Table of Contents
UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-Q
Valmont Industries, Inc. (Exact name of registrant as specified in its charter)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
26,414,248 Outstanding shares of common stock as of April 19, 2011
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements:
Condensed Consolidated Statements of Operations for the thirteen weeks ended March 26, 2011 and March 27, 2010
Condensed Consolidated Balance Sheets as of March 26, 2011 and December 25, 2010
Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended March 26, 2011 and March 27, 2010
Condensed Consolidated Statements of Shareholders' Equity for the thirteen weeks ended March 26, 2011 and March 27, 2010
Notes to Condensed Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
Signatures
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Product sales
Services sales
Net sales
Product cost of sales
Services cost of sales
Total cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Other income (expenses):
Interest expense
Interest income
Other
Earnings before income taxes and equity in earnings of nonconsolidated subsidiaries
Income tax expense:
Current
Deferred
Earnings before equity in earnings of nonconsolidated subsidiaries
Equity in earnings of nonconsolidated subsidiaries
Net earnings
Less: Earnings attributable to noncontrolling interests
Net earnings attributable to Valmont Industries, Inc.
Earnings per share attributable to Valmont Industries, Inc.—Basic
Earnings per share attributable to Valmont Industries, Inc.—Diluted
Cash dividends per share
Weighted average number of shares of common stock outstanding—Basic (000 omitted)
Weighted average number of shares of common stock outstanding—Diluted (000 omitted)
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Receivables, net
Inventories
Prepaid expenses
Refundable and deferred income taxes
Total current assets
Property, plant and equipment, at cost
Less accumulated depreciation and amortization
Net property, plant and equipment
Goodwill
Other intangible assets, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt
Notes payable to banks
Accounts payable
Accrued employee compensation and benefits
Accrued expenses
Dividends payable
Total current liabilities
Deferred income taxes
Long-term debt, excluding current installments
Defined benefit pension liability
Deferred compensation
Other noncurrent liabilities
Shareholders' equity:
Preferred stockAuthorized 500,000 shares; none issued
Common stock of $1 par valueAuthorized 75,000,000 shares; 27,900,000 issued
Retained earnings
Accumulated other comprehensive income
Treasury stock
Total Valmont Industries, Inc. shareholders' equity
Noncontrolling interest in consolidated subsidiaries
Total shareholders'equity
Total liabilities and shareholders' equity
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash flow from operations:
Depreciation and amortization
Stock-based compensation
Defined benefit pension plan expense
Loss on sales of property, plant and equipment
Changes in assets and liabilities (net of the effects from acquisitions):
Receivables
Income taxes payable/refundable
Net cash flows from operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment
Proceeds from sale of assets
Acquisitions
Cash restricted for acquisitions
Dividends to noncontrolling interests
Other, net
Net cash flows from investing activities
Cash flows from financing activities:
Net payments under short-term agreements
Proceeds from long-term borrowings
Principal payments on long-term obligations
Dividends paid
Proceeds from exercises under stock plans
Excess tax benefits from stock option exercises
Purchase of treasury shares
Purchase of common treasury shares—stock plan exercises
Net cash flows from financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents—beginning of year
Cash and cash equivalents—end of period
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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Balance at December 26, 2009
Comprehensive income:
Currency translation adjustment
Total comprehensive income
Cash dividends ($0.15 per share)
Purchase of noncontrolling interests
Purchase of 12,351 treasury shares
Stock plan exercises; 44,088 shares issued
Stock plan exercises; 22,317 shares purchased
Tax benefit from exercise of stock options
Stock option expense
Stock awards; 9,088 shares issued
Balance at March 27, 2010
Balance at December 25, 2010
Cash dividends ($0.165 per share)
Purchase of 53,847 treasury shares
Stock plan exercises; 253,133 shares issued
Stock plan exercises; 165,735 shares purchased
Stock awards; 2,992 shares issued
Balance at March 26, 2011
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of March 26, 2011, the Condensed Consolidated Statements of Operations, Cash Flows and Shareholders' Equity for the thirteen week periods ended March 26, 2011 and March 27, 2010 have been prepared by the Company, without audit. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) have been made to present fairly the financial statements as of March 26, 2011 and for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 2010. The accounting policies and methods of computation followed in these interim financial statements are the same as those followed in the financial statements for the year ended December 25, 2010. The results of operations for the period ended March 26, 2011 are not necessarily indicative of the operating results for the full year.
