Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Forward‑Looking Statements
Management’s discussion and analysis, and other sections of this annual report, contain 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, 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.
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial position. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes.
This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year en ded December 31, 2020 .
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General
2021 2020 Change
2021 - 2020 2019 Change
2020 - 2019
Dollars in millions, except per share amounts
Consolidated
Net sales
$ 3,501.6 $ 2,895.4 20.9 % $ 2,767.0 4.6 %
Gross profit
883.9 765.5 15.5 % 682.7 12.1 %
as a percent of sales
25.2 % 26.4 % 24.7 %
SG&A expense
597.1 539.6 10.7 % 454.8 18.6 %
as a percent of sales
17.1 % 18.6 % 16.4 %
Operating income
286.8 225.9 27.0 % 227.9 (0.9) %
as a percent of sales
8.2 % 7.8 % 8.2 %
Net interest expense
41.4 38.7 7.0 % 36.2 6.9 %
Effective tax rate
23.6 % 25.7 % 23.9 %
Net earnings attributable to Valmont Industries, Inc
195.6 140.7 39.0 % 146.4 (3.9) %
Diluted earnings per share
$ 9.10 $ 6.57 38.5 % $ 6.73 (2.4) %
Utility Support Structures Segment
Net sales
$ 1,121.0 $ 1,002.2 11.9 % $ 885.6 13.2 %
Gross profit
197.1 210.4 (6.3) % 187.6 12.2 %
SG&A expense
129.5 109.6 18.2 % 99.8 9.8 %
Operating income
67.6 100.8 (32.9) % 87.8 14.8 %
Engineered Support Structures Segment
Net sales
$ 1,064.4 $ 983.5 8.2 % $ 1,002.1 (1.9) %
Gross profit
296.1 271.4 9.1 % 229.0 18.5 %
SG&A expense
180.6 206.1 (12.4) % 163.4 26.1 %
Operating income
115.5 65.3 76.9 % 65.6 (0.5) %
Coatings Segment
Net sales
$ 299.1 $ 269.6 10.9 % $ 300.6 (10.3) %
Gross profit
92.2 86.4 6.7 % 94.2 (8.3) %
SG&A expense
41.9 43.4 (3.5) % 43.2 0.5 %
Operating income
50.3 43.0 17.0 % 51.0 (15.7) %
Irrigation Segment
Net sales
$ 1,017.1 $ 640.1 58.9 % $ 578.7 10.6 %
Gross profit
297.7 197.3 50.9 % 171.9 14.8 %
SG&A expense
160.6 114.2 40.6 % 100.2 14.0 %
Operating income
137.1 83.1 65.0 % 71.7 15.9 %
Net corporate expense
Gross profit
$ 0.8 $ — — $ — — %
SG&A expense
84.5 66.3 27.5 % 48.2 37.6 %
Operating loss
(83.7) (66.3) 26.2 % (48.2) 37.6 %
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RESULTS OF OPERATIONS
FISCAL 2021 COMPARED WITH FISCAL 2020
Overview
The increase in net sales in 2021, as compared with 2020, was due to higher sales in all segments. The changes in net sales in 2021, as compared with 2020, were as follows:
Total Utility ESS Coatings Irrigation
Sales - 2020 $ 2,895.3 $ 1,002.1 $ 983.5 $ 269.6 $ 640.1
Volume 241.4 44.6 (29.6) (0.4) 226.8
Pricing/mix 321.3 69.7 85.5 21.6 144.5
Acquisition 10.9 2.2 — — 8.7
Currency translation 32.7 2.4 25.0 8.3 (3.0)
Sales - 2021 $ 3,501.6 $ 1,121.0 $ 1,064.4 $ 299.1 $ 1,017.1
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 higher in 2021, as compared to 2020, contributing to higher cost of sales and lower gross profit margin for the Utility and Irrigation segments and the overall Company as raw material cost inflation was not fully recovered through selling pricing mechanisms.
Items Impacting Comparability
Items of note impacting the comparability of results from net earnings for 2021 included the following:
• charges totaling pre-tax $27.9 million ($21.7 million after-tax) related to the impairment of the Offshore and other complex steel structures long-lived assets. In addition, income tax expense of $5.1 million to establish a valuation allowance related to the tax assets of the associated product line,
• Stock based compensation expense of $5.2 million ($4.8 million after-tax) for the employees from the recently acquired Prospera subsidiary, and
• charges totaling $5.5 million ($4.3 million after-tax) related to the write-off of a receivable.
Items of note impacting the comparability of results from net earnings for 2020 included the following:
• charges totaling $16.6 million ($16.2 million after-tax) related to the impairment of goodwill and tradenames for the Access Systems reporting unit (ESS segment),
• charges totaling $23.1 million ($17.3 million after-tax) related to our 2020 restructuring plan.
Acquisitions
The Company acquired the following businesses in 2021 and 2020:
• Prospera in the second quarter of 2021 for $300 million. Prospera is a privately-held Israeli-based artificial intelligence company focused on machine learning and computer vision in agriculture (Irrigation),
• PivoTrac in the second quarter of 2021 for $12.5 million. PivoTrac is an agricultural technology company that offers solutions focused on remote monitoring of center pivot irrigation machines (Irrigation),
• Energia Solar Do Brasil ("Solbras") in the second quarter of 2020 for $4.3 million. Solbras is a leading provider of solar energy solutions for agriculture (Irrigation), and
• Remaining 49% of AgSense LLC in the first quarter of 2020 for $44.0 million (Irrigation).
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COVID-19 Impact on Financial Results and Liquidity
During 2020 and to a lesser extent in 2021, the effects of COVID and the related actions of governments and other authorities to contain COVID affected and continue to affect the company’s operations, results, and cash flows. 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. All our manufacturing facilities were open and fully operational as of December 25, 2021. 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.
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.
