Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 SEC, 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 provide information that management believes is relevant to an assessment and understanding of the Company’s 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 the Form 10-K generally discusses fiscal 2023 items, fiscal 2022 items, and year-to-year comparisons between fiscal 2023 and fiscal 2022. Discussions of fiscal 2021 items and year-to-year comparisons between fiscal 2022 and fiscal 2021 that are not included on Form 10-K can be found in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
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General
Fiscal Year Ended
Fiscal Year Ended
December 30,
December 31,
Percent
December 25,
Percent
Dollars in millions, except per share amounts
2023
2022
Change
2021
Change
Consolidated
Net sales
$
4,174.6
$
4,345.2
(3.9)
%
$
3,501.6
24.1
%
Gross profit
1,236.0
1,126.3
9.8
%
883.9
27.4
%
as a percent of net sales
29.6
%
25.9
%
25.2
%
Selling, general, and administrative expenses
768.4
693.0
10.9
%
590.6
17.3
%
as a percent of net sales
18.4
%
15.9
%
16.9
%
Impairment of goodwill and intangible assets
140.8
—
NM
6.5
NM
Realignment charges
35.2
—
NM
—
NM
Operating income
291.6
433.3
(32.7)
%
286.8
51.1
%
as a percent of net sales
7.0
%
10.0
%
8.2
%
Net interest expense
50.6
45.5
11.2
%
41.4
9.9
%
Effective tax rate
38.1
%
29.9
%
23.6
%
Net earnings attrib. to Valmont Industries, Inc.
150.8
250.9
(39.9)
%
195.6
28.3
%
Diluted earnings per share
$
6.78
$
11.62
(41.7)
%
$
9.10
27.7
%
Infrastructure
Net sales
$
2,999.6
$
2,909.7
3.1
%
$
2,361.5
23.2
%
Gross profit
842.1
736.6
14.3
%
603.6
22.0
%
Selling, general, and administrative expenses
424.9
382.1
11.2
%
330.0
15.8
%
Impairment of goodwill and intangible assets
3.6
—
NM
—
NM
Realignment charges
17.3
—
NM
—
NM
Operating income
396.3
354.5
11.8
%
273.6
29.6
%
Agriculture
Net sales
$
1,175.0
$
1,335.3
(12.0)
%
$
1,017.1
31.3
%
Gross profit
393.9
381.8
3.2
%
297.7
28.2
%
Selling, general, and administrative expenses
230.7
202.5
13.9
%
160.6
26.1
%
Impairment of goodwill and intangible assets
137.2
—
NM
—
NM
Realignment charges
9.1
—
NM
—
NM
Operating income
16.9
179.3
(90.6)
%
137.1
30.8
%
Other
Net sales
$
—
$
100.2
NM
$
123.0
(18.5)
%
Gross profit (loss)
—
7.9
NM
(18.2)
NM
Selling, general, and administrative expenses
—
5.6
NM
15.5
(63.9)
%
Impairment of goodwill and intangible assets
—
—
NM
6.5
NM
Operating income (loss)
—
2.3
NM
(40.2)
NM
Corporate
Gross profit
$
—
$
—
NM
$
0.8
NM
Selling, general, and administrative expenses
112.8
102.8
9.7
%
84.5
21.7
%
Realignment charges
8.8
—
NM
—
NM
Operating loss
(121.6)
(102.8)
18.3
%
(83.7)
22.8
%
NM = not meaningful
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FISCAL 2023 COMPARED WITH FISCAL 2022
Overview
The decrease in net sales in fiscal 2023, as compared with fiscal 2022, was the result of lower sales in the Agriculture segment, partially offset by higher sales in the Infrastructure segment. Fiscal 2023 included 52 weeks, while fiscal 2022 included 53 weeks. The estimated impact on the Company's results of operations due to the extra week in fiscal 2022 was additional net sales of approximately $80.8 million and additional net earnings of approximately $5.3 million.
Dollars in millions
Infrastructure
Agriculture
Other
Total
Net sales - fiscal 2022
$
2,909.7
$
1,335.3
$
100.2
$
4,345.2
Volume
9.6
(175.5)
—
(165.9)
Pricing and mix
85.1
(1.2)
—
83.9
Acquisition
12.2
14.0
—
26.2
Divestiture
—
—
(100.2)
(100.2)
Currency translation
(17.0)
2.4
—
(14.6)
Net sales - fiscal 2023
$
2,999.6
$
1,175.0
$
—
$
4,174.6
Volume impacts are estimated based on 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 products sold. Accordingly, pricing and mix changes do not necessarily result in operating income changes.
Steel prices for both hot rolled coil and plate have remained volatile over the past two fiscal years, especially in North America. Decreases in the average cost of consumed steel combined with recent customer pricing strategy mechanisms more than offset the overall decrease in volumes on a consolidated basis in fiscal 2023, as compared to fiscal 2022.
During the third quarter of fiscal 2023, management initiated a plan to streamline segment support across the Company and reduce costs through an organizational realignment program (the “Realignment Program”). The Realignment Program provided for a reduction in force through a voluntary early retirement program and other headcount reduction actions, which were completed by the end of fiscal 2023. The Board of Directors authorized the incurrence of cash charges up to $36.0 million in connection with the Realignment Program of which $35.2 million were incurred in fiscal 2023. Severance and other employee benefit costs totaled approximately $17.3 million within the Infrastructure segment, $9.1 million within the Agriculture segment, and $8.8 million within Corporate expense.