At March 26, 2011, approximately 36% of inventory is valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market. All other inventory is valued at the lower of cost, determined on the first-in, first-out (FIFO) method or market. Finished goods and manufactured goods inventories include the costs of acquired raw materials and related factory labor and overhead charges required to convert raw materials to manufactured and finished goods. The excess of replacement cost of inventories over the LIFO value was approximately $53,000 and $42,500 at March 26, 2011 and December 25, 2010, respectively.
Inventories consisted of the following:
Raw materials and purchased parts
Work-in-process
Finished goods and manufactured goods
Subtotal
LIFO reserve
Net inventory
Stock Plans
The Company maintains stock-based compensation plans approved by the shareholders, which provide that the Human Resources Committee of the Board of Directors may grant incentive stock options, nonqualified stock options, stock appreciation rights, non-vested stock awards and bonuses of common stock. At March 26, 2011, 861,332 shares of common stock remained available for issuance under the plans. Shares and options issued and available are subject to changes in capitalization. The
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Company's policy is to issue shares upon stock option exercises from treasury shares held by the Company.
Under the plans, the exercise price of each option equals the market price at the date of the grant. Options vest beginning on the first anniversary of the grant in equal amounts over three to six years or on the fifth anniversary of the grant. Expiration of grants is from six to ten years from the date of grant. The Company recorded $1,252 and $1,228 of compensation expense (included in selling, general and administrative expenses) in the quarters ended March 26, 2011 and March 27, 2010, respectively, related to stock options. The associated tax benefits recorded were $482 and $472, respectively.
Fair Value
The Company applies the provisions of Accounting Standards Codification 820, Fair Value Measurements ("ASC 820") which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 apply to other accounting pronouncements that require or permit fair value measurements. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
ASC 820 establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refers broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value.
Trading Securities: The assets and liabilities recorded for the investments held in the Valmont Deferred Compensation Plan represent mutual funds, invested in debt and equity securities, classified as trading securities in accordance with Accounting Standards Codification 320, Accounting for Certain Investments in Debt and Equity Securities, considering the employee's ability to change investment
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allocation of their deferred compensation at any time. Quoted market prices are available for these securities in an active market and therefore categorized as a Level 1 input.
Assets:
Trading Securities
Accumulated Other Comprehensive Income (Loss)
Results of operations for foreign subsidiaries are translated using the average exchange rates during the period. Assets and liabilities are translated at the exchange rates in effect on the balance sheet dates. "Accumulated other comprehensive income (loss)" consisted of the following at March 26, 2011 and December 25, 2010:
Foreign currency translation adjustment
Actuarial gain in defined benefit pension plan
Balance, end of period
2. Acquisition of Delta plc
On May 12, 2010, the Company acquired Delta, plc. ("Delta") a public limited company incorporated in Great Britain, and listed on the London Stock Exchange (LSE: DLTA). The price paid per share was 185 pence in cash for each Delta share, or £284,463, or $436,736 based on the contracted average exchange rate of $1.5353 / £. Delta has manufacturing operations employing over 2,500 people in Australia, Asia, South Africa and the United States. Delta's businesses include engineered steel products, galvanizing services and manganese materials.
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2. Acquisition of Delta plc (Continued)
The Company's pro forma results of operations for the quarter ended March 27, 2010, assuming that the acquisition occurred at the beginning of fiscal 2010 were as follows:
Earnings per share—diluted
3. Goodwill and Intangible Assets
The Company's annual impairment testing of goodwill and intangible assets was performed during the third quarter of 2010. As a result of that testing, it was determined the goodwill and other intangible assets on the Company's Condensed Consolidated Balance Sheet were not impaired. The Company continues to monitor changes in the global economy and its reporting units that could impact future operating results of its reporting units and related components.
Amortized Intangible Assets
The components of amortized intangible assets at March 26, 2011 and December 25, 2010 were as follows:
Customer Relationships
Proprietary Software & Database
Patents & Proprietary Technology
Non-compete Agreements
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3. Goodwill and Intangible Assets (Continued)
Amortization expense for intangible assets during the first quarter of 2011 and 2010 was $3,532 and $2,040, respectively. Estimated amortization expense related to amortized intangible assets is as follows:
2011
2012
2013
2014
2015
The useful lives assigned to finite-lived intangible assets included consideration of factors such as the Company's past and expected experience related to customer retention rates, the remaining legal or contractual life of the underlying arrangement that resulted in the recognition of the intangible asset and the Company's expected use of the intangible asset.