Fiscal 2020 Restructuring Plan
During 2020, the Company executed certain regional restructuring activities (the "2020 Plan") primarily in the ESS and Utility segments and a U.S. specific early retirement program covering all segments. The increase in 2021 gross profit and operating income due to the 2020 restructuring expense that did not recur in 2021 by segment is as follows:
Total ESS Utility Coatings Irrigation Corporate
Gross profit $ 6.8 $ 1.0 $ 4.2 $ 1.6 $ — $ —
Operating Income $ 23.1 $ 7.6 $ 6.6 $ 3.9 $ 3.0 $ 2.0
Currency Translation
In 2021, we realized a reduction in operating profit, as compared with fiscal 2020, due to currency translation effects. The breakdown of this effect by segment was as follows:
Total ESS Utility Coatings Irrigation Corporate
Full year $ 0.9 $ 1.4 $ (0.6) $ 1.4 $ (0.3) $ (1)
Gross Profit, SG&A, and Operating Income
At a consolidated level, gross profit as a percent of sales was lower in 2021, as compared with 2020, due to higher raw material costs which were partially offset by an increase in average selling prices across all segments. Gross profit increased for the ESS, Coatings, and Irrigation segments in 2021, but was lower for the Utility segment which recognized a $21.4 million impairment of property, plant, and equipment at the Offshore and other complex steel structures reporting unit during 2021.
The Company saw an increase in selling, general, and administrative (SG&A) expense in 2021, as compared to 2020. The increase was primarily due to the SG&A attributed to the Prospera acquisition (acquired in May 2021) and higher incentives and stock-based compensation due to improved operations, and the $5.5 million write off of an international accounts receivable in the Utility segment. These increases in SG&A were partially offset by $16.3 million of restructuring expense (mostly severance) recognized during 2020 that did not recur in 2021. Impairments of intangible assets (and goodwill in 2020) of $6.5 million and $16.6 million were recognized in 2021 and 2020, respectively.
Net Interest Expense and Debt
Net interest expense in 2021 was higher than 2020, due to higher average borrowings during the year. Interest income was lower in 2021, as compared to 2020, due to lower interest rates.
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Other Income/Expense
The change in other income/expenses in 2021, as compared to 2020, was due to an increase of approximately $7.3 million of income recognized from the Delta pension plan.
Income Tax Expense
Our effective income tax rate in 2021 and 2020 was 23.6% and 25.7%, respectively. In 2021, the decrease in the effective tax rate was the result of a U.S. tax benefit related to foreign taxes paid which was offset by a valuation allowance recorded against the Offshore and other complex steel structures' deferred tax assets. In 2020, the effective tax rate was impacted by the partial impairment of goodwill and tradename for the Access Systems business that was not fully tax deductible.
Earnings Attributable to Noncontrolling Interests
Earnings attributable to noncontrolling interests was comparable in 2021 with 2020.
Cash Flows from Operations
Our cash flows provided by operations was $65.9 million in fiscal 2021, as compared with $316.3 million provided by operations in fiscal 2020. The decrease in operating cash flow in 2021, as compared with 2020, was due to the $289.9 million increase in inventory and the $69.3 million increase in accounts receivable partially offset by the increase in accounts payable and accrued expenses of $119.3 million and the early payment (December 2020) of the required 2021 annual contribution to the Delta pension plan that did not occur in 2021.
Engineered Support Structures (ESS) segment
Net sales were higher in 2021 as compared to 2020, primarily driven by an increase in average selling prices across all product lines, and favorable foreign currency translation effects which offset the decrease in sales volumes for the lighting, traffic, and highway product line. Sales amounts were higher for the communication products and access systems product lines while comparable for lighting, traffic, and highway products' line year over year. Customer pricing actions were taken across all product lines during 2021 to counter the significant inflation seen in materials, most specifically steel.
Lighting, traffic, and highway safety product sales in 2021 were $0.4 million higher, as compared to 2020. In North America, sales decreased slightly as declines in volumes within the transportation markets were partially offset by increased higher average selling pricing year over year. Lighting, traffic, and highway safety product sales in international markets increased in 2021, as compared to 2020, due to favorable foreign currency translation effects of approximately $18 million, slightly higher average selling prices, and slightly lower sales volumes.
Communication product line sales were higher by $50 million in 2021 as compared with 2020. In North America, communication product sales volumes increased due to strong demand from 5G and other connectivity initiatives and an increase in average selling prices. Communication product line sales within international markets increased modestly in 2021 mostly attributed to an increase in volume.
Access Systems product line net sales increased by $17.5 million in 2021, as compared to 2020. Favorable foreign currency translation effects were approximately $6 million in 2021, as compared to 2020, with the majority of the remaining increase in 2021 attributed to improved sales volumes.
Gross profit was higher in 2021, as compared to 2020, primarily from the sales volume increase in the communication product line. SG&A was lower in 2021 versus 2020 due primarily to recording a partial goodwill and tradename impairment for the Access Systems business of $16.6 million during 2020. Operating income increased in 2021 due the gross profit contribution from the increase in sales volumes and the lower SG&A due to the goodwill and tradename impairment of the Access Systems business and other restructuring costs recognized in 2020 that did not recur in 2021.
Utility Support Structures (Utility) segment
In the Utility segment, sales increased in 2021, as compared with 2020, due primarily to an increase in average selling prices for the steel structures product line. A number of our sales contracts in North America contain provisions that
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tie the sales price to published steel index pricing at the time our customer issues their purchase order. Our average selling prices for the steel structures product line were higher during the second half of 2021, as compared to 2020, reflecting the significant inflation seen in the cost of steel during 2021.
Offshore and other complex steel structures sales was comparable in 2021 to 2020 and solar tracking solutions sales decreased $23.5 million in 2021, as compared to 2020, due to a decrease in sales volumes attributed to less large projects.
