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VMI > SEC Filings for VMI > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for VALMONT INDUSTRIES INC

Form 10-K for VALMONT INDUSTRIES INC


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Forward-Looking Statements

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

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial position. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes.

References to 2013 and 2012 relate to the fifty-two week periods ended December 28, 2013 and December 29, 2012, respectively. 2011 relates to the fifty-three week period ended December 31, 2011.


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General

                                                     Change                       Change
                            2013        2012       2013 - 2012       2011       2012 - 2011
                                    Dollars in millions, except per share amounts
Consolidated
Net sales                 $ 3,304.2   $ 3,029.5             9.1 %  $ 2,661.5            13.8 %
Gross profit                  945.2       802.5            17.8 %      666.8            20.4 %
as a percent of sales          28.6 %      26.5 %                       25.1 %
SG&A expense                  472.1       420.2            12.4 %      403.5             4.1 %
as a percent of sales          14.3 %      13.9 %                       15.2 %
Operating income              473.1       382.3            23.8 %      263.3            45.2 %
as a percent of sales          14.3 %      12.6 %                        9.9 %
Net interest expense           26.0        23.4            11.1 %       26.9           (13.0 )%
Effective tax rate             35.1 %      35.2 %                        2.0 %
Net earnings
attributable to Valmont
Industries, Inc               278.5       234.1            19.0 %      228.3             2.5 %
Diluted earnings per
share                     $   10.35   $    8.75            18.3 %  $    8.60             1.7 %
Engineered Support
Structures Segment
Net sales                 $   897.5   $   833.3             7.7 %  $   792.6             5.1 %
Gross profit                  256.4       215.8            18.8 %      189.1            14.1 %
SG&A expense                  168.7       161.8             4.3 %      148.3             9.1 %
Operating income               87.7        54.0            62.4 %       40.8            32.4 %
Utility Support
Structures Segment
Net sales                     959.7       869.7            10.3 %      620.8            40.1 %
Gross profit                  257.4       200.4            28.4 %      139.2            44.0 %
SG&A expense                   82.7        71.4            15.8 %       68.6             4.1 %
Operating income              174.7       129.0            35.4 %       70.6            82.7 %
Coatings Segment
Net sales                     301.0       282.1             6.7 %      280.8             0.5 %
Gross profit                  106.7       104.4             2.2 %       93.5            11.7 %
SG&A expense                   31.8        32.8            (3.0 )%      34.9            (6.0 )%
Operating income               74.9        71.6             4.6 %       58.6            22.2 %
Irrigation Segment
Net sales                     882.2       750.6            17.5 %      665.9            12.7 %
Gross profit                  272.7       216.1            26.2 %      178.6            21.0 %
SG&A expense                   91.2        72.4            26.0 %       70.8             2.3 %
Operating income              181.5       143.7            26.3 %      107.8            33.3 %
Other
Net sales                     263.8       293.9           (10.2 )%     301.4            (2.5 )%
Gross profit                   51.8        65.7           (21.2 )%      65.9            (0.3 )%
SG&A expense                   20.8        19.1             8.9 %       20.2            (5.4 )%
Operating income               31.0        46.6           (33.5 )%      45.7             2.0 %
Net corporate expense
Gross profit                    0.2           -              NA          0.5          (100.0 )%
SG&A expense                   76.9        62.6            22.8 %       60.7             3.1 %
Operating loss                (76.7 )     (62.6 )          22.5 %      (60.2 )           4.0 %


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RESULTS OF OPERATIONS

FISCAL 2013 COMPARED WITH FISCAL 2012

     Overview

    On a consolidated basis, the increase in net sales in 2013, as compared with
2012, reflected improved sales in all reportable segments while sales were down
in the "Other" category. The increase in net sales in 2013, as compared with
2012, was due to the following factors:

