 2017 were as follows:
 
June 30,
2018
 
December 30,
2017
 
Year Acquired
Newmark
$
11,111

 
$
11,111

 
2004
Valmont SM
9,717

 
9,973

 
2014
Webforge
9,230

 
9,432

 
2010
Ingal EPS/Ingal Civil Products
7,526

 
7,690

 
2010
Shakespeare
4,000

 
4,000

 
2014
Other
16,894

 
22,647

 
 
 
$
58,478

 
$
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 2017. The values of each trade name was determined using the relief-from-royalty method. Based on this evaluation, no trade names were determined to be impaired.
Goodwill
The carrying amount of goodwill by segment as of June 30, 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
—

 
—

 
—

 
3,922

 
—

 
3,922

Divestiture of grinding media
—

 
—

 
—

 
—

 
(15,814
)
 
(15,814
)
Foreign currency translation
(3,443
)
 
(380
)
 
(527
)
 
(116
)
 
—

 
(4,466
)
Balance at June 30, 2018
$
147,963

 
$
89,868

 
$
59,947


$
23,584

 
$
—

 
$
321,362


The Company’s annual impairment test of goodwill was performed during the third quarter of 2017. As a result of that testing, the Company determined that its goodwill was not impaired, as the valuation of the reporting units exceeded their respective carrying values. The Company's offshore and other complex steel structures reporting unit with $14,464 of goodwill, is the reporting unit that did not have a substantial excess of estimated fair value over its carrying value. The Company continues to monitor changes in global market conditions, including commodity prices, which could impact future results of any of its reporting units.

21

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


(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 twenty-six weeks ended June 30, 2018 and July 1, 2017 were as follows:
 
2018
 
2017
Interest
$
19,448

 
$
22,113

Income taxes
22,796

 
26,966

(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 June 30, 2018:
 
 
 
 
 
Net earnings attributable to Valmont Industries, Inc.
$
32,960

 
$
—

 
$
32,960

Shares outstanding (000 omitted)
22,438

 
135

 
22,573

Per share amount
$
1.47

 
$
(0.01
)
 
$
1.46

Thirteen weeks ended July 1, 2017:
 
 
 
 
 
Net earnings attributable to Valmont Industries, Inc.
$
45,664

 
$
—

 
$
45,664

Shares outstanding (000 omitted)
22,517

 
223

 
22,740

Per share amount
$
2.03

 
$
(0.02
)
 
$
2.01

Twenty-six weeks ended June 30, 2018:
 
 
 
 
 
Net earnings attributable to Valmont Industries, Inc.
$
72,241

 
$
—

 
$
72,241

Shares outstanding (000 omitted)
22,523

 
161

 
22,684

Per share amount
$
3.21

 
$
(0.03
)
 
$
3.18

Twenty-six weeks ended July 1, 2017:
 
 
 
 
 
Net earnings attributable to Valmont Industries, Inc.
$
84,643

 
$
—

 
$
84,643

Shares outstanding (000 omitted)
22,494

 
206

 
22,700

Per share amount
$
3.76

 
$
(0.03
)
 
$
3.73

Basic and diluted earnings per share in the second quarter and first half of 2018 were impacted by the 2018 Restructuring Plan costs of $6,295, after-tax ($0.28 per share) and $9,620, after-tax ($0.43 per share), respectively. In addition, 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 June 30, 2018 and July 1, 2017, there were 145,105 and 84,712 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.

22

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


(8) LONG-TERM DEBT
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.
Long-term debt is as follows:
 
June 30,
2018
 
December 30,
2017
5.00% senior unsecured notes due 2044(a)
$
450,000

 
$
250,000

5.25% senior unsecured notes due 2054(b)
305,000

 
250,000

Unamortized discount on 5.00% and 5.25% senior unsecured notes (a)(b)
(21,624
)
 
(4,312
)
6.625% senior unsecured notes due 2020(c)
250,200

 
250,200

Unamortized premium on 6.625 senior unsecured notes (c)
2,018

 
2,545

Revolving credit agreement (d)
—

 
—

IDR Bonds(e)
8,500

 
8,500

Other notes
3,456

 
4,033

Debt issuance costs
(8,167
)
 