Gross profit decreased in 2021, as compared to 2020, due primarily to the $21.4 million impairment of long-lived asset for the offshore steel structures product line. SG&A expense was higher in 2021, as compared with 2020, primarily due to $6.5 million of impairments of Offshore and other complex steel structures intangible assets and a $5.5 million write-off of an account receivable. These increases in SG&A were partially offset by the 2020 restructuring actions, including the early retirement program, which resulted in $2.5 million of expense during 2020 that did not recur in 2021. Operating income decreased in 2021 primarily due to the $27.9 million impairment of long-lived assets for the Offshore and other complex steel structures reporting unit.
Coatings segment
Coatings segment sales increased in 2021, as compared to 2020, due to higher average selling prices and favorable foreign currency translation. In North America, higher average selling prices helped to counteract the higher cost of zinc that incurred throughout the year. North America continued to see decreased industrial production attributed largely to the economic impacts from COVID-19, but not to the severity of 2020. In the Asia-Pacific region, sales volumes improved in all regions, primarily due to an increase in average sales price, higher volumes, and favorable foreign currency translation.
SG&A expense decreased in 2021, as compared to 2020. SG&A expense in 2020 included $2.4 million of non-recurring costs related to closing down a Coatings location in North America and the early retirement program that did not recur in 2021. Operating income was higher in 2021, compared to 2020, due to the higher average selling prices and foreign currency translation in North America and Asia and the lower SG&A expense, partially offset by startup costs incurred in 2021 related to the new Pittsburgh facility.
Irrigation segment
Irrigation segment net sales increased in 2021, as compared to 2020, primarily due to higher sales volumes in almost all markets, as well as higher average selling prices. Net sales also increased slightly due to the continuing increase in sales of technology-related products and services, strengthened by our acquisitions of Prospera and PivoTrac. The sales increase for international irrigation of $215.7 million was primarily due to deliveries on the multi-year Egypt project and higher sales volumes in Brazil. In North America, higher sales volumes for irrigation systems and parts were driven by improved agricultural commodity prices. Average selling prices for the North American tubular product line were up substantially in 2021, versus 2020, to reflect the inflation seen in the cost of steel during 2021.
SG&A was higher in 2021, as compared to 2020, due to approximately $20.0 million of SG&A from recently acquired Prospera and PivoTrac, higher compensation costs, and higher incentives due to improved business performance. These increases were somewhat offset by one-time costs associated with the early retirement program incurred in 2020. Operating income increased in 2021 over 2020, as improved global sales volumes and pricing more than offset increases in the cost of steel.
Net corporate expense
Corporate SG&A expense was higher in 2021 as compared to 2020. The increase can be attributed to higher incentive expenses due to improved business performance, an increase in stock compensation expense, an increase in acquisition diligence expense, as well as an increase in rent expense with the new corporate headquarters lease. The increase was partially offset by $1.7 million of non-recurring severance costs from the 2020 early retirement program and the change in valuation of deferred compensation plan assets which resulted in lower expense in 2021, as compared to 2020. The change in deferred compensation plan assets is offset by the same amount in other income/expenses.
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LIQUIDITY AND CAPITAL RESOURCES
Capital Allocation Philosophy
We have historically funded our growth, capital spending and acquisitions through a combination of operating cash flows and debt financing. The following are the capital allocation/priorities for cash generated:
• working capital and capital expenditure investments necessary for future sales growth;
• dividends on common stock in the range of 20% of the prior year's fully diluted net earnings;
• acquisitions; and
• return of capital to shareholders through share repurchases.
We also announced 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- by Fitch Ratings, and BBB+ by Standard and Poor's Rating Services. We would be willing to allow our debt rating to fall to BBB- to finance a special acquisition or other opportunity. We expect to maintain a ratio of debt to invested capital which will support our current investment grade debt rating.
The Board of Directors in May 2014 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. The Board of Directors authorized an additional $250 million of share purchases, without an expiration date in both February 2015 and again in October 2018. The 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 repurchases and may discontinue the program at any time. As of December 25, 2021, we have acquired approximately 6.5 million shares for approximately $878.0 million under this share repurchase program.
Sources of Financing
Our debt financing at December 25, 2021 consisted primarily of long‑term debt and borrowings on our revolving credit facility. Our long‑term debt as of December 25, 2021, principally consisted of:
• $450 million face value ($436.9 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 ($297.7 million carrying value) of senior unsecured notes that bear interest at 5.25% per annum and are due in October 2054.
We are allowed to repurchase the notes subject to the payment of a make-whole premium. Both tranches of these notes are guaranteed by certain of our subsidiaries.
Our revolving credit facility with JP Morgan Chase Bank, N.A., as Administrative Agent, and the other lenders party thereto, had a maturity date of October 18, 2022. On October 18, 2021, we along with our wholly-owned subsidiaries Valmont Industries Holland B.V. and Valmont Group Pty. Ltd., as borrowers, entered into an amendment and restatement of our revolving credit agreement with our lenders. The term was extended to October 18, 2026.
The revolving credit facility provides for $800 million of committed unsecured revolving credit loans with available borrowings thereunder to $400 million in foreign currencies. We may increase the credit facility by up to an additional $300 million at any time, subject to lenders increasing the amount of their commitments. The Company and our wholly-owned subsidiaries Valmont Industries Holland B.V. and Valmont Group Pty. Ltd., are authorized borrowers under the credit facility. The obligations arising under the revolving credit facility are guaranteed by the Company and its wholly-owned subsidiaries Valmont Telecommunications, Inc., Valmont Coatings, Inc., Valmont Newmark, Inc., and Valmont Queensland Pty. Ltd.
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The interest rate on our borrowings will be, at our option, either:
(a) term SOFR (based on a 1, 3 or 6 month interest period, as selected by the Company) plus a 10 basis point adjustment plus a spread of 100 to 162.5 basis points, depending on the credit rating of the Company's senior, unsecured, long-term debt published by Standard & Poor's Rating Services and Moody's Investors Service, Inc.;
(b) the higher of
• the prime lending rate,
• the overnight bank rate plus 50 basis points, and
• term SOFR (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 our senior, unsecured, long-term debt published by Standard & Poor's Rating Services and Moody's Investors Service, Inc.; or
(c) daily simple SOFR plus a 10 basis point adjustment plus a spread of 100 to 162.5 basis points, depending on the credit rating of the Company's senior, unsecured, long-term debt published by Standard & Poor's Rating Services and Mood's Investors Service, Inc.