                            Total       EIP     Utility     Coatings     Irrigation     Other
   Sales-2012             $ 3,029.5   $ 833.3    $ 869.6    $   282.1    $     750.6   $ 293.9
   Volume                     120.3       9.2        9.3         (9.3 )        114.7      (3.6 )
   Pricing/mix                 98.2      (2.0 )     80.8          1.4           27.5      (9.5 )
   Acquisitions                99.0      64.7          -         34.3              -         -
   Currency translation       (42.8 )    (7.7 )        -         (7.5 )        (10.6 )   (17.0 )


   Sales-2013             $ 3,304.2   $ 897.5    $ 959.7    $   301.0    $     882.2   $ 263.8

Volume effects are estimated based on a physical production or sales measure, such as tons. As the products we sell are not uniform in nature, pricing and mix relate to a combination of changes in sales prices and the attributes of the product sold. Accordingly, pricing and mix changes do not necessarily result in increased operating income. Acquisitions included Locker Group Holdings ("Locker") and Pure Metal Galvanizing ("PMG"). We acquired PMG in December 2012 and Locker in February 2013. We report Locker in the Engineered Infrastructure Products segment and PMG in the Coatings segment.

In 2013, we realized a decrease in operating profit, as compared with 2012, due to currency translation effects. On average, the U.S. dollar strengthened in particular against the Australian dollar, Brazilian Real and the South Africa Rand, resulting in less operating profit in U.S. dollar terms. The breakdown of this effect by the affected segment was as follows:

Total EIP Coatings Irrigation Other Corporate $ (5.5 ) $ (1.2 ) $ (1.1 ) $ (1.7 ) $ (1.7 ) $ 0.2

The increase in gross margin (gross profit as a percent of sales) in 2013, as compared with 2012, was due to a combination of improved sales prices and sales mix, improved factory operations and moderating raw material costs in 2013, as compared with 2012. In general, our cost of steel and other raw materials were slightly lower in 2013, as compared with 2012. 2013 included a $12.2 million fixed asset impairment loss in our electrolytic manganese dioxide (EMD) operation, which was recorded as Product Cost of Sales. The impairment was a result of continued global oversupply of global manganese dioxide in the market, increased price competition and increasing input costs. In addition, a major customer advised us that its purchases from us in 2014 would be substantially below prior years. As future prospects for the operation were not as favorable as the past, we undertook an impairment review in the fourth quarter of 2013, which resulted in the $12.2 million impairment.

Selling, general and administrative (SG&A) spending in 2013 increased over 2012, mainly due to the following factors:


Expenses recorded by Locker and PMG of $19.4 million;


Increased employee incentive accruals of $13.8 million, due to improved operating results and increased share price in valuing long-term incentive plans;


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Increased compensation expenses of $8.2 million, mainly associated with increased employment levels and salary increases;


Increased doubtful account provisions of $3.1 million, principally in the Irrigation segment, and;


Increased deferred compensation expenses of $2.4 million, which was offset by the same amount of other income.

In addition, certain non-recurring items affecting the comparisons of SG&A expenses included:


The sale of one of our galvanizing facilities in Australia resulted in a gain of $4.6 million in 2013, which was reported as a reduction of SG&A expense, and;


Insurance proceeds received related to a fire in one of our galvanizing facilities in Australia resulted in a non-recurring reduction in SG&A in 2012 of $2.0 million.

On a reportable segment basis, all segments realized improved operating income in 2013, as compared with 2012.

Net interest expense increased in 2013, as compared with 2012, due to a combination of lower interest income and slightly higher interest expense. Interest income for 2013 was lower than 2012 due mainly to lower interest rates and lower average cash balances in Australia. The increase in interest expense principally was due to higher bank fees and interest incurred due to increased short-term borrowings to finance working capital in our India operation.

The increase in other income in 2013, as compared with 2012, mainly was attributable to $2.4 million of higher investment gains in our deferred compensation plan assets. This benefit was offset by an increase in SG&A expense of the same amount.