Items Impacting Comparability
Items of note impacting the comparability of results from net earnings for fiscal 2023 included:
● charges of $140.8 million ($136.5 million after-tax) related to the impairment of long-lived assets, namely goodwill,
● charges of $35.2 million ($26.5 million after-tax) related to the Realignment Program,
● charges of $5.6 million ($4.2 million after-tax) related to non-recurring charges related to major scope changes for two strategic projects initiated by departed senior leadership,
Items of note impacting the comparability of results from net earnings for fiscal 2022 included:
● charges of $33.3 million (no associated tax benefit) related to the divestiture of the offshore wind energy structures business,
● charges of $6.6 million ($5.1 million after-tax) related to amortization of identified intangible assets from the Prospera subsidiary, and
● charges of $9.9 million ($8.9 million after-tax) related to stock-based compensation expense for the employees from the Prospera subsidiary acquired in the second quarter of fiscal 2021.
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Acquisitions
The Company acquired the following businesses in fiscal 2023 and fiscal 2022:
● HR Products, a leading wholesale supplier of irrigation parts in Australia, in the third quarter of fiscal 2023, for $37.3 million, included in the Agriculture segment, and
● 51% of ConcealFab, a Colorado-based 5G infrastructure and passive intermodulation mitigation solutions company, in the second quarter of fiscal 2022, for $39.3 million, included in the Infrastructure segment.
Divestitures
The Company divested the following businesses in fiscal 2023 and fiscal 2022:
● Torrent Engineering and Equipment in the second quarter of fiscal 2023, which resulted in a gain of $3.0 million. The integrator of prepackaged pump stations in Indiana was included in the Agriculture segment and the gain was recorded in “Other income (expenses)” in the Consolidated Statements of Earnings, and
● Valmont SM in the fourth quarter of fiscal 2022, which resulted in a loss of $33.3 million with no associated tax benefit. The offshore wind energy structures business in Denmark was included in the Other segment and the loss was recorded in “Other income (expenses)” in the Consolidated Statements of Earnings.
Macroeconomic Impacts on Financial Results and Liquidity
We continue to monitor several macroeconomic and geopolitical uncertainties that have impacted or may impact our business, including inflationary cost pressures, supply chain disruptions, changes in foreign currency exchange rates against the U.S. dollar, rising interest rates, ongoing international armed conflicts, and labor shortages.
Reportable Segments
In addition to the two reportable segments, the Company had a business and related activities in fiscal 2022 that were not more than 10% of consolidated sales, operating income, or assets. This business, the offshore wind energy structures business, was reported in the Other segment until its divestiture in the fourth quarter of fiscal 2022. All prior period information has been recast to reflect this change in reportable segments. See Note 21 to our Consolidated Financial Statements for additional information.
Backlog
The consolidated backlog of unshipped orders was approximately $1.5 billion as of December 30, 2023 as compared to approximately $1.7 billion as of December 31, 2022. The decrease is attributed to the Agriculture segment, while Infrastructure segment backlog remains comparable to the prior year end.
Gross Profit, Selling, General, and Administrative Expenses (“SG&A”), and Operating Income
On a consolidated basis, gross profit and gross profit as a percentage of sales increased in fiscal 2023, as compared to fiscal 2022. Gross profit and gross profit as a percentage of sales increased for both the Infrastructure and Agriculture segments in fiscal 2023 primarily due to increased average selling prices and activities executed to improve overall costs of goods sold, partially offset by decreased volumes.
Consolidated SG&A increased in fiscal 2023, as compared to fiscal 2022, due to increased employment costs and increased professional fees, partially offset by slightly decreased incentive expenses.
Consolidated operating income in fiscal 2023, as compared to fiscal 2022, was impacted by the impairment of certain goodwill and intangible assets totaling $140.8 million primarily within the Agriculture Technology reporting unit and realignment charges totaling $35.2 million, along with higher SG&A partially offset by increased gross profit.
Net Interest Expense
Consolidated interest expense increased in fiscal 2023, as compared to fiscal 2022, primarily due to additional borrowings on the revolving line of credit along with increased interest rates.
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Other Income / Expenses (including Gain (Loss) on Investments – Unrealized)
Amounts in “Gain (loss) on investments - unrealized" included changes in the market value of deferred compensation assets which were offset by an equal opposite amount included in SG&A for the corresponding change in the valuation of deferred compensation liabilities. Other items included in “Other income (expenses)” were pension expense, a gain related to the sale of Torrent Engineering and Equipment in the second quarter of fiscal 2023 totaling approximately $3.0 million, and a loss related to Argentine peso hyperinflation totaling approximately $5.1 million. Pension expense in fiscal 2023 was $0.2 million compared to a pension benefit of $10.1 million in fiscal 2022.
Income Tax Expense
Our effective income tax rate in fiscal 2023 and fiscal 2022 was 38.1% and 29.9%, respectively. In fiscal 2023, the effective tax rate was the result of goodwill impairment charges for which no tax benefits were recorded. In fiscal 2022, the effective tax rate was the result of a change in geographical earnings and the approximately $33.3 million loss from divestiture of the offshore wind energy structures business which had no associated income tax benefit.
Loss (Earnings) Attributable to Redeemable Noncontrolling Interests
Loss (earnings) attributable to redeemable noncontrolling interests reflects the operating results of the subsidiaries the Company does not own 100%. Two of the subsidiaries not 100% owned generated net losses in fiscal 2023 whereas these two subsidiaries generated net earnings in fiscal 2022.