A commitment fee is also required under the revolving credit facility which accrues at 10 to 25 basis points, depending on the credit rating of our senior, unsecured long-term debt published by Standard and Poor's Rating Services and Moody's Investor Services, Inc., on the average daily unused portion of the commitments under the revolving credit agreement.
At December 25, 2021, we had outstanding borrowings of $218.9 million under the revolving credit facility. The revolving credit facility has a maturity date of October 18, 2026 and contains a financial covenant that may limit our additional borrowing capability under the agreement. At December 25, 2021, we had the ability to borrow $590.5 million under this facility, after consideration of standby letters of credit of $0.7 million associated with certain insurance obligations. We also maintain certain short‑term bank lines of credit totaling $137.8 million; $124.4 million of which was unused at December 25, 2021.
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 revolving credit facility requires maintenance of a financial leverage ratio, measured as of the last day of each of our fiscal quarters, of 3.50:1 or less. The leverage ratio is the ratio of: (a) interest-bearing debt minus unrestricted cash in excess of $50 million (but not exceeding $500 million); to (b) adjusted EBITDA. The debt agreements provide a modification of the definition of “EBITDA” to add-back any non-cash stock-based compensation in any trailing twelve month period and allow for an adjustment to EBITDA, subject to certain limitations, for non-cash charges or gains that are non-recurring in nature. The leverage ratio is permitted to increase from 3.50:1 to 3:75:1 for the four consecutive fiscal quarters after certain material acquisitions.
The amended and restated revolving credit agreement also contains customary affirmative and negative covenants or credit facilities of this type, including, among others, limitations on us and our subsidiaries with respect to indebtedness, liens, mergers and acquisitions, investments, dispositions of assets, restricted payments, transactions with affiliates and prepayments of indebtedness. The amended and restated revolving credit agreement also provides for acceleration of the obligations thereunder and exercise of other enforcement remedies upon the occurrence of customary events of default (subject to customary grace periods, as applicable).
At December 25, 2021, we were in compliance with all covenants related to these debt agreements.
The calculation of Adjusted EBITDA-last four quarters and the Leverage ratio are presented under the column for fiscal 2021 in footnotes (b) and (c) to the tables below in Selected Financial Measures.
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Cash Uses
Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to pension plan, and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements.
Cash requirements for fiscal 2022 are expected to consist primarily of capital expenditures, Delta pension plan contributions, operating leases, and interest on outstanding debt. The Company also has unconditional purchase commitments that relate to purchase orders for zinc, aluminum and steel, all of which we plan to use in 2022. We believe the quantities under contract are reasonable in light of normal fluctuations in business levels and we expect to use the commodities under contract during the contract period. Total capital expenditures for fiscal 2022 are expected to be approximately $115 million.
The following table summarizes current and long-term material cash requirements as of December 25, 2021 (in millions of dollars):
Contractual Obligations Total Next 12 months Thereafter
Long‑term debt $ 979.6 $ 4.9 $ 974.7
Interest 1
1,075.6 41.4 1,034.2
Delta pension plan contributions 175.8 19.5 156.3
Operating leases 235.4 23.2 212.2
Total contractual cash obligations $ 2,466.4 $ 89.0 $ 2,377.4
1 Interest expense amount assumes that long-term debt will be held to maturity.
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 for fiscal 2022 and beyond.
We have cash balances of $177.2 million at December 25, 2021, approximately $169.5 million is held in our non-U.S. subsidiaries. If we distributed our foreign cash balances certain taxes would be applicable. At December 25, 2021, we have a liability for foreign withholding taxes and U.S. state income taxes of $2.7 million and $0.7 million, respectively.
Cash Flows
(Dollars in thousands) 2021 2020 2019
Cash flow data:
Net cash flows from operating activities $ 65,938 $ 316,294 $ 307,614
Net cash flows from investing activities (417,308) (104,029) (168,150)
Net cash flows from financing activities 133,500 (173,756) (98,950)
Operating Cash Flows and Working Capital - Cash generated from operating activities totaled $65.9 million in 2021, compared with $316.3 million in 2020 and $307.6 million in 2019. Net working capital was $946.9 million at December 25, 2021, as compared with $881.3 million at December 26, 2020. The increase in net working capital in 2021 was attributed to an increase in inventory (primarily driven by the impact of higher steel costs) and receivables (primarily driven by higher sales in the fourth quarter), somewhat offset by increases in accounts payable and accrued compensation and benefits (primarily driven by higher accrual for incentives earned during 2021) and the use of cash to facilitate our investing and financing activities. The decrease in operating cash flow in 2021 was favorably impacted by the required 2021 annual contribution to the Delta pension plan being made early in December 2020.
Investing Cash Flows - Cash used in investing activities totaled $417.3 million in 2021, compared to $104.0 million in 2020. Investing activities in 2021 primarily included capital spending of $107.8 million and the acquisition of two
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businesses within the Irrigation segment for $312.5 million. In 2020, investing activities primarily included capital spending of $106.7 million, acquisitions of $15.9 million, proceeds from the settlement of a net investment hedge of $12.0 million, and proceeds from the sale of assets of $10.9 million.
Financing Cash Flows - Cash provided by financing activities totaled $133.5 million in 2021, compared to cash used in financing activities of $173.8 million in 2020. Our total interest‑bearing debt increased to $965.4 million at December 25, 2021, from $766.3 million at December 26, 2020. Financing cash inflows in 2021 primarily consisted of proceeds from long-term debt borrowings of $312.5 million, offset by payments on long-term debt of $91.3 million, dividends paid of $41.4 million, net payments on short-term agreements of $20.2 million, and the purchase of treasury shares of $26.1 million. During 2020, the Company had proceeds from long-term debt borrowings of $88.9 million and net proceeds of $13.0 million from short-term agreements. This was reduced primarily by the repayment of long-term debt of $121.7 million, dividends paid of $36.9 million, the purchase of noncontrolling interest of $59.4 million and the purchase of treasury shares of $56.5 million.