Non-amortized intangible assets
Intangible assets with indefinite lives are not amortized. The carrying values of trade names at March 26, 2011 and December 25, 2010 were as follows:
Webforge
Newmark
Ingal EPS/ Ingal Civil Products
Donhad
PiRod
Industrial Galvanizers
The Company's trade names were tested for impairment separately from goodwill in the third quarter of 2010. The values of the trade names were determined using the relief-from-royalty method. Based on this evaluation, the Company determined that its trade names were not impaired.
In its determination of these intangible assets as indefinite-lived, the Company considered such factors as its expected future use of the intangible asset, legal, regulatory, technological and competitive factors that may impact the useful life or value of the intangible asset and the expected costs to maintain the value of the intangible asset. The Company expects that these intangible assets will maintain their value indefinitely. Accordingly, these assets are not amortized.
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The carrying amount of goodwill as of March 26, 2011 was as follows:
Balance December 25, 2010
Foreign currency translation
Balance March 26, 2011
4. Cash Flows
The Company considers all highly liquid temporary cash investments purchased with a maturity of three months or less to be cash equivalents. Cash payments for interest and income taxes (net of refunds) for the thirteen weeks ended were as follows:
Interest
Income taxes
5. Earnings Per Share
The following table reconciles Basic and Diluted earnings per share (EPS):
Thirteen weeks ended March 26, 2011:
Shares outstanding
Per share amount
Thirteen weeks ended March 27, 2010:
At March 26, 2011 there were 8,962 shares of outstanding stock options with exercise prices exceeding the market price of common stock that were therefore excluded from the computation of fully diluted shares earnings per share for the thirteen weeks ended March 26, 2011. At March 27, 2010 there were 44,767 of outstanding stock options with exercise prices exceeding the market price of common stock that were therefore excluded from the computation of fully diluted shares earnings per share for the thirteen weeks ended March 27, 2010.
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6. Business Segments
The Company aggregates its operating segments into four reportable segments. Aggregation is based on similarity of operating segments as to economic characteristics, products, production processes, types or classes of customer and the methods of distribution. Net corporate expense is net of certain service-related expenses that are allocated to business units generally on the basis of employee headcounts and sales dollars.
Reportable segments are as follows:
ENGINEERED INFRASTRUCTURE PRODUCTS: This segment consists of the manufacture of engineered metal structures and components for the global lighting and traffic, wireless communication, roadway safety and access systems applications;
UTILITY SUPPORT STRUCTURES: This segment consists of the manufacture of engineered steel and concrete structures for the global utility industry;
COATINGS: This segment consists of galvanizing, anodizing and powder coating services on a global basis; and
IRRIGATION: This segment consists of the manufacture of agricultural irrigation equipment and related parts and services for the global agricultural industry.
In addition to these four reportable segments, the Company has other businesses and activities that individually are not more than 10% of consolidated sales. These include the manufacture of forged steel grinding media for the mining industry, tubular products for industrial customers, the electrolytic manganese dioxide for disposable batteries and the distribution of industrial fasteners and are reported in the "Other" category.
In the fourth quarter of 2010, the Company reorganized its segment reporting structure to reflect the management structure as a result of the acquisition of Delta plc. The main business units of Delta are organized as follows in the reportable segment structure:
It was not necessary to reclassify fiscal 2010 to conform to the fiscal 2011 presentation as Delta plc was acquired on May 12, 2010 which was subsequent to the Company's first quarter end for fiscal 2010.
The accounting policies of the reportable segments are the same as those described in Note 1. The Company evaluates the performance of its business segments based upon operating income and invested capital. The Company does not allocate interest expense, non-operating income and deductions, or income taxes to its business segments.