Infrastructure Segment
Fiscal Year Ended
December 30,
December 31,
Dollar
Percent
Dollars in millions
2023
2022
Change
Change
Transmission, Distribution, and Substation
$
1,243.8
$
1,184.7
$
59.1
5.0
%
Lighting and Transportation
964.1
940.5
23.6
2.5
%
Coatings
354.3
356.7
(2.4)
(0.7)
%
Telecommunications
252.2
320.3
(68.1)
(21.3)
%
Solar
195.7
126.2
69.5
55.1
%
Total sales
$
3,010.1
$
2,928.4
$
81.7
2.8
%
Operating income
$
396.3
$
354.5
$
41.8
11.8
%
Infrastructure segment sales increased in fiscal 2023, as compared to fiscal 2022, due to increased average selling prices across all product lines and increased volumes in TD&S and Solar, partially offset by unfavorable foreign currency translation effects and much lower volumes in Telecommunications. Infrastructure segment sales increased in North America in fiscal 2023, as compared to fiscal 2022, while decreasing slightly internationally in the same period.
Transmission, Distribution, and Substation product line sales increased in fiscal 2023, as compared to fiscal 2022, due to increased average selling prices and increased sales volumes, partially offset by unfavorable foreign currency translation effects totaling approximately $4.0 million.
Lighting and Transportation product line sales increased in fiscal 2023, as compared to fiscal 2022, due to increased average selling prices and increased sales volumes, partially offset by an unfavorable currency translation effect totaling approximately $8.1 million.
Coatings product line sales decreased in fiscal 2023, as compared to fiscal 2022, due to decreased sales volumes along with an unfavorable currency translation effect totaling approximately $6.5 million partially offset by increased average selling prices.
Telecommunications product line sales decreased in fiscal 2023, as compared to fiscal 2022, due to decreased sales volumes partially offset by increased average selling prices and incremental sales from the second quarter of fiscal 2022 acquisition of ConcealFab totaling $12.2 million. We expect sales for Telecommunications to remain lower until network enhancement spending of the major carriers returns to more elevated levels. As the continued rollout and expansion of 5G wireless technology accelerates globally, sales for our products are expected to grow.
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Solar product line sales increased in fiscal 2023, as compared to fiscal 2022, due to increased sales volumes primarily attributable to increased market share and throughput in the North American and European markets.
We expect Infrastructure segment sales to increase mid-single digits in fiscal 2024 from growth in the TD&S and Solar product lines attributed to the grid hardening efforts in the U.S. and the global energy transition.
Infrastructure segment gross profit and gross profit margin increased in fiscal 2023, as compared to fiscal 2022, due to contractual customer pricing mechanisms and selling price management leading to increased average selling prices and deliberate actions to improve overall costs of goods sold. These items, partially offset by a decrease in sales volumes in the Telecommunications product line, resulted in an overall increase in the amount of gross profit.
Infrastructure segment SG&A increased in fiscal 2023, as compared to fiscal 2022, due to increased compensation and incentive costs, increased bad debt reserve charges including approximately $2.7 million related to a Telecommunications customer that became insolvent, increased research and development expenses, and incremental SG&A from the June 2022 acquisition of ConcealFab.
We incurred severance and other employee benefit costs totaling $17.3 million within the Infrastructure segment in fiscal 2023 related to the Realignment Program.
Infrastructure segment operating income increased in fiscal 2023, as compared to fiscal 2022, due to gross profit improvements, driven by favorable pricing and deliberate actions to improve overall costs of goods sold more than offsetting increased SG&A.
Agriculture Segment
Fiscal Year Ended
December 30,
December 31,
Dollar
Percent
Dollars in millions
2023
2022
Change
Change
North America
$
587.1
$
766.9
$
(179.8)
(23.4)
%
International
595.1
579.8
15.3
2.6
%
Total sales
$
1,182.2
$
1,346.7
$
(164.5)
(12.2)
%
Operating income
$
16.9
$
179.3
$
(162.4)
(90.6)
%
Agriculture segment sales decreased in fiscal 2023, as compared to fiscal 2022. In North America, the decrease in sales in fiscal 2023, as compared to fiscal 2022, was primarily due to notably lower sales volumes of irrigation equipment. This was impacted by lower net farm income, growers’ decisions to delay capital investments due to general economic uncertainty, and a number of macroeconomic factors including higher interest rates, continued inflationary pressures, and recessionary fears. International sales growth was driven by higher project sales and incremental sales from the HR Products acquisition totaling $14.0 million partially offset by lower sales volumes in Brazil due to muted farmer sentiment attributed to lower agricultural commodity prices. Sales of technology-related products and services in fiscal 2023 were similar to fiscal 2022.
Our Agriculture business is cyclical and is impacted by changes in net farm income, commodity prices, weather volatility, geopolitical factors, and farmer sentiment related to future economic uncertainty. We continue to monitor potential impacts of these factors on our financial results including estimated U.S. net farm income, as released periodically by the USDA. In Brazil, we also actively track changes in soybean and other crop prices and projected farm input costs to evaluate grower sentiment.
Irrigation equipment and aftermarket part sales in North America are expected to remain below prior year levels in fiscal 2024. The previous three fiscal years benefited from record levels of disaster relief and pandemic-related stimulus for farmers in North America which contributed to higher demand.
