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VMI > SEC Filings for VMI > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for VALMONT INDUSTRIES INC

Form 10-Q for VALMONT INDUSTRIES INC


29-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions that management has made in light of experience in the industries in which the Company operates, as well as management's perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond the Company's control) and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions. Many factors could affect the Company's actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. These factors include, among other things, risk factors described from time to time in the Company's reports to the Securities and Exchange Commission, as well as future economic and market circumstances, industry conditions, company performance and financial results, operating efficiencies, availability and price of raw materials, availability and market acceptance of new products, product pricing, domestic and international competitive environments, and actions and policy changes of domestic and foreign governments.

This discussion should be read in conjunction with the financial statements and notes thereto, and the management's discussion and analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.


Table of Contents

Results of Operations

    Dollars in millions, except per share amounts

                             Thirteen Weeks Ended                          Thirty-nine Weeks Ended
                  September 29,     September 24,    % Incr.      September 29,     September 24,    % Incr.
                      2012              2011         (Decr.)          2012              2011         (Decr.)
Consolidated
Net sales          $       729.8     $       672.2        8.6 %   $      2,214.5    $      1,908.8       16.0 %
Gross profit               192.4             167.4       14.9 %            578.1             471.9       22.5 %
as a percent
of sales                    26.4 %            24.9 %                        26.1 %            24.7 %
SG&A expense               102.0              95.4        6.9 %            307.6             285.9        7.6 %
as a percent
of sales                    14.0 %            14.2 %                        13.9 %            15.0 %
Operating
income                      90.4              72.0       25.6 %            270.6             186.0       45.5 %
as a percent
of sales                    12.4 %            10.7 %                        12.2 %             9.7 %
Net interest
expense                      6.3               4.5       40.0 %             17.6              19.8      (11.1 )%
Effective tax
rate                        33.3 %            36.1 %                        36.2 %            30.6 %
Net earnings       $        56.7     $        42.1       34.7 %   $        169.0    $        113.6       48.8 %
Diluted
earnings per
share              $        2.12     $        1.59       33.3 %   $         6.32    $         4.28       47.7 %
Engineered
Infrastructure
Products
Net sales          $       219.3     $       215.6        1.7 %   $        616.0    $        579.6        6.3 %
Gross profit                57.3              53.3        7.5 %            156.0             135.9       14.8 %
SG&A expense                38.6              36.1        6.9 %            115.1             105.0        9.6 %
Operating
income                      18.7              17.2        8.7 %             40.9              30.9       32.4 %
Utility
Support
Structures
Net sales          $       216.9     $       155.3       39.7 %   $        617.9    $        415.3       48.8 %
Gross profit                49.6              31.7       56.5 %            138.6              91.5       51.5 %
SG&A expense                19.4              17.0       14.1 %             56.7              50.3       12.7 %
Operating
income                      30.2              14.7      105.4 %             81.9              41.2       98.8 %
Coatings
Net sales          $        71.4     $        69.0        3.5 %   $        213.1    $        204.1        4.4 %
Gross profit                26.3              22.7       15.9 %             79.0              65.1       21.4 %
SG&A expense                 7.7               8.4       (8.3 )%            24.4              25.5       (4.3 )%
Operating
income                      18.6              14.3       30.1 %             54.6              39.6       37.9 %
Irrigation
Net sales                  156.4             150.6        3.9 %   $        546.7    $        485.4       12.6 %
Gross profit                44.5              42.4        5.0 %            156.4             131.1       19.3 %
SG&A expense                17.3              18.7       (7.5 )%            53.2              50.5        5.3 %
Operating
income                      27.2              23.7       14.8 %            103.2              80.6       28.0 %
Other
Net sales                   65.8              81.7      (19.5 )%  $        220.8    $        224.4       (1.6 )%
Gross profit                14.5              17.3      (16.2 )%            47.9              48.2       (0.6 )%
SG&A expense                 4.8               4.7        2.1 %             14.5              15.3       (5.2 )%
Operating
income                       9.7              12.6      (23.0 )%            33.4              32.9        1.5 %
Net corporate
expense
Gross profit                 0.2                 -         NM     $          0.2    $          0.1         NM
SG&A expense                14.2              10.4       36.5 %             43.6              39.3       10.9 %
Operating loss             (14.0 )           (10.4 )    (34.6 )%           (43.4 )           (39.2 )    (10.7 )%