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6. Business Segments (Continued)
Sales:
Engineered Infrastructure Products segment:
Lighting, Traffic, and Roadway Products
Communication Products
Access Systems
Engineered Infrastructure Products segment
Utility Support Structures segment:
Steel
Concrete
Utility Support Structures segment
Coatings segment
Irrigation segment
Total
Intersegment Sales:
Engineered Infrastructure Products
Utility Support Structures
Coatings
Irrigation
Net Sales:
Operating Income (Loss):
Net corporate expense
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7. Guarantor/Non-Guarantor Financial Information
On April 8, 2010, the Company issued $300,000 of senior unsecured notes at a coupon rate of 6.625% per annum. The notes are guaranteed jointly, severally, fully and unconditionally by certain of the Company's current and future direct and indirect domestic and foreign subsidiaries (collectively the "Guarantors"), excluding its other current domestic and foreign subsidiaries which do not guarantee the debt (collectively referred to as the "Non-Guarantors"). All Guarantors are owned 100% by the Company.
On May 4, 2004, the Company completed a $150,000 offering of 67/8% Senior Subordinated Notes. The Notes are guaranteed, jointly, severally, fully and unconditionally, on a senior subordinated basis by the Guarantors.
Condensed consolidated financial information for the Company ("Parent"), the Guarantor subsidiaries and the Non-Guarantor subsidiaries is as follows:
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSFor the Thirteen Weeks Ended March 26, 2011
Cost of sales
Earnings before income taxes and equity in earnings/(losses) of nonconsolidated subsidiaries
Income tax expense (benefit):
Earnings before equity in earnings/(losses) of nonconsolidated subsidiaries
Equity in earnings/(losses) of nonconsolidated subsidiaries
Net Earnings
Net Earnings attributable to Valmont Industries, Inc.
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7. Guarantor/Non-Guarantor Financial Information (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Thirteen Weeks Ended March 27, 2010
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CONDENSED CONSOLIDATED BALANCE SHEETSMarch 26, 2011
Other intangible assets
Investment in subsidiaries and intercompany accounts
Commitments and contingencies
Common stock of $1 par value
Additional paid-in capital
Total shareholders' equity
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CONDENSED CONSOLIDATED BALANCE SHEETS December 25, 2010
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Thirteen Weeks Ended March 26, 2011
Cash flows from operations:
Depreciation
Equity in losses of nonconsolidated subsidiaries
Other adjustments
Changes in assets and liabilities:
Net cash flows from operations
Proceeds from sale of property and equipment
Acquisitions, net of cash acquired
Net repayments under short-term agreements
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Thirteen Weeks Ended March 27, 2010
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION
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 the 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 25, 2010.
In the fourth quarter of 2010, we reorganized our segment reporting structure to reflect our management structure as a result of the acquisition of Delta plc. The main business units of Delta are organized as follows in our segment structure:
It was not necessary to reclassify fiscal 2010 to conform to the fiscal 2011 presentation.
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Results of Operations
Dollars in thousands, except per share amounts
Consolidated
as a percent of sales
SG&A expense
Net interest expense
Effective tax rate
Earnings per share attributable to Valmont Industries, Inc—diluted
Net Corporate expense
Operating loss
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Acquisition of Delta plc
On May 12, 2010, we acquired Delta plc (Delta). The total amount of the acquisition was $436.7 million and was financed by a combination of cash, borrowings under our revolving credit agreement of $85.0 million and $300.0 million of senior unsecured notes.
We began consolidating Delta's financial results in our consolidated financial statements beginning on May 12, 2010. Therefore, Delta's operating results were not included in our first quarter 2010 results. Delta's sales and operating income included in our statement of earnings in the first quarter of 2011 was $133.2 million. Delta's operating income in the first quarter of 2011 was $6.2 million, including $2.0 million in depreciation and amortization expenses related to the acquisition.
On a segment reporting basis, Delta's operations are included in our results as follows:
Delta's sales and operating income by segment in the first quarter of 2011 were as follows (in millions):
Overview
On a consolidated basis, the increase in net sales in the first quarter of fiscal 2011, as compared with 2010, were mainly due to the Delta acquisition ($133.2 million) and improved sales in the Irrigation ($42.4 million), Utility ($12.4 million) and Coatings ($2.6 million, exclusive of Delta) segments. Aside from the impact of the Delta acquisition, sales in the Engineered Infrastructure Products (EIP) segment were $6.3 million higher in 2011, as compared with the first quarter of fiscal 2010.