(6,112
)
Long-term debt
989,383

 
754,854

Less current installments of long-term debt
253,081

 
966

Long-term debt, excluding current installments
$
736,302

 
$
753,888

(a)
The 5.00% senior unsecured notes due 2044 include an aggregate principal amount of $450,000 on which interest is paid and an unamortized discount balance of $14,053 at June 30, 2018. The notes bear interest at 5.000% per annum and are due on October 1, 2044. The discount is amortized and recognized as interest expense as interest payments are made over the term of the notes. The notes may be repurchased prior to maturity in whole, or in part, at any time at 100% of their principal amount plus a make-whole premium and accrued and unpaid interest. These notes are guaranteed by certain subsidiaries of the Company.
(b)
The 5.25% senior unsecured notes due 2054 include an aggregate principal amount of $305,000 on which interest is paid and an unamortized discount balance of $7,571 at June 30, 2018. The notes bear interest at 5.250% per annum and are due on October 1, 2054. The discount is amortized and recognized as interest expense as interest payments are made over the term of the notes. The notes may be repurchased prior to maturity in whole, or in part, at any time at 100% of their principal amount plus a make-whole premium and accrued and unpaid interest. These notes are guaranteed by certain subsidiaries of the Company.
(c)
The 6.625% senior unsecured notes due 2020, following a partial tender offer in September 2014, include a remaining aggregate principal amount of $250,200 on which interest is paid and an unamortized premium balance of $2,018 at June 30, 2018. The notes bear interest at 6.625% per annum and are due on April 1, 2020. The remaining premium will be amortized against interest expense as interest payments are made over the term of the notes. The notes may be redeemed prior to maturity in whole, or in part, at any time at 100% of their principal amount plus a make-whole premium and accrued and unpaid interest. These notes are guaranteed by certain subsidiaries of the Company.
On June 11, 2018, the Company notified the holders of the 2020 bonds of its plan to redeem all of these bonds. On July 9, 2018, the Company redeemed all $250,200 of the 2020 bonds at a make-whole redemption price equal to approximately $266,000 plus approximately $3,600 of accrued and unpaid interest on the notes from April 20, 2018

23

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


(8) LONG-TERM DEBT (Continued)
to July 8, 2018. The Company recognized approximately $14,800 of redemption related expenses, including the recognition of the unamortized premium, in the third quarter of 2018.
(d)
On October 18, 2017, the Company amended and restated its revolving credit facility with JP Morgan Chase Bank, N.A., as Administrative Agent, and the other lenders party thereto. The credit facility provides for $600,000 of committed unsecured revolving credit loans.  The Company may increase the credit facility by up to an additional $200,000 at any time, subject to lenders increasing the amount of their commitments. This amendment extends the maturity date of the credit facility from October 17, 2019 to October 18, 2022 and increases the available borrowings in foreign currencies from $200 million to $400 million. The interest rate on the borrowings will be, at the Company's option, either:
(i)
LIBOR (based on a 1, 2, 3 or 6 month interest period, as selected by the Company) plus 100 to 162.5 basis points, depending on the credit rating of the Company's senior debt published by Standard & Poor's Rating Services and Moody's Investors Service, Inc., or;
(ii)
the higher of
•
the prime lending rate,
•
the Federal Funds rate plus 50 basis points, and
•
LIBOR (based on a 1 month interest period) plus 100 basis points,
plus, in each case, 0 to 62.5 basis points, depending on the credit rating of the Company's senior debt published by Standard & Poor's Rating Services and Mood's Investors Service, Inc.
At June 30, 2018, the Company had no outstanding borrowings under the revolving credit facility. The revolving credit facility has a maturity date of October 18, 2022 and contains certain financial covenants that may limit additional borrowing capability under the agreement. At June 30, 2018, the Company had the ability to borrow $585,350 under this facility, after consideration of standby letters of credit of $14,650 associated with certain insurance obligations. We also maintain certain short-term bank lines of credit totaling $110,940, $110,670 of which was unused at June 30, 2018.
(e)
The Industrial Development Revenue Bonds were issued to finance the construction of a manufacturing facility in Jasper, Tennessee. Variable interest is payable until final maturity on June 1, 2025. The effective interest rates at June 30, 2018 and December 30, 2017 were 2.96% and 2.00%, respectively.
The lending agreements include certain maintenance covenants, including financial leverage and interest coverage. The Company was in compliance with all financial debt covenants at June 30, 2018. The minimum aggregate maturities of long-term debt for 2018 is $250,685 and each of the five years following 2018 are: $820, $824, $829, $499 and $0.
The obligations arising under the 5.00% senior unsecured notes due 2044, the 5.25% senior unsecured notes due 2054, the 6.625% senior unsecured notes due 2020, and the revolving credit facility are guaranteed by the Company and its wholly-owned subsidiaries PiRod, Inc., Valmont Coatings, Inc., Valmont Newmark, Inc., and Valmont Queensland Pty. Ltd.