Our effective income tax rate in 2013 was comparable with 2012. In 2012 and 2013, U.K. tax rates were collectively reduced from 26% to 20%. Accordingly, we reduced the value of our deferred tax assets associated with net operating loss carryforwards and certain timing differences by $8.3 million in 2013 ($4.8 million in 2012), with a corresponding increase in income tax expense. The effects of the U.K. tax rate decrease were offset somewhat by approximately $3.2 million of tax benefits associated with the 2013 sale of our nonconsolidated investment in South Africa and $1.8 million of increased research and development tax credits in the U.S.

Earnings in non-consolidated subsidiaries were lower in 2013, as compared with 2012, due to the sale of our 49% owned manganese materials operation in February 2013. There was no significant gain or loss on the sale.

Earnings attributable to non-controlling interests in 2013 was lower than 2012, mainly due to the impairment loss recorded in our electromagnetic manganese dioxide (EMD) operation. The total after-tax impairment loss was approximately $8.8 million. Our proportionate share of this loss was $4.6 million ($0.17 per share) and the remainder was attributable to the non-controlling interest. This decrease was offset to a degree by improved earnings realized by our other operations that are less than 100% owned.

In December 2013, we reduced our ownership interest in the EMD operation to below 50% and deconsolidated this entity. Accordingly, we recognized a $12.0 million after-tax loss, or $0.45 per share, in accordance with the relevant accounting standards. The loss upon deconsolidation consisted of $8.6 million of currency translation adjustments previously recorded in the balance sheet and $3.4 million related to reducing the book value of the remaining EMD investment to fair value, including $1.7 million in deferred income taxes.


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The reported earnings per share in 2013 of $10.35 included the deconsolidation and fixed asset impairment loss at EMD, which aggregated to $0.62 per share. The earnings per share improvement in 2013 over 2012 was the result of higher net earnings in 2013, as compared with 2012.

Our cash flows generated by operations were approximately $396.4 million in 2013, as compared with $197.1 million in 2012. The increase in operating cash flow in 2013 was the result of improved net earnings and less additional working capital to support the improved sales in 2013, as compared with 2012.

Engineered Infrastructure Products (EIP) segment

The increase in net sales in 2013, as compared with 2012, was mainly due to improved access systems and communication products sales. Global lighting sales in 2013 were comparable with 2012. The transportation market for lighting and traffic structures in the U.S., while stable, continues to be challenging, due in part to the lack of long-term U.S. federal highway funding legislation. Sales in other market channels such as sales to lighting fixture manufacturers and commercial construction projects in fiscal 2013 improved somewhat as compared with the same periods in 2012. In Europe, sales in 2013 were approximately 7% lower than 2012, as low economic growth and budget restrictions have hampered government roadway spending activity and demand for lighting structures.

Communication product line sales improved in 2013, as compared with 2012. On a regional basis, North American sales in 2013 improved over the same periods in 2012 by $16.9 million. The increase in North America sales was mainly attributable to stronger sales demand for components due to 4G wireless communication development. In China, sales of wireless communication structures in 2013 were lower than 2012, as we believe local wireless communication carriers have delayed their 4G investment upgrades until 2014.

Access systems product line sales improved in 2013, as compared with 2012, due to the Locker acquisition in February 2013. Otherwise, access systems sales in 2013 were lower than 2012, due a combination of slowness in mining sector investment in Australia, exchange rate effects due to a weaker Australian dollar in 2013 and related competitive pricing effects. Highway safety product sales in 2013 were comparable with 2012, as growth in spending for roads and highways in Australia continues to be affected by budgetary restrictions.

Operating income for the segment in 2013 increased, as compared with 2012, due primarily to:


improved operating performance of our lighting operations as a result of better factory operating performance (approximately $18.2 million);


improved North American communication product sales (approximately $5.9 million), and;


operating profit generated from Locker (approximately $4.7 million).

The increase in SG&A spending was attributable to Locker (approximately $14.7 million). SG&A spending otherwise was lower in 2013, as compared with 2012, mainly associated with cost cutting measures taken in Europe in the third and fourth quarters of 2012.