NM=Not meaningful


Table of Contents

Overview

On a consolidated basis, the increases in net sales in the third quarter and first three quarters of 2012, as compared with 2011, were due to the following factors:


Unit sales volumes increased approximately $54 million and $313 million in the third quarter and first three quarters of fiscal 2012, respectively, as compared with 2011. In the third quarter and first three quarters of 2012, all reportable segments reported higher sales, as compared with the same periods in 2011. The segments with the most significant unit sales increases were the Utility Support Structures and Irrigation segments.


Sales prices and mix in the aggregate for the third quarter and first three quarters of 2012 were higher than 2011 by approximately $20 million and $27 million, respectively.

Foreign currency translation, in the aggregate, resulted in lower net sales and operating income in the third quarter and first three quarters of 2012, as compared with 2011. On average, the U.S. dollar strengthened against most currencies in 2012, as compared to 2011. The most significant currencies that contributed to this movement were the euro, Australian dollar, Brazilian real and the South African rand. On a segment basis, the currency effects on net sales and operating income in the third quarter and first three quarters of 2012, as compared with 2011, were as follows (in millions):

                                     Third Quarter Effect          Year-to-date Effect
                                                   Operating                    Operating
                                   Net Sales        Income       Net Sales       Income
Engineered Infrastructure
Products                           $      (6.4 )   $     (0.4 )  $    (13.8 )   $     (0.7 )
Coatings                                  (0.8 )         (0.1 )        (2.5 )         (0.3 )
Irrigation                                (5.6 )         (0.8 )       (10.9 )         (1.6 )
Other                                     (3.4 )         (0.4 )        (7.0 )         (0.8 )

Total                              $     (16.2 )   $     (1.7 )  $    (34.2 )   $     (3.4 )

The increase in gross profit margin (gross profit as a percent of sales) in fiscal 2012, as compared with 2011, was primarily due to improved sales pricing and mix and moderating raw material costs in 2012 as compared with 2011. Steel prices and zinc prices in 2012 were down slightly as compared with 2011. LIFO expense for the first three quarters of 2012 was $10.3 million lower than the same period in 2011, contributing to the comparatively higher gross profit margin in 2012, as compared with 2011.

Selling, general and administrative (SG&A) expense in the third quarter and first three quarters of 2012, as compared with 2011, increased mainly due to the following factors:


Increased employee incentive accruals of $2.3 million and $6.9 million, respectively, due to improved operating results;


Increased compensation expenses of $6.0 million and $14.3 million, respectively, associated with increased employment levels and increased employee benefit costs;


Increased commissions of $0.3 million and $1.7 million, respectively, related to higher sales;


Deferred compensation expense of $2.2 million and $3.2 million, respectively, incurred in the third quarter and first three quarters of 2012 associated with the increase in deferred compensation plan liabilities. The corresponding increase in deferred compensation plan assets was recorded as a decrease in "Other" expense; and,


Australia stamp duty expense of $1.2 million incurred in the first quarter of 2012 related to the legal restructuring that was completed in fiscal 2011. This expense was non-recurring in nature.


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These increases were offset to a degree by settlements related to property insurance claims and a settlement related to a vendor dispute aggregating $1.4 million and $3.7 million in the third quarter and first three quarters, respectively, of 2012. These expense decreases were considered non-recurring in nature. SG&A expense also decreased in the third quarter and first three quarters of 2012, as compared with 2011, due to foreign exchange translation effects of $2.0 million and $4.2 million, respectively.

The increase in operating income on a reportable segment basis in the third quarter and first three quarters of 2012, as compared with 2011, was due to improved operating performance in all reportable segments. The "Other" category reported lower operating income in the third quarter of 2012, as compared with 2011. Operating income in the "Other" category for the first three quarters of 2012 was comparable with 2011.

The increase in net interest expense in the third quarter of fiscal 2012, as compared with 2011, mainly was attributable to interest income received on certain income tax refunds in 2011 (approximately $1.0 million) and $0.4 million of unamortized debt issue costs that were written off when we renewed our revolving credit agreement in the third quarter of 2012. On a year-to-date basis, net interest expense is lower in 2012 as compared with 2011, due to interest savings realized from the refinancing of our $150 million of senior subordinated debt in June 2011 and approximately $2.8 million of expense incurred in the second quarter of 2011 related to the refinancing of our $150 million of senior subordinated notes. Average borrowing levels in 2012 were comparable with 2011.