Agriculture segment gross profit increased in fiscal 2023, as compared to fiscal 2022, due to deflation in the cost of steel and other favorable changes in input costs more than offsetting the impact of lower sales volumes.
Agriculture segment SG&A increased in fiscal 2023, as compared to fiscal 2022, due to increased bad debt reserve charges, particularly in Brazil, and increased employment costs, partially offset by decreased incentive expenses.
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We incurred severance and other employee benefit costs totaling $9.1 million within the Agriculture segment in fiscal 2023 related to the Realignment Program.
Agriculture segment operating income decreased in fiscal 2023, as compared to fiscal 2022, primarily due to the impairment of certain goodwill and other intangible assets in the third quarter of fiscal 2023 totaling approximately $137.2 million, along with decreased sales volumes offset by gross profit improvements.
Other
In November 2022, we completed the sale of Valmont SM, an offshore wind energy structures business with operations in Denmark. We realized an approximate $33.3 million loss on the sale that was recorded in “Other income (expenses)” in the Consolidated Statements of Earnings. The final payment of $2.2 million was received in January 2024, subsequent to the fiscal year ended December 30, 2023.
Corporate
Corporate SG&A increased in fiscal 2023, as compared to fiscal 2022, due to increased employment costs, increased professional fees, and incremental expense from changes in the valuation of deferred compensation plan liabilities. Charges related to changes in deferred compensation plan liabilities are offset by an opposite change in an equal amount included in “Other income (expenses)” for the change in deferred compensation plan assets.
We incurred severance and other employee benefit costs totaling $8.8 million within Corporate expense in fiscal 2023 related to the Realignment Program.
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 generally in the range of 15% of the prior fiscal year’s fully diluted net earnings;
● acquisitions; and
● return of capital to shareholders through share repurchases.
We intend to manage our capital structure to maintain our investment grade debt rating. Our most recent ratings were Baa3 by Moody’s Investors Service, Inc., BBB- by Fitch Ratings, Inc., and BBB+ by S&P Global Ratings. 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.
In May 2014, the Board of Directors authorized the purchase of up to $500.0 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 $250.0 million of share repurchases in February 2015 and again in October 2018, and authorized an additional $400.0 million of share repurchases in February 2023. These authorizations have no expiration date. The purchases are 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 30, 2023, we have acquired approximately 7.9 million shares for approximately $1,263.9 million under this share repurchase program.
In November 2023, we entered into an accelerated purchase agreement to repurchase $120.0 million of the Company’s outstanding common stock, under our previously announced share repurchase program described above. In the fourth quarter of fiscal 2023, we pre-paid $120.0 million and received an initial delivery of a number of shares of common stock which represented 75% of the prepayment amount. The accelerated share repurchase will be completed during the first quarter of fiscal 2024.
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In February 2023, the Company announced that the Board of Directors approved an increase to the quarterly cash dividend on the common stock to $0.60 per share, or a rate of $2.40 per share on an annualized basis, an increase of 9% from the prior quarterly cash dividend of $0.55 per share.
Supplier Finance Program
We have a supplier finance program agreement with a financial institution which allows qualifying suppliers, at their election and on terms they negotiate directly with the financial institution, to sell their receivables from the Company. A supplier’s voluntary participation in the program does not change our payment terms, amounts paid, payment timing, or impact our liquidity, and we have no economic interest in a supplier’s decision to participate. As of December 30, 2023 and December 31, 2022, our accounts payable on our Consolidated Balance Sheets included $41.9 million and $48.9 million, respectively, of our payment obligations under this program.
Sources of Financing
Our debt financing as of December 30, 2023 consisted primarily of long‑term debt and borrowings on our revolving credit facility. Our long‑term debt as of December 30, 2023, principally consisted of:
● $450.0 million face value ($433.5 million carrying value) of senior unsecured notes that bear interest at 5.00% per annum and are due in October 2044, and
● $305.0 million face value ($295.2 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 JPMorgan Chase Bank, N.A., as Administrative Agent, and the other lenders party thereto, has a maturity date of October 18, 2026.
The revolving credit facility provides for $800.0 million of committed unsecured revolving credit loans with available borrowings thereunder to $400.0 million in foreign currencies. We may increase the credit facility by up to an additional $300.0 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.
The interest rate on our borrowings will be, at our option, either:
(a) term Secured Overnight Financing Rate (“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 S&P Global Ratings 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 one-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 S&P Global Ratings 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 S&P Global Ratings and Moody’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 S&P Global Ratings and Moody’s Investors Service, Inc., on the average daily unused portion of the commitments under the revolving credit agreement.
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As of December 30, 2023 and December 31, 2022, we had outstanding borrowings of $377.9 million and $140.5 million, respectively, 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. As of December 30, 2023, we had the ability to borrow $421.9 million under this facility, after consideration of standby letters of credit of $0.2 million associated with certain insurance obligations. We also maintain certain short‑term bank lines of credit totaling $39.3 million, of which $36.1 million were unused as of December 30, 2023.
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 or less. The leverage ratio is the ratio of: (a) interest-bearing debt minus unrestricted cash in excess of $50.0 million (but not exceeding $500.0 million) to (b) earnings before interest, taxes, depreciation, and amortization, adjusted for non-cash stock-based compensation and non-cash charges or gains that are non-recurring in nature, subject to certain limitations (“Adjusted EBITDA”). The leverage ratio is permitted to increase from 3.50 to 3.75 for the four consecutive fiscal quarters after certain material acquisitions.