For the company as a whole, without consideration of Delta sales, our first quarter 2011 sales increase over 2010 was mainly due to increased sales unit volumes. On a reportable segment basis, the most significant sales unit volume increase was in the Irrigation and Utility Support Structures (Utility) segments. Sales prices overall were about 3% higher in the first quarter of 2011, mainly in response to rising steel prices.
The decrease in gross profit margin (gross profit as a percent of sales) in 2011, as compared with 2010, was due to the following factors:
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Selling, general and administrative (SG&A) spending for the first quarter of fiscal 2011, as compared with 2010, increased due to the following factors:
These increases were somewhat offset by $1.8 million in lower acquisition and integration costs associated with the Delta acquisition.
On a reportable segment basis, the Irrigation and Coatings segments reported increased operating income and the EIP and Utility segments reported slightly lower operating income in the first quarter of fiscal 2011, as compared with 2010.
The increase in net interest expense in the first quarter of fiscal 2011, as compared with 2010, was mainly due to $5.0 million in interest associated with the $300 million in senior unsecured notes issued in April 2010, less $2.9 million of bank fees incurred in the first quarter of fiscal 2010 related to providing the required bridge loan funding commitment for the Delta acquisition and additional interest income from Delta's cash balances.
The decrease in the effective income tax rate in first quarter of fiscal 2011, as compared with 2010, was mainly due to the non-deductibility of a portion of the Delta acquisition expenses incurred in 2010.
Our cash flows provided by operations were approximately $5.7 million in 2011, as compared with $19.3 million in 2010. Despite increased net earnings in 2011, as compared with 2010, increased working capital in 2011 was the main reasons for the lower operating cash flow in 2011.
Engineered Infrastructure Products (EIP) segment
The increase in net sales in the first quarter of fiscal 2011 as compared with 2010 was mainly due to the Delta EIP operations and improved international sales volumes. Global lighting markets experienced weak demand, resulting in increased price competition, despite rising raw material prices. In the Lighting product line, 2011 North American first quarter sales were down slightly as compared with 2010. Market conditions in North America continue to be weak, especially in the market that is funded through federal, state and local governments. We believe sales demand in the transportation market was dampened by the lack of a long-term federal highway funding legislation and state budget deficits, as the lack of long-term funding legislation does not give the various states ample visibility to implement long-term initiatives. Furthermore, highway spending sponsored under the federal program requires the various states to provide part of required funding. Many states are in budget deficits, which may constrain their ability to access federal matching funds to implement roadway projects. Commercial lighting market sales in the first quarter of 2011 were comparable with 2010. In Europe, sales were higher in the first quarter of 2011, as compared with 2010. However, pricing and product mix generally was unfavorable due to weak demand, as the European economy was sluggish.
Sales in the communication structures product line were higher in the first quarter of fiscal 2011, as compared with 2010. Sales were flat in North America. In China, sales of wireless communication structures likewise were higher in 2011, as compared with 2010. In 2010, annual supply contracts with Chinese wireless carriers were settled later than in the past and 2011 was more in line with what we believe is a more normal demand pattern.
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Operating income for the segment was slightly lower in the first quarter of fiscal 2011, as compared with 2010. While operating income was enhanced by the addition of the Delta operations, the impact of rising raw material prices that were not able to be recovered through sales price increases hampered operating income for the segment, included LIFO expense that was $1.3 million higher in fiscal 2011 than in 2010. The impact of lower sales on operating profit was mitigated to an extent by factory operational improvements. The increase in SG&A expense in fiscal 2011 was mainly due to the acquisition of the Delta operations ($9.8 million), offset to a degree by lower spending levels in North America and Asia.
Utility Support Structures (Utility) segment
In the Utility segment, the sales increase in fiscal 2011, as compared with 2010, was due to improved unit sales volumes in the U.S., offset to a degree by lower sales volumes in international markets. In U.S. markets, electrical utility companies are increasing their investment in the electrical grid over a relatively slow 2010. We believe this increase in investment is due in part to an improving U.S. economy. Pricing continues to be very competitive, which is reflective of depressed market conditions when utility structures projects were bid out in 2010. In international markets, the sales decrease was mainly due to lower project sales into emerging markets and lower sales volumes in China.
Despite higher sales, operating income was slightly lower in fiscal 2011, as compared with 2010, mainly due to lower international sales volumes. Gross profit margins were negatively affected by an unfavorable product mix in North America and rising steel costs, which mitigated the effect of higher sales volumes on operating income. SG&A expenses for the segment in fiscal 2011 were comparable with 2010.