The decrease in "Other" expenses in the third quarter and first three quarters of fiscal 2012, as compared with 2011, was mainly due to investment returns in the assets held in our deferred compensation plan of $2.2 million and $3.2 million, respectively. The increase in the value of these assets was offset by a corresponding increase in our deferred compensation liabilities, which was reflected as an increase in SG&A expense. Accordingly, there was no effect on net earnings from these investment gains.

Our effective income tax rate in the third quarter of fiscal 2012 was lower than 2011, mainly due to a more favorable result this year in the reconciliation of our annual income tax filings and certain non-deductible currency losses in our Mexican operation in 2011 that did not occur in 2012. In the third quarter of 2012, the U.K. reduced its income tax rate from 26% to 24%. As a result, our income tax expense increased in the third quarter of 2012 by $4.0 million, mainly due to the revaluation of deferred income tax assets. This effect on our third quarter 2012 income tax expense was largely mitigated by increased foreign tax credits and other tax benefits in 2012. On a year-to-date basis, our effective tax rate in 2012 was higher than 2011 due to a $4.1 million tax benefit related to the acquisition of the 40% of our grinding media operation that we did not own, $1.4 million of income tax contingencies that we reversed in 2011 due to the expiring of statutes of limitation and a higher share of our pre-tax earnings coming from our U.S. operations. Going forward, depending on our geographic mix of earnings and currently enacted income tax rates in the countries in which we operate, we expect our effective tax rate to approximate 34%.

Earnings attributable to noncontrolling interests was lower in the third quarter and first three quarters of 2012, as compared with 2011, mainly due to lower net earnings in those consolidated operations that are less than 100% owned, partly due to currency translation effects. On a year-to-date basis, the 2012 decrease was also due to the purchase of the noncontrolling interest in our grinding media operation in June 2011. This operation was previously 40% owned by noncontrolling interests.

Our cash flows provided by operations were $117.7 million in 2012, as compared with $64.1 million in 2011. The increase in operating cash flow resulted from increased net income in 2012. Working capital increased somewhat is 2012, due mainly to increased sales levels, and results in operating cash flow being less than net earnings.


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Engineered Infrastructure Products (EIP) segment

The increase in EIP segment net sales in the third quarter and first three quarters of fiscal 2012, as compared with 2011, was due to improved sales volumes of approximately $4 million and $34 million, respectively, and $6 million and $17 million, respectively, of favorable pricing and sales mix changes. These increases were offset to a degree, by unfavorable foreign exchange translation effects of approximately $6 million and $14 million, respectively. North America lighting sales in the third quarter of 2012 were comparable with 2011, while sales in the first three quarters of 2012 were up modestly over last year. The increase in sales mainly resulted from higher sales prices and favorable sales mix. The transportation market for lighting and traffic structures continues to be steady but not particularly strong. While a two-year extension to the current U.S. highway funding legislation was enacted in the third quarter, this event has not yet affected the market for lighting and traffic structures. We also believe that state budget issues are limiting roadway project activity. Sales in other market channels such as sales to lighting fixture manufacturers and commercial construction projects in 2012 were comparable with 2011. In Europe, sales in the third quarter and first three quarters of fiscal 2012 were lower than the comparable periods in 2011. We divested of our Turkish and Italian operations in late 2011, resulting in lower sales in the third quarter and first three quarters of 2012, as compared with 2011, of $5.2 million and $13.6 million, respectively. Current economic conditions in Europe and weak and uncertain. As a result, public spending for streets and highways is under pressure, as governments dealing with lower tax receipts and budget deficits. However, lighting sales in local currency were higher in the the third quarter and first three quarters of 2012, as compared with 2011. Stronger sales in France, Scandinavia and the U.K. were offset somewhat by weaker sales volumes in northern Europe.