The 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 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).
As of December 30, 2023, we were in compliance with all covenants related to these debt agreements.
The calculation of Adjusted EBITDA and the leverage ratio are presented in the tables below in Selected Financial Measures.
Cash Uses
Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to the 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 2024 are expected to consist primarily of capital expenditures, pension plan contributions, operating leases, and interest on outstanding debt. We also have unconditional purchase commitments that relate to purchase orders for zinc, aluminum, and steel, all of which we plan to use in fiscal 2024. 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 2024 are expected to be approximately $125.0 million to $140.0 million.
The following table summarizes current and long-term material cash requirements as of December 30, 2023:
Next 12
Dollars in millions
Months
Thereafter
Total
Long‑term debt
$
0.7
$
1,134.2
$
1,134.9
Interest 1
57.7
901.3
959.0
Pension plan contributions
16.7
200.2
216.9
Operating leases
27.9
222.4
250.3
Total contractual cash obligations
$
103.0
$
2,458.1
$
2,561.1
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,
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access to capital markets, and our history of positive operational cash flows, we believe that we have adequate liquidity to meet our needs for fiscal 2024 and beyond.
We had cash balances of $203.0 million as of December 30, 2023 with approximately $162.0 million held in our non-U.S. subsidiaries. If we distributed our foreign cash balances, certain taxes would be applicable. As of December 30, 2023, we had a liability for foreign withholding taxes and U.S. state income taxes of $1.6 million and $0.8 million, respectively.
Cash Flows
The following table includes a summary of our cash flow information for the fiscal years ended December 30, 2023, December 31, 2022, and December 25, 2021:
Fiscal Year Ended
December 30,
December 31,
December 25,
Dollars in thousands
2023
2022
2021
Net cash flows provided by operating activities
$
306,775
$
326,265
$
65,938
Net cash flows used in investing activities
(115,281)
(132,080)
(417,308)
Net cash flows provided by (used in) financing activities
(176,405)
(181,905)
133,500
Operating Cash Flows and Working Capital – Cash provided by operating activities totaled $306.8 million in fiscal 2023, as compared with $326.3 million in fiscal 2022. The decrease in operating cash flows reflects cash flows generated from higher gross profits, more than offset by increases in tax and interest payments of $10.6 million and $8.9 million, respectively, and payments of severance and other employee benefit costs related to the Realignment Program totaling $22.7 million in fiscal 2023.
Investing Cash Flows – Cash used in investing activities totaled $115.3 million in fiscal 2023, as compared to $132.1 million in fiscal 2022. Investing activities in fiscal 2023 included capital spending of $96.8 million and the acquisition of HR Products, net of cash acquired, of $32.7 million partially offset by proceeds from the divestiture of Torrent Engineering and Equipment, net of cash divested, of $6.4 million, and proceeds from property damage insurance claims of $7.5 million. Investing activities in fiscal 2022 included capital spending of $93.3 million and the acquisition of a controlling ownership investment in ConcealFab for $39.3 million.
Financing Cash Flows – Cash used in financing activities totaled $176.4 million in fiscal 2023, as compared to $181.9 million in fiscal 2022. Our total interest‑bearing debt increased to $1,138.1 million as of December 30, 2023, from $878.0 million as of December 31, 2022. The financing cash used in fiscal 2023 was primarily the result of borrowings on the revolving credit agreement and short-term notes of $400.8 million, offset by principal payments on our long-term debt and short-term borrowings of $168.8 million, dividends paid of $49.5 million, the purchase of treasury shares of $345.3 million, and $12.9 million of net activity from stock option and incentive plans, including the associated withholding tax payments. The financing cash used in fiscal 2022 primarily consisted of principal payments of long-term borrowings of $336.4, offset by proceeds from long-term debt borrowings of $254.0 million, dividends paid of $45.8 million, net payments on short-term agreements of $7.6 million, the purchase of treasury shares of $40.5 million, and the purchase of redeemable noncontrolling interests of $7.3 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 our 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 the Issuer and Guarantors is presented on a combined basis with intercompany balances and transactions between the Issuer and Guarantors eliminated. The Issuer’s or Guarantors’ amounts due from, amounts due to, and transactions with non-guarantor subsidiaries are separately disclosed.
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Combined financial information for the fiscal years ended December 30, 2023, December 31, 2022, and December 25, 2021 was as follows:
Fiscal Year Ended
December 30,
December 31,
December 25,
Dollars in thousands
2023
2022
2021
Net sales
$
2,713,928
$
2,876,425
$
2,139,427
Gross profit
756,966
695,211
574,128
Operating income
255,401
268,142
208,041
Net earnings
134,831
167,114
120,655
Net earnings attributable to Valmont Industries, Inc.
133,300
167,220
120,458
Combined financial information as of December 30, 2023 and December 31, 2022 was as follows:
December 30,
December 31,
Dollars in thousands
2023
2022
Current assets
$
777,539
$
769,263
Non-current assets
872,016
925,088
Current liabilities
361,211
459,961
Non-current liabilities
1,436,131
1,189,548
Redeemable noncontrolling interests
10,518
1,612
Included in non-current assets is a due from non-guarantor subsidiaries receivable of $136,904 and $205,424 as of December 30, 2023 and December 31, 2022, respectively. Included in non-current liabilities is a due to non-guarantor subsidiaries payable of $216,633 and $200,522 as of December 30, 2023 and December 31, 2022, respectively.