24

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


(9) BUSINESS SEGMENTS
In the fourth quarter of 2017, the Company's management structure and reporting was changed to reflect management's expectations of the future growth of certain product lines and to take into consideration the expected divestiture of the grinding media business which historically was reported in the Energy and Mining segment. Grinding media is reported in "Other" and was sold in the second quarter of 2018. The access systems applications product line is now part of the Engineered Support Structures ("ESS") segment and the offshore and other complex structures product line is now part of the Utility segment. The segment financial information have been accordingly reclassified in this report to reflect these changes, for all periods presented.

The Company has four reportable segments based on its management structure. Each segment is global in nature with a manager responsible for segment operational performance and the allocation of capital within the segment. Net corporate expense is net of certain service‑related expenses that are allocated to business units generally on the basis of employee headcounts.

Reportable segments are as follows:

ENGINEERED SUPPORT STRUCTURES: This segment consists of the manufacture of engineered metal and composite structures and components for lighting, traffic, and wireless communication markets, engineered access systems, integrated solutions for smart cities, and highway safety products;

UTILITY SUPPORT STRUCTURES: This segment consists of the manufacture of engineered steel and concrete structures for the global utility transmission, distribution, and generation applications and on and offshore and other complex steel structures used in energy generation and distribution outside of North America, and inspection services;
COATINGS: This segment consists of galvanizing, painting, and anodizing services; and
IRRIGATION: This segment consists of the manufacture of agricultural irrigation equipment, parts, services, tubular products, water management solutions, and technology for precision agriculture.
In addition to these four reportable segments, the Company had other businesses and activities that individually are not more than 10% of consolidated sales, operating income or assets. This includes the manufacture of forged steel grinding media for the mining industry and is reported in the "Other" category.
The Company evaluates the performance of its business segments based upon operating income and invested capital. The Company does not allocate LIFO expense, interest expense, non-operating income and deductions, or income taxes to its business segments.

25

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


(9) BUSINESS SEGMENTS (Continued)
Summary by Business
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
SALES:
 
 
 
 
 
 
 
Engineered Support Structures segment:
 
 
 
 
 
 
 
Lighting, Traffic, and Highway Safety Products
$
178,930

 
$
161,474

 
$
339,374

 
$
302,276

    Communication Products
39,592

 
43,813

 
73,705

 
75,289

Access Systems
32,189

 
31,516

 
62,586

 
64,187

Engineered Support Structures segment
250,711

 
236,803

 
475,665

 
441,752

Utility Support Structures segment:
 
 
 
 
 
 
 
Steel
146,117

 
163,079

 
310,100

 
311,433

Concrete
30,185

 
22,906

 
53,847

 
49,110

Offshore and Other Complex Steel Structures
21,417

 
24,619

 
43,634

 
50,326

Utility Support Structures segment
197,719

 
210,604

 
407,581

 
410,869

Coatings segment
91,572

 
79,781

 
176,519

 
153,249

Irrigation segment
162,936

 
188,287

 
350,889

 
355,511

Other
4,681

 
21,072

 
23,080

 
40,666

Total
707,619

 
736,547

 
1,433,734

 
1,402,047

INTERSEGMENT SALES:
 
 
 
 
 
 
 
Engineered Support Structures segment
4,670

 
5,525

 
13,708

 
17,398

Utility Support Structures segment
1,188

 
982

 
1,191

 
1,217

Coatings segment
17,033

 
15,181

 
33,522

 
29,317

Irrigation segment
2,323

 
2,122

 
4,224

 
3,905

Other
—

 
—

 
—

 
—

Total
25,214

 
23,810

 
52,645

 
51,837

NET SALES:
 
 
 
 
 
 
 
Engineered Support Structures segment
246,041

 
231,278

 
461,957

 
424,354

Utility Support Structures segment
196,531

 
209,622

 
406,390

 
409,652

Coatings segment
74,539

 
64,600

 
142,997

 
123,932

Irrigation segment
160,613

 
186,165

 
346,665

 
351,606

Other
4,681

 
21,072