Net sales in the Coatings segment increased in fiscal 2011, as compared with 2010. Aside from the effect from the galvanizing operations acquired in the Delta transaction, the sales increase for the segment was due to stronger unit sales demand in our operations. We believe this increase in sales volume is reflective of an overall stronger U.S. economy, especially among agricultural equipment manufacturers.
The increase in segment operating income in fiscal 2011, as compared with 2010, was due to the effect of the acquired Delta businesses, improved sales volume and the associated operating leverage. SG&A expenses for the segment in 2011 increased over 2010, mainly due to the effect of the Delta businesses ($4.7 million).
Irrigation segment net sales in fiscal 2011 improved over 2010, mainly due to stronger sales volumes in both North American and international markets. In global markets, the sales growth was due to a very strong agricultural economy. Farm commodity prices are very favorable and projected net farm income is projected to be strong in 2011. In addition, weather conditions in North America in 2011 were generally drier than 2010, further enhancing demand for irrigation machines and related service parts. In international markets, the sales improvement in fiscal 2011, as compared with 2010, was realized in most markets, particularly Australia and Brazil.
Operating income for the segment improved in 2011 over 2010, due to improved sales unit volumes in North America and the associated operational leverage. Rising raw material prices resulted in $4.1 million in increased LIFO expense in fiscal 2011, as compared with 2010, which negatively affected gross profit margins. SG&A expenses increased mainly due to employee compensation costs to support the increase in sales activity and future initiatives ($0.8 million).
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This unit includes the Delta grinding media and electrolytic manganese operations and our industrial tubing and fasteners operations. The increase in sales and operating income in 2011, as compared with 2010, was due to the addition of the Delta operations and stronger sales demand for tubing products.
The increase in net corporate expense in the first quarter of 2011, as compared with 2010 was mainly due to Delta ($4.1 million). The Delta expenses include pension plan expenses of $1.5 million, and various central administration costs. The London office, which was closed during the first quarter of fiscal 2011, incurred expenses of $1.0 million during the quarter. Aside from the Delta expenses, net corporate expense decreased slightly in 2011, as compared with 2010. The decrease mainly resulting from lower costs associated with the acquisition and integration of Delta of $1.8 million, offset somewhat by $0.8 million in higher employee incentive accruals associated with an increase in profitability in 2011.
Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows—Net working capital was $809.5 million at March 26, 2011, as compared with $747.3 million at December 25, 2010. The increase in net working capital in 2011 mainly resulted from increased inventories to support the increase in sales, especially in the Irrigation and Utility Support Structures segments. Operating cash flow was $5.7 million in fiscal 2011, as compared with $19.3 million for the same period in 2010. The decrease in operating cash flow in 2011 mainly was the result of the increase in working capital as compared with 2010.
Investing Cash Flows—Capital spending in the fiscal 2011 was $12.6 million, as compared with $4.6 million in 2010. We expect our capital spending for the 2011 fiscal year to be approximately $60 to $70 million. Investing cash flows for fiscal 2010 included $264.0 million of restricted cash to provide funding related to the Delta acquisition and an aggregate of $7.5 million associated with increasing our ownership interest in West Coast Engineering, Ltd. from 70% to 80% and the additional purchase price paid to the former shareholders of Stainton related to the performance of the operation after its acquisition in November 2008.
Financing Cash Flows—Our total interest-bearing debt increased from $477.7 million at December 25, 2010 to $494.7 million as of March 26, 2011. The increase in borrowings in 2011 was a seasonal increase in borrowings due to the increase in working capital in the U.S.
Sources of Financing and Capital
We have historically funded our growth, capital spending and acquisitions through a combination of operating cash flows and debt financing. We have an internal long-term objective to maintain long-term debt as a percent of invested capital at or below 40%. At March 26, 2011, our long-term debt to invested capital ratio was 26.5%, as compared with 26.7% at December 25, 2010. Subject to our level of acquisition activity and steel industry operating conditions (which could affect the levels of inventory we need to fulfill customer commitments), we plan to maintain this ratio below 40% in 2011.