Selected Financial Measures
We are including the following financial measures for the Company.
Return on Invested Capital – Return on invested capital (“ROIC”) and Adjusted ROIC are some of our key operating ratios, as they allow investors to analyze our operating performance in light of the amount of investment required to generate our operating profit. ROIC and Adjusted ROIC are also measurements used to determine management incentives. The table below shows how invested capital, ROIC, and Adjusted ROIC are calculated from our Consolidated Statements of Earnings and our Consolidated Balance Sheets. ROIC is calculated as after-tax operating income divided by the average of beginning and ending invested capital. Adjusted ROIC is calculated as after-tax operating income adjusted for the impairment of long-lived assets, realignment charges, non-recurring charges associated with the major scope changes for two strategic projects initiated by departed senior leadership, intangible asset amortization and stock-based compensation related to the Prospera subsidiary acquisition, the write-off of a receivable, and acquisition diligence then divided by the average of beginning and ending invested capital. Invested capital represents total assets minus total liabilities (excluding interest-bearing debt and redeemable noncontrolling interests). ROIC and Adjusted ROIC are non-generally accepted accounting principles (“GAAP”) measures. Accordingly, invested capital, ROIC, and Adjusted ROIC 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.
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The calculation of these ratios for the fiscal years ended December 30, 2023, December 31, 2022, and December 25, 2021 was as follows:
Fiscal Year Ended
December 30,
December 31,
December 25,
Dollars in thousands
2023
2022
2021
Operating income
$
291,557
$
433,249
$
286,785
Adjusted effective tax rate 1
38.1
%
27.7
%
23.6
%
Tax effect on operating income
(111,124)
(119,872)
(67,681)
After-tax operating income
$
180,433
$
313,377
$
219,104
Average invested capital
$
2,504,474
$
2,437,232
$
2,176,577
Return on invested capital
7.2
%
12.9
%
10.1
%
Operating income
$
291,557
$
433,249
$
286,785
Impairment of long-lived assets
140,844
—
27,911
Realignment charges
35,210
—
4,052
Other non-recurring charges
5,626
—
—
Prospera intangible asset amortization 3
—
6,580
3,396
Prospera stock-based compensation 3
—
9,896
5,240
Write-off of a receivable
—
—
5,545
Acquisition diligence
—
—
1,120
Adjusted operating income
$
473,237
$
449,725
$
334,049
Adjusted effective tax rate 1,2
25.9
%
27.7
%
23.6
%
Tax effect on adjusted operating income
(122,665)
(124,431)
(78,836)
After-tax adjusted operating income
$
350,572
$
325,294
$
255,213
Average invested capital
$
2,504,474
$
2,437,232
$
2,176,577
Adjusted return on invested capital
14.0
%
13.3
%
11.7
%
Total assets
$
3,477,448
$
3,556,996
$
3,447,249
Less: Defined benefit pension asset
(15,404)
(24,216)
—
Less: Accounts payable
(358,311)
(360,312)
(347,841)
Less: Accrued expenses
(277,764)
(248,320)
(253,330)
Less: Contract liabilities
(70,978)
(172,915)
(135,746)
Less: Income taxes payable
—
(3,664)
—
Less: Dividends payable
(12,125)
(11,742)
(10,616)
Less: Deferred income taxes
(21,205)
(41,091)
(47,849)
Less: Operating lease liabilities
(162,743)
(155,469)
(147,759)
Less: Deferred compensation
(32,623)
(30,316)
(35,373)
Less: Defined benefit pension liability
—
—
(536)
Less: Other non-current liabilities
(12,818)
(13,480)
(89,207)
Total invested capital
$
2,513,477
$
2,495,471
$
2,378,992
Beginning invested capital
$
2,495,471
$
2,378,992
$
1,974,162
Average invested capital
$
2,504,474
$
2,437,232
$
2,176,577
1 The adjusted effective tax rate for fiscal 2022 excluded the effects of the $33.3 million loss from the divestiture of the offshore wind energy structures business which was not deductible for income tax purposes. The effective tax rate including the loss on the divestiture was 29.9%.
2 The adjusted effective tax rate for fiscal 2023 excluded the effects of the impairment of long-lived assets of $140.8 million, realignment charges of $35.2 million, non-recurring charges associated with major scope changes for two strategic projects initiated by departed senior leadership of $5.6 million, loss from Argentine peso hyperinflation of $5.1 million, and non-recurring tax benefit items of $3.6 million. The effective tax rate including these items was 38.1%.
3 The Company does not include adjustments for the Prospera non-cash expenses for fiscal 2023 or going forward as these amounts are no longer financially significant after the third quarter of fiscal 2023 impairment of long-lived assets and realignment activities completed during the fourth quarter of fiscal 2023.
ROIC and Adjusted ROIC, as presented, may not be comparable to similarly titled measures of other companies.