Utility Support Structures (Utility) segment

In the Utility segment, the sales increase in 2013, as compared with 2012, was due mainly to improved sales in the U.S. market. International sales were slightly lower in 2013, as compared with 2012, as bid projects in the Asia Pacific region were somewhat lower.

In the U.S., electrical utility companies continue to invest in the electrical grid at a high rate, as evidenced by record backlogs at December 29, 2012 and continued strong order flow in 2013. Certain


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low margin orders that shipped and were completed in 2012 contributed to improved sales prices and mix in 2013, as compared with 2012.

Operating income in 2013, as compared with 2012, increased due to improved sales pricing and mix as well as increased volumes. The improvements in sales pricing and mix largely were related to strong market conditions and certain large low margin orders that were completed in 2012 and did not recur in 2013. In addition, 2012 included approximately $12.9 million of unanticipated production and rework costs associated with one large order. These costs did not recur in 2013, which contributed to the gross profit improvements in 2013, as compared with 2012. The increase in SG&A expense in 2013, as compared with 2012, were mainly due to increased employee compensation (approximately $3.6 million) and incentives (approximately $1.7 million) associated with the increase in business levels and operating income.

Coatings segment

Coatings segment sales increased in 2013, as compared with 2012, due mainly to the December 2012 PMG acquisition. North America experienced slightly lower external demand for galvanizing services, although internal demand from our other segments was higher in 2013, as compared with 2012. Asia Pacific volumes in 2013 were lower than 2012 due to lower demand in Australia. Unit pricing in 2013 was comparable with 2012.

The increase in segment operating income in 2013, as compared with 2012, was mainly due to the gain on the sale of an Australian galvanizing operation in the second quarter of 2013 of $4.6 million, and operating income provided by PMG (approximately $4.1 million). These two positive effects on 2013 operating income were offset to an extent by the effect of lower external demand for coatings services in Australia and the settlement of a dispute with a vendor of approximately $0.9 million in 2012.

In 2013, we had a kettle failure in one North America facility and a fire in another. In 2012, we realized recoveries related to fire and storm damages at one of our Australian galvanizing facilities. The effect of these events on 2013 operating profit was not significant, as the related insurance recoveries to this point approximated certain related incurred costs and the carrying value of assets that were damaged. The insurance claims process is continuing and expected to conclude in 2014.

Irrigation segment

The increase in Irrigation segment net sales in 2013, as compared with 2012, was mainly due to sales volume increases in both North American and International markets. The pricing and sales mix effect was generally due to sales price increases that took effect in 2012 to recover higher material costs in early 2012. In global markets, the sales growth was due to strong net farm income and agricultural economies around the world. We believe that farm commodity prices have been generally favorable due to strong demand, including consumption in the production of ethanol and other fuels, and traditionally low inventories of major farm commodities. In addition, in North America, we believe widespread drought throughout much of the country in 2012 further highlighted the benefits of center pivot irrigation and contributed to enhanced demand for our products. In international markets, sales improved in 2013, as compared with 2012, mainly due to increased activity in Brazil, Eastern Europe and Australia. These increases were offset somewhat by lower sales in China, Argentina and the Middle East, which were due to certain economic and political uncertainties in these regions.

Operating income for the segment improved in 2013 over 2012, due to improved global sales unit volumes and related price increases. Moderating raw material prices in light of higher selling prices also contributed to improved operating income in 2013, as compared with 2012. The most significant reasons for the increase in SG&A expense in 2013, as compared with 2012, related to employee compensation costs and incentives (approximately $7.3 million), approximately $2.6 million in provisions


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for international receivables recorded in 2013 and other expenses incurred to support the business activity levels and product development.

Other

This unit includes the grinding media, industrial tubing, EMD and industrial fasteners operations. The decrease in sales in 2013, as compared with 2012, was mainly due to lower sales prices in the tubing and grinding media operations due to lower steel prices and exchange rate translation effects. Operating income in 2013 was lower than 2012, mainly due to a $12.2 million fixed asset impairment charge recorded by the EMD operation. Otherwise, lower raw material prices helped to dampen the effects of lower selling prices on operating income.