Communication product line sales in the third quarter and first three quarters of fiscal 2012 were improved over 2011. North America sales in the third quarter and first three quarters of 2012 were $8.4 million and $20.3 million, respectively, higher in 2012, as compared with 2011. The increase in sales was attributable to improved market conditions (somewhat attributable to the build out of 4G wireless technology) and the resolution of the proposed AT&T/T-Mobile merger, which we believe slowed sales activity for structures and components in 2011. In China, sales of wireless communication structures in 2012 were comparable with 2011.

Sales in the access systems product line in 2012 were improved as compared with 2011, as industrial production investments in the mining and energy economic sectors are increasing in the Asia Pacific region.

Sales of highway safety products in the third quarter of 2012 was comparable with 2011, while year-to-date sales in 2012 were somewhat higher as compared with 2011. Floods in parts of Australia affected infrastructure spending in the first three quarters of 2011, as public spending priorities shifted from roadway development to supporting recovery from the floods. The improvement in 2012 reflects a more normal demand pattern for this product line. While public spending on roadways in Australia is down somewhat in 2012, establishment of sales channels in other countries in the Asia Pacific region has helped maintain sales volumes for the product line.

Operating income for the segment in the third quarter and first three quarters of fiscal 2012 was higher than 2011. Improved operating income resulted from higher sales volumes, improved sales prices and moderating raw material costs (including $2.6 million of lower year-to-date LIFO expense), offset somewhat by factory operational inefficiencies of $5.2 million and $12.3 million, respectively. The factory operational inefficiencies related mainly to start-up costs related to capacity expansion in the U.S. and certain production inefficiencies in Europe. The increase in SG&A spending in the third quarter and first three quarters of 2012, as compared with 2011, mainly was attributable to higher compensation costs of $2.2 million and $6.2 million, respectively, and increased employee incentives of $1.1 million and $2.8 million, respectively. These increases were offset to a degree by currency translation effects of $1.2 million in the third quarter and $2.4 million in the first three quarters of fiscal 2012, as compared with the same periods in 2011.


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Utility Support Structures (Utility) segment

In the Utility segment, the sales increase in the third quarter and first three quarters of 2012, as compared with 2011, was primarily due to improved unit sales volumes of approximately $49 million and $211 million, respectively. In U.S. markets, investments in the electrical grid by utility companies is increasing, resulting in improved sales of transmission and substation structures. The effect of sales mix was favorable for the third quarter of 2012, as compared with 2011, by approximately $13 million, while the year-to-date sales mix effect in fiscal 2012 was unfavorable, as compared with 2011, by approximately $7 million. The unfavorable year-to-date mix effect reflected shipments on certain large orders that were taken in 2010, when market pricing was particularly low. As market conditions improved, pricing recovered to a degree, resulting in improved pricing and mix in the third quarter. Sales in international markets in the third quarter was comparable with 2011, while year-to-date fiscal 2012 sales were slightly lower than 2011. Sales in the Asia Pacific region are higher, offset to some extent by lower sales in Europe and the Middle East.

Operating income in fiscal 2012, as compared with 2011, increased due to the increase in North America sales volume, moderating raw material costs and leverage effects on fixed SG&A and factory expenses. These positive effects were offset to a degree in the third quarter and first three quarters of 2012 by $1.3 million and $8.4 million, respectively, of additional costs associated with production inefficiencies and unanticipated costs related to certain large orders. The increase in SG&A expense for the segment in fiscal 2012 as compared with 2011, was mainly due to increased employee compensation of $1.3 million and $2.8 million, respectively, increased employee incentives of $0.7 million and $1.2 million, respectively, and increased sales commissions of $0.3 million and $1.2 million, respectively, all associated with the increase in business levels and operating income.

Coatings segment

The increase in net sales in the Coatings segment was due to improved sales in the United States, offset to a degree by slightly lower sales in the Asia Pacific region. In the United States, we experienced broad-based improved demand from customers, especially in the agriculture, petrochemical and energy economic sectors. Asia Pacific volumes in the third quarter and first three quarters of 2012 were down modestly from 2011, due to slowness in the Australian industrial economy not related to mining. Average selling prices in the third quarter and first three quarters of 2012 were comparable with 2011.