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
For the three year period ended December 25, 2021
Dollars in thousands 2021 2020 2019
Net sales $ 2,139,427 $ 1,854,141 $ 1,751.899
Gross Profit 574,128 512,880 454,295
Operating income 208,041 180,206 178,990
Net earnings 120,655 106,404 109,908
Net earnings attributable to Valmont Industries, Inc. 120,458 102,266 109,908
Supplemental Combined Parent and Guarantors Financial Information
December 25, 2021 and December 26, 2020
Dollars in thousands 2021 2020
Current assets $ 801,797 $ 738,437
Noncurrent assets 807,294 701,571
Current liabilities 383,394 321,979
Noncurrent liabilities 1,305,756 1,100,657
Noncontrolling interest in consolidated subsidiaries 1,844 1,738
Included in noncurrent assets is a due from non-guarantor subsidiaries receivable of $93,613 and $88,309 at December 25, 2021 and December 26, 2020. Included in noncurrent liabilities is a due to non-guarantor subsidiaries payable of $236,577 and $262,935 at December 25, 2021 and December 26, 2020
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Selected Financial Measures
We are including the following financial measures for the company.
Dollars in thousands 2021 2020 2019
Total invested capital(a) $ 2,378,992 $ 1,974,162 $ 1,977,223
Return on invested capital(a) 10.1 % 8.7 % 8.9 %
Adjusted EBITDA(b) $ 448,864 $ 368,493 $ 328,165
Leverage ratio (c) 1.87 1.13 1.47
(a) Return on Invested Capital is calculated as Operating Income (after-tax) divided by the average of beginning and ending Invested Capital. Invested Capital represents total assets minus total liabilities (excluding interest-bearing debt). Return on Invested Capital is one of our key operating ratios, as it allows investors to analyze our operating performance in light of the amount of investment required to generate our operating profit. Return on Invested Capital is also a measurement used to determine management incentives. Return on Invested Capital is a non-GAAP measure. Accordingly, Invested Capital and Return on Invested Capital should not be considered in isolation or as a substitute for net earnings, cash flows from operations or other income or cash flow data prepared in accordance with GAAP or as a measure of our operating performance or liquidity. The table below shows how Invested Capital and Return on Invested Capital are calculated from our income statement and balance sheet.
Dollars in thousands 2021 2020 2019
Operating income $ 286,785 $ 225,953 $ 227,905
Adjusted effective tax rate 1
23.6 % 24.2 % 23.9 %
Tax effect on operating income (67,681) (54,681) (54,469)
After-tax operating income 219,104 171,272 173,436
Average invested capital 2,176,577 1,975,693 1,953,120
Return on invested capital 10.1 % 8.7 % 8.9 %
Total assets 3,447,249 2,953,160 2,807,216
Less: Accounts payable (347,841) (268,099) (197,957)
Less: Accrued expenses (253,330) (227,735) (167,264)
Less: Defined benefit pension liability (536) (118,523) (140,007)
Less: Deferred compensation (35,373) (44,519) (45,114)
Less: Other noncurrent liabilities (89,207) (58,657) (8,904)
Less: Dividends payable (10,616) (9,556) (8,079)
Less: Lease liability (147,759) (80,202) (85,817)
Less: Contract liability (135,746) (130,018) (117,945)
Less: Deferred tax liability (47,849) (41,689) (58,906)
Total Invested capital $ 2,378,992 $ 1,974,162 $ 1,977,223
Beginning of year invested capital $ 1,974,162 $ 1,977,223 $ 1,929,016
Average invested capital $ 2,176,577 $ 1,975,693 $ 1,953,120
1 The adjusted effective tax rate for 2020 excludes the effects of the $12,575 goodwill impairment which is not deductible for income tax purposes. The effective tax rate in 2020 including the impairments is 25.7%.
Return on invested capital, as presented, may not be comparable to similarly titled measures of other companies.
(b) Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) is one of our key financial ratios in that it is the basis for determining our maximum borrowing capacity at any one time. Our bank credit agreements contain a financial covenant that our total interest‑bearing debt not exceed 3.50x Adjusted EBITDA (or 3.75x Adjusted EBITDA after certain material acquisitions) for the most recent four quarters. These bank credit agreements allow us to add estimated EBITDA from acquired businesses for periods we did not own the acquired businesses. The bank credit agreements also provide for an adjustment to EBITDA, subject to certain specified limitations, for non-cash charges or gains that are non-recurring in nature. If this financial covenant is violated, we may incur additional financing costs or be required to pay the debt before its maturity date. Adjusted EBITDA is non-GAAP measure and, accordingly, should not be considered in isolation or as a substitute for net earnings, cash flows from operations or other income or cash flow data prepared in accordance with GAAP or as a measure of our operating performance or liquidity. The calculation of Adjusted EBITDA is as follows:
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Dollars in thousands 2021 2020 2019
Net cash flows from operations $ 65,938 $ 316,294 $ 307,614
Interest expense 42,612 41,075 40,153
Income tax expense 61,414 49,615 47,753
Loss on investment — (39) 172
Impairment of long-lived assets (27,911) (20,389) —
Deferred income tax (expense) benefit (71) 1,397 (1,486)
Noncontrolling interest (2,095) (1,456) (5,697)
Equity in earnings of nonconsolidated subsidiaries — (1,004) —
Pension plan expense 14,567 7,311 513
Contribution to pension plan 1,924 35,399 18,461
Changes in assets and liabilities, net of acquisitions 264,558 (98,994) (81,831)
Other 17 (60) 2,513
EBITDA 420,953 329,149 328,165
Impairment of long-lived assets 27,911 20,389 —
Cash restructuring expenses — 18,955 —
Adjusted EBITDA $ 448,864 $ 368,493 $ 328,165
2021 2020 1
2019 1
Net earnings attributable to Valmont Industries, Inc. $ 195,630 $ 140,693 $ 146,408
Interest expense 42,612 41,075 40,153
Income tax expense 61,414 49,615 47,753
Stock based compensation 28,720 14,874 11,587
Depreciation and amortization expense 92,577 82,892 82,264
EBITDA 420,953 329,149 328,165
Impairment of long-lived assets 27,911 20,389 —
Cash restructuring expenses — 18,955 —
Adjusted EBITDA $ 448,864 $ 368,493 $ 328,165
Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies. In October 2021, our revolving credit facility was amended to allow the Company to add-back any non-cash stock-based compensation in any trailing twelve month period and allow for an adjustment to EBITDA, subject to certain limitations, for non-cash charges or gains that are non-recurring in nature.