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Our debt financing at March 26, 2011 consisted primarily of long-term debt. We also maintain certain short-term bank lines of credit totaling $52.5 million, $47.5 million of which was unused at March 26, 2011. Our long-term debt principally consists of:
Until May 1, 2011
From May 1, 2011 until May 1, 2012
After May 1, 2012
At March 26, 2011, we had $24.0 million in outstanding borrowings under the revolving credit agreement, at a weighted average annual interest rate of 2.54%, not including facility fees. These outstanding borrowings were associated with funding requirements related to the Delta acquisition. The revolving credit agreement has a termination date of October 16, 2013 and contains certain financial covenants that may limit our additional borrowing capability under the agreement. At March 26, 2011, we had the ability to borrow an additional $236.9 million under this facility.
These debt agreements contain covenants that require us to maintain certain coverage ratios and may limit us with respect to certain business activities, including capital expenditures. Our key debt covenants are that interest-bearing debt is not to exceed 3.75x EBITDA of the prior four quarters and that our EBITDA over our prior four quarters must be at least 2.50x our interest expense over the same period. At March 26, 2011, we were in compliance with all covenants related to these debt agreements. The key covenant calculations at March 26, 2011 were as follows:
Interest-bearing debt
EBITDA—last 12 months
Leverage ratio
Interest expense—last 12 months
Interest earned ratio
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The calculation of EBITDA—last 12 months (March 27, 2010—March 26, 2011) is as follows:
Income tax expense
Deferred income tax benefit
Noncontrolling interest
Equity in earnings/(losses) in nonconsolidated subsidiaries
Changes in assets and liabilities, net of acquisitions
EBITDA
Our businesses are cyclical, but we have diversity in our markets, from a product, customer and a geographical standpoint. We have demonstrated the ability to effectively manage through business cycles and maintain liquidity. We have consistently generated operating cash flows in excess of our capital expenditures. Based on our available credit facilities, recent issuance of senior unsecured notes and our history of positive operational cash flows, we believe that we have adequate liquidity to meet our needs. We have not made any provision for U.S. income taxes in our financial statements on approximately $388 million of undistributed earnings of our foreign subsidiaries, as we intend to reinvest those earnings. Therefore, if we need to repatriate foreign cash balances to the United States to meet our cash needs, income taxes would be paid to the extent that those cash repatriations were undistributed earnings of our foreign subsidiaries.
Financial Obligations and Financial Commitments
There have been no material changes to our financial obligations and financial commitments as described beginning on page 35 in our Form 10-K for the year ended December 25, 2010.
Off Balance Sheet Arrangements
There have been no changes in our off balance sheet arrangements as described on page 36 in our Form 10-K for the fiscal year ended December 25, 2010.
Critical Accounting Policies
There have been no changes in our critical accounting policies as described on pages 37-41 on our Form 10-K for the fiscal year ended December 25, 2010 during the quarter ended March 26, 2011.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There were no material changes in the company's market risk during the quarter ended March 27, 2010. For additional information, refer to the section "Risk Management" beginning on page 36 in our Form 10-K for the fiscal year ended December 25, 2010.
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Item 4. Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 is (1) accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
No changes in the Company's internal control over financial reporting occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
December 26, 2010 to January 22, 2011
January 23, 2011 to February 26, 2011
February 27, 2011 to March 26, 2011
During the first quarter, the only shares reflected above were those delivered to the Company by employees as part of stock option exercises, either to cover the purchase price of the option or the related taxes payable by the employee as part of the option exercise. The price paid per share was the market price at the date of exercise.
Item 5. Other Information
Valmont's annual meeting of stockholders was held on April 26, 2011. The stockholders elected three directors to serve three-year terms and ratified the appointment of Deloitte & Touche LLP to audit the Company's financial statements for fiscal 2011. For the annual meeting there were 26,388,998 shares outstanding and eligible to vote of which 24,584,538 were present at the meeting in person or by proxy. The tabulation for each matter voted upon at the meeting was as follows:
Election of Directors:
Mogens C. Bay.
Walter Scott, Jr.
Clark T. Randt, Jr.
Proposal to ratify the appointment of Deloitte & Touche LLP as independent auditors for fiscal 2011:
For
Against
Abstain
Advisory vote on executive compensation:
Broker non-votes
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Advisory vote on the frequency of holding an advisory vote on executive compensation:
1 year
2 years
3 years
Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf and by the undersigned hereunto duly authorized.
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Index of Exhibits
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