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Adjusted EBITDA – 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 3.50 times Adjusted EBITDA (or 3.75 times Adjusted EBITDA after certain material acquisitions), calculated on a rolling four fiscal quarter basis. 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 outline adjustments for non-cash stock-based compensation and non-cash charges or gains that are non-recurring in nature, subject to certain limitations, to be included in the calculation of Adjusted EBITDA. 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 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 Adjusted EBITDA for the fiscal year ended December 30, 2023 was as follows:
Fiscal Year Ended
December 30,
Dollars in thousands
2023
Net cash flows provided by operating activities
$
306,775
Interest expense
56,808
Income tax expense
90,121
Impairment of long-lived assets
(140,844)
Deferred income tax benefit
18,649
Redeemable noncontrolling interests
5,937
Defined benefit pension plan cost
(249)
Contribution to defined benefit pension plan
17,345
Changes in assets and liabilities, net of acquisitions
80,561
Other
602
EBITDA
435,705
Impairment of long-lived assets
140,844
Realignment charges
35,210
Proforma acquisition adjustment
5,152
Adjusted EBITDA
$
616,911
Fiscal Year Ended
December 30,
Dollars in thousands
2023
Net earnings attributable to Valmont Industries, Inc.
$
150,849
Interest expense
56,808
Income tax expense
90,121
Depreciation and amortization expense
98,708
Stock-based compensation
39,219
EBITDA
435,705
Impairment of long-lived assets
140,844
Realignment charges
35,210
Proforma acquisition adjustment
5,152
Adjusted EBITDA
$
616,911
Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies.
Leverage Ratio – Leverage ratio is calculated as the sum of interest-bearing debt minus unrestricted cash in excess of $50.0 million (but not exceeding $500.0 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 3.50 (or 3.75 after certain material acquisitions), calculated on a rolling four fiscal quarter basis. 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.
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The calculation of this ratio as of December 30, 2023 was as follows:
December 30,
Dollars in thousands
2023
Interest-bearing debt, excluding origination fees and discounts of $26,310
$
1,138,119
Less: Cash and cash equivalents in excess of $50,000
153,041
Net indebtedness
985,078
Adjusted EBITDA
616,911
Leverage ratio
1.60
Leverage ratio, as presented, may not be comparable to similarly titled measures of other companies.
MARKET RISK
Changes in Prices
Certain key materials we use are commodities traded in worldwide markets which 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 TD&S product line where the cost of steel has been approximately 50% of net sales, on average. In fiscal 2018, we began using hot rolled steel 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 net sales in this product line by approximately $100.0 million for the fiscal year ended December 30, 2023.
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 natural gas prices on our operating income.
Risk Management
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 Rate Risk: Our interest‑bearing debt as of December 30, 2023 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 fiscal 2023 and fiscal 2022 by approximately $2.5 million and $0.8 million, respectively. 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 by approximately $0.2 million and $0.2 million in fiscal 2023 and fiscal 2022, respectively.
Foreign Exchange Risk: Exposures to transactions denominated in a currency other than an 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. We are 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. As of December 30, 2023, the Company had one outstanding fixed-for-fixed cross currency swap (“CCS”), swapping U.S. dollar principal and interest payments on a portion of its 5.00% senior unsecured notes due in fiscal 2044 for Euro denominated payments. The CCS was entered into in fiscal 2019 in order to mitigate foreign currency risk on our Euro investments and to reduce interest expense. The notional amount of the Euro CCS is $80.0 million and matures in fiscal 2024. In fiscal 2019, the Company entered into a fixed-for-fixed CCS, swapping U.S. dollar principal and interest payments on a portion of its 5.00% senior unsecured notes due in fiscal 2044 for Danish krone (“DKK”) denominated payments. The DKK CCS, which qualified as a net investment hedge, was settled in fiscal 2022, with the Company receiving $3.5 million.
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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 $13.2 million in fiscal 2023 and $11.2 million in fiscal 2022.
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 in the recorded value of our most significant investments as of December 30, 2023 and December 31, 2022 assuming a hypothetical 10% change in the value of the U.S. dollar.
December 30,
December 31,
Dollars in millions
2023
2022
Australian dollar
$
6.9
$
4.3
Brazilian real
18.8
11.8
British pound
17.2
17.5
Canadian dollar
4.0
3.8
Chinese renminbi
5.6
6.0
Euro
9.5
8.6
Commodity Risk: Hot rolled steel coil is a significant commodity input used by each of our segments in the manufacture of our products, with the exception of the Coatings product line. Steel prices are volatile and we may utilize derivative financial instruments to mitigate commodity price risk on fixed-price orders. In fiscal 2023 and fiscal 2022, we entered into hot rolled steel coil forward contracts and swaps which qualified as cash flow hedges of the variability in the cash flows attributable to future steel purchases. As of December 30, 2023, we had open forward contracts and swaps with a notional amount of $7.8 million for the total purchase of 8,500 short tons from December 2023 to April 2024.
Natural gas is a significant commodity used in our factories, especially in our Coatings product line galvanizing operations, where it is used to heat tanks that enable the hot-dipped galvanizing process. Natural gas prices are volatile which is somewhat mitigated through the use of derivative financial instruments. Our current policy is to manage this commodity price risk for 0 to 75% of our U.S. natural gas requirements for the upcoming 6 to 24 months through the purchase of natural gas swaps based on New York Mercantile Exchange 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. As of December 30, 2023, we had open natural gas swaps with a notional value of $4.3 million for 960,475 MMBtu from January 2024 to October 2025.
Diesel fuel is a significant commodity used by our contracted carriers who deliver our products. Diesel fuel prices are volatile which is somewhat mitigated through the use of derivative financial instruments. In fiscal 2023, we entered into diesel fuel option contracts that qualified as cash flow hedges of the variability of cash flows attributable to the diesel fuel costs charged by contracted carriers. As of December 30, 2023, we had open option contracts with a notional amount of $0.5 million for the total purchase of 1,890,000 gallons from January 2024 to September 2024.