(c) Leverage ratio is calculated as the sum of interest-bearing debt minus unrestricted cash in excess of $50 million (but not exceeding $500 million); divided by Adjusted EBITDA. The leverage ratio is one of the key financial ratios in the covenants under our major debt agreements and the ratio cannot exceed 3.5 (or 3.75x after certain material acquisitions) for any reporting period (four quarters). If those covenants are violated, we may incur additional financing costs or be required to pay the debt before its maturity date. Leverage ratio is a non-GAAP measure and, accordingly, should not be considered in isolation or as a substitute for net earnings, cash flows from operations or other income or cash flow data prepared in accordance with GAAP or as a measure of our operating performance or liquidity. The calculation of this ratio is as follows:
Dollars in thousands 2021 2020 1
2019 1
Interest-bearing debt $ 965,395 $ 766,326 $ 787,478
Less: Cash and cash equivalents in excess of $50 million 127,232 350,726 303,542
Net indebtedness 838,163 415,600 483,936
Adjusted EBITDA 448,864 368,493 328,165
Leverage Ratio 1.87 1.13 1.47
Leverage ratio, as presented, may not be comparable to similarly titled measures of other companies.
1 Calculated in accordance with the terms of the credit facility as in effect on December 25, 2021.
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MARKET RISK
Changes in Prices
Certain key materials we use are commodities traded in worldwide markets and are subject to fluctuations in price. The most significant materials are steel, aluminum, zinc and natural gas. Over the last several years, prices for these commodities have been volatile. The volatility in these prices was due to such factors as fluctuations in supply and demand conditions, government tariffs and the costs of steel‑making inputs. Steel is most significant for our Utility Support Structures segment where the cost of steel has been approximately 50% of the net sales, on average. In 2018, we began using steel hot rolled coil derivative contracts on a limited basis to mitigate the impact of rising steel prices on operating income. Assuming a similar sales mix, a hypothetical 20% change in the price of steel would have affected our net sales from our Utility Support Structures segment by approximately $75 million for the year ended December 25, 2021.
We have also experienced volatility in natural gas prices in the past several years. Our main strategies in managing these risks are a combination of fixed price purchase contracts with our vendors to reduce the volatility in our purchase prices and sales price increases where possible. We use natural gas swap contracts on a limited basis to mitigate the impact of rising gas prices on our operating income.
Risk Management
Market Risk—The principal market risks affecting us are exposure to interest rates, foreign currency exchange rates and commodity prices. At times, we utilize derivative financial instruments to hedge these exposures, but we do not use derivatives for trading purposes.
Interest Rates—Our interest‑bearing debt at December 25, 2021 was primarily fixed rate debt and borrowings on our revolving credit facility. Our notes payable, revolving credit facility, and a small portion of our long-term debt accrue interest at a variable rate. Assuming average interest rates and borrowings on variable rate debt, a hypothetical 10% change in interest rates would have affected our interest expense in 2021 and 2020 by approximately $0.4 million. Likewise, we have excess cash balances on deposit in interest‑bearing accounts in financial institutions. An increase or decrease in interest rates of ten basis points would have impacted our annual interest earnings in 2021 and 2020 by approximately $0.2 million and $0.3 million, respectively.
Foreign Exchange—Exposures to transactions denominated in a currency other than the entity’s functional currency are not material, and therefore the potential exchange losses in future earnings, fair value and cash flows from these transactions are not material. The Company is also exposed to investment risk related to foreign operations. From time to time, as market conditions indicate, we will enter into foreign currency contracts to manage the risks associated with anticipated future transactions, current balance sheet positions, and foreign subsidiary investments that are in currencies other than the functional currencies of our businesses. At December 25, 2021, the Company had two outstanding fixed-for-fixed cross currency swaps (“CCS”), swapping U.S. dollar principal and interest payments on a portion of its 5.00% senior unsecured notes due 2044 for Danish krone (DKK) and Euro denominated payments. The CCS were entered into in 2019 in order to mitigate foreign currency risk on the Company's Euro and DKK investments and to reduce interest expense. The notional of the Euro and DKK CCS are $80.0 million and $50.0 million, respectively, and mature in 2024. In 2019, the Company had outstanding foreign currency forward contracts which mitigate foreign currency risk of the Company's investment in its Australian denominated businesses. The forward contracts, which qualified as net investment hedges, were settled in 2020 with the Company receiving $12.0 million. Much of our cash in non-U.S. entities is denominated in foreign currencies, where fluctuations in exchange rates will impact our cash balances in U.S. dollar terms. A hypothetical 10% change in the value of the U.S. dollar would impact our reported cash balance by approximately $13.6 million in 2021 and $16.6 million in 2020.
We manage our investment risk in foreign operations by borrowing in the functional currencies of the foreign entities or by utilizing hedging instruments (as discussed above) where appropriate. The following table indicates the change
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in the recorded value of our most significant investments at year-end assuming a hypothetical 10% change in the value of the U.S. Dollar.