The increase in segment operating income in the third quarter and first three quarters of 2012, as compared with 2011, was mainly due to improved productivity and operating leverage through volume increases and lower zinc costs. The effect of lower zinc costs on segment operating income in the third quarter and first three quarters of 2012, as compared with the same periods in 2011, was approximately $1.9 million and $5.5 million, respectively. SG&A expenses for the segment in the third quarter and first three quarters of 2012, as compared with 2011, were slightly lower, due to a $0.9 million favorable dispute settlement with a vendor in the second quarter of 2012 and a $0.8 million insurance settlement in the third quarter of 2012.

Irrigation segment

The increase in Irrigation segment net sales in the third quarter and first three quarters of 2012, as compared with 2011, was mainly due to improved sales volumes of approximately $10 million and $55 million, respectively, and favorable pricing and sales mix of approximately $2 million and $19 million respectively. These increases were offset by unfavorable currency translation effects of $5.6 million and $10.9 million in the third quarter and first three quarters of 2012, respectively, as compared with 2011. The pricing and sales mix effect was generally due to sales price increases that took effect in the second half of 2011 to recover higher material costs in early 2011. In global markets,


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the sales growth was due to very strong agricultural economies around the world. Farm commodity prices continue to be favorable, with a positive outlook for net farm income in most markets around the world. We believe that farm commodity prices have been favorable due to strong demand, including consumption in the production of ethanol and other fuels, and traditionally low inventories of major farm commodities. We believe the drought conditions in much of the U.S. this summer contributed to the increased demand for irrigation equipment and related service parts in 2012. In international markets, the sales improvement in fiscal 2012, as compared with 2011, was realized in most markets, also due to generally favorable economic conditions in the global farm economy.

Operating income for the segment improved in the third quarter and first three quarters of 2012, as compared with 2011, due to improved sales unit volumes and improved sales prices in light of stable material costs. The higher average selling prices resulted from rising material costs in 2011, when sales price increases lagged material cost inflation. The stability in raw material purchase costs also resulted in $4.7 million in lower LIFO expenses in the first three quarters of 2012, respectively, as compared with 2011. SG&A expenses in the third quarter of 2012 were slightly lower than the same period in 2011, due in part to foreign currency translation effects ($0.5 million). On a year-to-date basis, SG&A spending increased in 2012 over 2011, due to increased compensation cost to support the increase in sales activity ($2.4 million), offset to a degree by currency translation effects of approximately $1.2 million.

Other

This category includes the grinding media, industrial tubing, electrolytic manganese and industrial fasteners operations. In the third quarter of 2012, sales and operating income were lower than 2011, mainly due lower sales volumes and profitability in the tubing and electrolytic manganese dioxide operations. On a year-to-date basis, fiscal 2012 sales and operating profits were, in the aggregate, comparable with 2011. Sales and operating income in our tubing operations were improved over 2011, while manganese dioxide sales and operating income were lower than 2011. Sales and operating income in the grinding media operations in the third quarter and first three quarters of fiscal 2012 were comparable with 2011.

Net corporate expense

Net corporate expense in the third quarter and first three quarters of fiscal 2012 was higher than 2011, mainly due to:


higher employee incentives associated with improved net earnings and share price, which affected long-term incentive plans (approximately $1.4 million and $3.5 million respectively);


higher deferred compensation expenses (approximately $2.2 million and $3.2 million, respectively) related to investment returns on assets in the deferred compensation plan. These increases are offset by decreases in "Other" expense, and;


increased expenses of $0.5 million and $2.2 million, respectively, related to less favorable experience in our health insurance plan.

These increases were offset by insurance settlements related to a fire and storm damage to one of our galvanizing facilities in Australia ($0.6 million and $2.0 million, respectively) and lower expenses in the Delta Pension Plan of $0.4 million and $1.4 million, respectively.


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Liquidity and Capital Resources

Cash Flows

Working Capital and Operating Cash Flows-Net working capital was $996.5 million at September 29, 2012, as compared with $844.9 million at December 31, 2011. The increase in net working capital in 2012 mainly resulted from increased receivables and inventories to support the increase in sales. Cash flow provided by operations was $117.7 million in fiscal 2012, as compared with $64.1 million in fiscal 2011. The increase in operating cash flow in 2012 was the result of higher net earnings, especially in the Utility Support Structures and Irrigation segments, offset to an extent by the increase in working capital and timing of income tax payments. Accounts receivable turns in . . .

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