Net corporate expense

Net corporate expense in 2013 increased over 2012. This increase were mainly due to:


higher employee incentives of approximately $6.3 million associated with improved net earnings and share price, which affected long-term incentive plans;


higher compensation and employee benefit costs (approximately $4.2 million);


increased expenses associated with the Delta Pension Plan (approximately $2.5 million), and;


insurance settlements realized in 2012 related to a fire and storm damage to one of our galvanizing facilities in Australia of $2.0 million that did not recur in 2013;

FISCAL 2012 COMPARED WITH FISCAL 2011

Overview

On a consolidated basis, the increase in net sales in 2012, as compared with 2011, was due to the following factors:


Unit sales volumes increased approximately $353 million in 2012, as compared with 2011. All reportable segments contributed to the higher sales volumes, with the most significant unit sales increases within the Utility Support Structures and Irrigation segments. Depending on the segment, unit volumes are measured in tons, units or some other physical measure of volume.


Sales prices and mix in 2012, as compared with 2011, were favorable, resulting in increased sales of approximately $50 million. As many of our products are either built to order or configured to customer specifications, sales mix can be due to a number of factors, in addition to pricing. These factors may include product specifications, options and other factors that may affect the unit price at which a product is sold. In some cases, pricing and mix may affect our cost of the product sold.


2012 included 52 weeks of operations, as compared with 2011, which was 53 weeks. This was the result of our year ending the last Saturday in December. Accordingly, all 2011 operational figures were higher than had the year been 52 weeks in length. The estimated effect of our 2011 net sales and net earnings due to the extra week of operations was approximately $50 million and $3 million, respectively.

Foreign currency translation factors, in the aggregate, resulted in lower net sales and operating income in 2012, as compared with 2011. On average, the U.S. dollar strengthened against most currencies in 2012. The most significant currencies that contributed to this movement were the euro,


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Brazilian real and the South African rand. On a segment basis, the approximate currency effects on net sales and operating income in 2012, as compared with 2011, were as follows (in millions of dollars):

                                                               Operating
                                                 Net Sales      Income
           Engineered Infrastructure Products    $    (14.8 )  $     (0.6 )
           Utility Support Structures                   0.5             -
           Coatings                                       -             -
           Irrigation                                 (15.0 )        (2.5 )
           Other                                       (5.7 )        (0.6 )
           Corporate                                      -             -


           Total                                 $    (35.0 )  $     (3.7 )

The increase in gross profit margin (gross profit as a percent of sales) in 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 in 2012 was $10.7 lower than 2011, contributing to the comparatively higher gross profit margin in 2012, as compared with 2011.

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


Increased compensation expenses of approximately $8.0 million, associated with increased employment levels and increased employee benefit costs;


Increased employee incentive accruals of approximately $10.6 million, due to improved operating results; and


Deferred compensation expense of $2.4 million incurred in 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.

These increases were offset to a degree by foreign exchange transaction effects of $4.7 million. SG&A spending as a percent of sales decreased from 15.2% in 2011 to 13.9% in 2012, as we achieved leverage of the fixed portion of SG&A expense in light of the sales increase.

The increase in operating income on a reportable segment basis in fiscal 2012, as compared with 2011, was due to improved operating performance in all reportable segments. The most significant increases were in the Irrigation and Utility segments.

The decrease in net interest expense in 2012, as compared with 2011, was the net effect of lower interest expense of $4.5 million and lower interest income of $1.0 million. The decrease in interest expense was attributable 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. The decrease in interest income was due to interest received on certain income tax refunds in 2011. Average borrowing levels in 2012 were comparable with 2011.

The decrease in "Other" expenses in 2012, as compared with 2011, of $3.0 million was mainly due to investment returns in the assets held in our deferred compensation plan of $2.4 million. The increase in the value of these assets was offset by a corresponding increase in our deferred compensation . . .

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