2021 2020
(in millions)
Australian dollar $ 11.6 $ 15.0
Euro 8.6 11.3
Danish krone 2.4 5.5
Chinese renminbi 6.2 6.7
Canadian dollar 3.6 3.6
U.K. pound 16.8 8.4
Brazilian real 4.5 3.4
Commodity risk— Steel hot rolled coil is a significant commodity input used by all of our segments in the manufacture of our products, with the exception of Coatings. Steel prices are volatile and we may utilize derivative instruments to mitigate commodity price risk on fixed price orders. In 2021, the Company entered into steel hot rolled coil forward contracts which qualified as a cash flow hedge of the variability in the cash flows attributable to future steel purchases. At December, 25, 2021, we had open forward contracts with a notional amount of $69.7 million for the total purchase of 55,600 short tons from January 2022 to December 2022.
Natural gas is a significant commodity used in our factories, especially in our Coatings segment galvanizing operations, where natural gas is used to heat tanks that enable the hot-dipped galvanizing process. Natural gas prices are volatile and we mitigate some of this volatility through the use of derivative commodity instruments. Our current policy is to manage this commodity price risk for 0-75% of our U.S. natural gas requirements for the upcoming 6-12 months through the purchase of natural gas swaps based on NYMEX futures prices for delivery in the month being hedged. The objective of this policy is to mitigate the impact on our earnings of sudden, significant increases in the price of natural gas. At December 25, 2021, we have open natural gas swaps for 360,000 MMBtu.
CRITICAL ACCOUNTING POLICIES
The following accounting policies involve judgments and estimates used in preparation of the consolidated financial statements. There is a substantial amount of management judgment used in preparing financial statements. We must make estimates on a number of items, such as impairments of long-lived assets, income taxes, revenue recognition for the product lines recognized over time, inventory obsolescence, and pension benefits. We base our estimates on our experience and on other assumptions that we believe are reasonable under the circumstances. Further, we re-evaluate our estimates from time to time and as circumstances change. Actual results may differ under different assumptions or conditions. The selection and application of our critical accounting policies are discussed annually with our audit committee.
Depreciation, Amortization and Impairment of Long-Lived Assets
Our long-lived assets consist primarily of property, plant and equipment, right-of-use (lease) assets, and goodwill and intangible assets acquired in business acquisitions. We have assigned useful lives to our property, plant and equipment and certain intangible assets ranging from 3 to 40 years. In November 2021, we obtained clarifying information on the amount of duties that the European Union would impose on imports of steel wind towers. A resulting impairment test (based on estimated undiscounted future cash flows) was required for our Offshore and other complex steel structures reporting unit. The undiscounted cash flows of its long-lived assets were less than the carrying values which required us to estimate their fair value and we recognized a pre-tax $27.9 million impairment of the long-lived assets (customer relationship intangible asset, trade name, and property, plant and equipment). Impairment losses of $3.8 million were recorded in 2020 as facilities were closed and certain fixed assets were no longer expected to be used as a result of our restructuring plans. Upon adoption of ASC 842, Leases in 2019, the Company impaired the right-of-use asset for one of our galvanizing facilities in Australia as it was determined that it would not generate sufficient cash flows to recover the carrying value.
We identified thirteen reporting units for purposes of evaluating goodwill and we annually evaluate our reporting units for goodwill impairment during the third fiscal quarter, which usually coincides with our strategic planning process. For twelve of the reporting units, we estimate the value of the reporting units using after-tax cash flows from operations (less
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capital expenses) discounted to present value ("discounted cash flows"). The key assumptions in the discounted cash flow analysis are the discount rate and the projected cash flows. We also use sensitivity analysis to determine the impact of changes in discount rates and cash flow forecasts on the valuation of the reporting units. For our solar tracking structure reporting unit, we project meaningful annual revenue growth for the foreseeable future due to strong market conditions. Therefore, we valued this reporting unit using a blend of both the discounted cash flows and a market approach. The market valuation approach estimates the value for this reporting unit using a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). We analyze EBITDA multiples for other industrial companies with similar product lines in determining what to use in the model . The key assumption in the market approach analysis are the selection of industrial companies with similar product lines and forecasted EBITDA.
For both the 2021 and 2020 annual impairment test, the estimated fair value of all of our reporting units exceeded their respective carrying value, so no goodwill was impaired during our annual impairment test in 2021 or 2020. A $12.6 million impairment of our access systems reporting unit was recognized as a result of an interim impairment test during second quarter of 2020.
If our assumptions on discount rates and future cash flows change as a result of events or circumstances, and we believe these assets may have declined in value, then we may record impairment charges, resulting in lower profits . Our reporting units are all cyclical and their sales and profitability may fluctuate from year to year. The Company continues to monitor changes in the global economy that could impact future operating results of its reporting units. If such conditions arise, the Company will test a given reporting unit for impairment prior to the annual test. In the evaluation of our reporting units, we look at the long-term prospects for the reporting unit and recognize that current performance may not be the best indicator of future prospects or value, which requires management judgment.
Our indefinite‑lived intangible assets consist of trade names. We assess the values of these assets apart from goodwill as part of the annual impairment testing. We use the relief-from-royalty method to evaluate our trade names, under which the value of a trade name is determined based on a royalty that could be charged to a third party for using the trade name in question. The royalty, which is based on a reasonable rate applied against estimated future sales, is tax-effected and discounted to present value. The most significant assumptions in this evaluation include estimated future sales, the royalty rate and the after-tax discount rate.
We performed our annual impairment test of all trade names in the third quarter of 2021 and determined none were impaired. As a result of a fourth quarter 2021 interim impairment test of the long-lived assets of the Offshore and other complex steel structures reporting unit, we recognized an impairment of approximately $2 million.
Inventories
Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or net realizable value. We write down slow-moving and obsolete inventory by the difference between the value of the inventory and our estimate of the reduced value based on potential future uses, the likelihood that overstocked inventory will be sold and the expected selling prices of the inventory. If our ability to realize value on slow-moving or obsolete inventory is less favorable than assumed, additional inventory write downs may be required.