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 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 2 to 30 years. In the fourth quarter of fiscal 2021, a pre-tax impairment of $21.4 million of property, plant, and equipment was recognized for the offshore wind energy structures business.
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We annually evaluate our reporting units for goodwill impairment during the third fiscal quarter, which usually coincides with our strategic planning process. We estimated the value of all fourteen of the reporting units identified for the fiscal 2023 goodwill impairment analysis utilizing a discounted cash flow model. The discounted cash flow model uses projected after-tax cash flows from operations (less capital expenditures) discounted to present value. We perform sensitivity analyses to determine what the impact of changes in key assumptions, including discount rates and cash flow forecasts, may have on the valuation of the reporting units.
For the fiscal 2023 annual impairment test, the estimated fair value of two of our reporting units was less than their respective carrying value. As a result, a $120.0 million impairment of our Agriculture Technology reporting unit and a $1.9 million impairment of our India Structures reporting unit were recognized in the third quarter of fiscal 2023.
The primary drivers for the reduction in the estimated fair value of the Agriculture Technology reporting unit were the less favorable outlook for the North American agriculture market and lower revenue projections for the Prospera agronomy software solutions. A higher weighted average cost of capital, primarily driven by increases in overall interest rates since the fiscal 2022 annual impairment test, and lower long-term revenue growth rate assumptions also partially contributed to the reduction in the estimated fair value of the reporting unit.
For the India Structures reporting unit, assumptions around future cash flows including working capital requirements resulted in the impairment of the goodwill.
For all reporting units, 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, 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. We continue to monitor changes in the global economy that could impact the future operating results of our reporting units. If such adverse conditions arise, we will test impacted reporting units 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.
For four of our reporting units, Europe, Middle East & Africa Structures, Asia Pacific Highway Safety, Asia Pacific Access Systems, and Solar Tracking Structure, the amount of cushion or excess fair value above carrying value was less than 15%. We have identified cost-saving initiatives within these reporting units and believe they will continue to generate positive cash flows in excess of their current carrying value, however, we will continue to monitor their prospects for growth and continuous improvement. Should our assumptions around these businesses change negatively, there could be additional triggers for another goodwill assessment in the future.
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. Based on our fiscal 2023 annual testing, the carrying value of one trade name exceeded its estimated fair value. An impairment of $1.7 million was recognized within the Infrastructure segment.
During the fourth quarter of fiscal 2021, an impairment test was required when the Company received clarifying information on the competitive environment of the offshore wind energy structures business. As a result, impairment charges of $2.0 million were recognized against the related trade name and $4.5 million were recognized against the related customer relationships asset.
In the third quarter of fiscal 2023, the Company tested the recoverability of a certain amortizing proprietary technology intangible asset related to Prospera included within the Agriculture Technology reporting unit due to identified impairment indicators. The Company determined the carrying value of the asset exceeded the total undiscounted estimated future cash flows and reduced the asset to its fair value. An impairment of $17.3 million was recognized within the Agriculture segment.
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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.
As of December 30, 2023, we had approximately $58.5 million in deferred tax assets relating to tax credits and loss carryforwards, with a valuation allowance of $42.4 million, including $2.5 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 re-invested and, accordingly, we have a deferred tax liability of $2.4 million related to these unremitted foreign earnings for future taxes that will be incurred when cash is repatriated.
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 U.K. 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 members. 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 is 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.
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The discount rate used to measure the defined benefit obligation was 4.50% as of December 30, 2023. The following tables present the key assumptions in the measurement of the pension cost for fiscal 2024 and the estimated impact relative to a change in those assumptions for fiscal 2024:
Assumptions
Discount rate
4.50
%
Expected return on plan assets
5.05
%
Inflation - CPI
2.25
%
Inflation - RPI
3.05
%
Increase
in Pension
Dollars in millions
Cost
0.25% decrease in discount rate
$
0.3
0.25% decrease in expected return on plan assets
1.3
0.25% increase in inflation
1.0
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.
The following provides additional information about our contracts with TD&S and certain Telecommunications customers where the revenue recognition is over time, the judgments we make in accounting for those contracts, and the resulting amounts recognized in our Consolidated Financial Statements.
Accounting for utility structures and telecommunication monopole contracts: TD&S and Telecommunications 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 transferred over time, revenue is recognized based on the extent of progress toward completion of the performance obligation. We also have certain Telecommunications 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 the time of the shipment of the structure.
The selection of the method to measure progress toward completion requires judgment. For our TD&S and Telecommunications 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 system captures the total costs incurred to date and the total production hours, both incurred to date and forecast to complete. The offshore wind energy structures business, divested in the fourth quarter of fiscal 2022, also recognized revenue 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 and 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 TD&S customer orders in a fiscal year that require one to three 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 wind energy structures business, prior to its divestiture in the fourth quarter of fiscal 2022, we updated the estimates of total costs to complete each order quarterly. Based on these updates, revenue in the current fiscal period may reflect adjustments for amounts that had been previously recognized. During fiscal 2023, 2022, and 2021, there were no changes to inputs or estimates which resulted in
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adjustments to revenue for production that occurred prior to the beginning of the fiscal 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 in the section “Market Risk” within "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this report.
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