Income Taxes
We record valuation allowances to reduce our deferred tax assets to amounts that are more likely than not to be realized. We consider future taxable income expectations and tax-planning strategies in assessing the need for the valuation allowance. If we estimate a deferred tax asset is not likely to be fully realized in the future, a valuation allowance to decrease the amount of the deferred tax asset would decrease net earnings in the period the determination was made. Likewise, if we subsequently determine that we are able to realize all or part of a net deferred tax asset in the future, an adjustment reducing the valuation allowance would increase net earnings in the period such determination was made.
At December 25, 2021, we had approximately $83.7 million in deferred tax assets relating to tax credits and loss carryforwards, with a valuation allowance of $49.7 million, including $8.4 million in valuation allowances related to capital loss carryforwards, which are unlikely ever to be realized. If circumstances related to our deferred tax assets change in the future, we may be required to increase or decrease the valuation allowance on these assets, resulting in an increase or decrease in income tax expense and a reduction or increase in net income. Also, we consider the earnings in our greater than 50% owned non-U.S. subsidiaries to not be indefinitely reinvested and, accordingly, we have a deferred tax liability of $3.4 million related to these unremitted foreign earnings for future taxes that will be incurred when cash is repatriated.
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We are subject to examination by taxing authorities in the various countries in which we operate. The tax years subject to examination vary by jurisdiction. We regularly consider the likelihood of additional income tax assessments in each of these taxing jurisdictions based on our experiences related to prior audits and our understanding of the facts and circumstances of the related tax issues. We include in current income tax expense any changes to accruals for potential tax deficiencies. If our judgments related to tax deficiencies differ from our actual experience, our income tax expense could increase or decrease in a given fiscal period.
Pension Benefits
Delta Ltd. maintains a defined benefit pension plan for qualifying employees in the United Kingdom. There are no active employees as members in the plan. Independent actuaries assist in properly measuring the liabilities and expenses associated with accounting for pension benefits to eligible employees. In order to use actuarial methods to value the liabilities and expenses, we must make several assumptions. The critical assumptions used to measure pension obligations and expenses are the discount rate and expected rate of return on pension assets.
We evaluate our critical assumptions at least annually. Key assumptions are based on the following factors:
• Discount rate is based on the yields available on AA-rated corporate bonds with durational periods similar to that of the pension liabilities.
• Expected return on plan assets is based on our asset allocation mix and our historical return, taking into consideration current and expected market conditions. Most of the assets in the pension plan are invested in corporate bonds, the expected return of which are estimated based on the yield available on AA rated corporate bonds. The long-term expected returns on equities are based on historic performance over the long-term.
• Inflation is based on the estimated change in the consumer price index (“CPI”) or the retail price index (“RPI”), depending on the relevant plan provisions.
The discount rate used to measure the defined benefit obligation was 1.9% at December 25, 2020. The following tables present the key assumptions used to measure the pension benefit for 2022 and the estimated impact relative to a change in those assumptions for 2022:
Assumptions Pension
Discount rate
1.90 %
Expected return on plan assets
3.48 %
Inflation - CPI
2.70 %
Inflation - RPI
3.30 %
Assumptions In Millions of Dollars Decrease
in Pension
Benefit
0.25% increase in discount rate $ 1.0
0.25% decrease in expected return on plan assets
$ 1.8
0.25% increase in inflation
$ 0.4
Revenue Recognition
We determine the appropriate revenue recognition for our contracts by analyzing the type, terms and conditions of each contract or arrangement with a customer. We have no contracts with customers, under any product line, where we could earn variable consideration. With the exception of our Utility segment and the wireless communication structures product line, our inventory is interchangeable for a variety of the product line’s customers. There is one performance obligation for revenue recognition. Our Irrigation and Coatings segments recognize revenue at a point in time, which is when the service has been performed or when the goods ship; this is the same time that the customer is billed. Lighting, traffic, highway safety, and access system product lines within the ESS segment recognize revenue and bill customers at a point in time, which is typically when the product ships or when it is delivered, as stipulated in the customer contract.
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The following provides additional information about our contracts with utility and wireless communication structures customers, where the revenue is recognized over time, the judgments we make in accounting for those contracts, and the resulting amounts recognized in our financial statements.
Accounting for utility structures and wireless communication monopole contracts: Steel and concrete utility and wireless communication monopole 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 us. Since control is transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We have certain wireless communication structures customers' contracts where we do not have the right to payment for work performed. In those instances, we recognize revenue at a point in time which is time of shipment of the structure.
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 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. Our enterprise resource planning (ERP) system captures the total costs incurred to-date and the total production hours, both incurred to-date and forecast to complete. Revenue from the Offshore and other complex steel structures business is also recognized using an inputs method, based on the cost-to-cost measure of progress. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.
Management must make assumptions and estimates regarding manufacturing labor hours and wages, the usage and cost of materials, and manufacturing burden / overhead recovery rates for each production facility. For our steel, concrete and wireless communication structures, production of an order, once started, is typically completed within three months. Projected profitability on open production orders is reviewed and updated monthly. We 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.
We also have a few steel structure customer orders in a fiscal year that require one or two years to complete, due to the quantity of structures. Burden rates and routed production hours, per structure, will be adjusted if and when actual costs incurred are significantly higher than what had been originally projected. This resets the timing of revenue recognition for future periods so it is better aligned with the new production schedule. For our Offshore and other complex steel structures business, we update the estimates of total costs to complete each order quarterly. Based on these updates, revenue in the current period may reflect adjustments for amounts that had been previously recognized. During fiscal 2021, 2020, and 2019, there were no changes to inputs/estimates which resulted in adjustments to revenue for production that occurred prior to the beginning of the year. A provision for loss on the performance obligation is recognized if and when an order is projected to be at a loss, whether or not production has started.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required is included under the captioned paragraph, “MARKET RISK” on page 33 of this report.
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