Description
Filed with the SEC from July 26 to Aug 01:
Valmont Industries (VMI)
The Robert B. Daugherty Charitable Foundation cut its stake to 2,119,268 shares (8.0%) by selling 337,249 from Feb. 28 through July 26 for $110.86 to $124.76 per share. In an April 2011 filing, it said it intends to retain 1,300,000 shares and to dispose of the rest in quarterly sales of 200,000 to 250,000 shares.
BUSINESS OVERVIEW
Business Strategy
Our strategy is to pursue growth opportunities that leverage our existing product portfolio, knowledge of our principal end-markets and customers and engineering capability to increase our sales, earnings and cash flow, including:
Increasing the Market Penetration of our Existing Products. Our strategy is to increase our market penetration by differentiating our products from our competitors' products through superior customer service, technological innovation and consistently high quality. For example, in recent years, our Utility segment increased its sales through our engineering capability, effective coordination of our production capacity and strong customer service to meet our customers' requirements, especially on large, complex projects. Our acquisition of Delta plc in May 2010 was in part intended to improve our market presence and penetration in the Australian lighting, communication and utility structures markets and the U.S. industrial galvanizing markets.
Bringing our Existing Products to New Markets. Our strategy is to expand the sales of our existing products into geographic areas where we do not currently have a strong presence as well as into applications for which end-users do not currently purchase our type of product. In recent years, our Utility business successfully expanded into new markets in Africa and we have also expanded our geographic presence in Europe and North Africa for lighting structures. We have also been successful introducing our pole products to utility and wireless communication applications where customers have traditionally purchased lattice tower products. Our strategy of building a manufacturing presence in China was based primarily on expanding our offering of pole structures for lighting, utility and wireless communication to the Chinese market. During 2011 we established manufacturing operations in India to provide pole structures for lighting, utility and wireless communications to the Indian market as well as galvanizing services. Our Irrigation segment has a long history of developing new mechanized irrigation markets in emerging markets. In recent years, these markets include China, the Middle East and Eastern Europe.
Developing New Products for Markets that We Currently Serve. Our strategy is to grow by developing new products for markets where we have a comprehensive understanding of end-user requirements and longstanding relationships with key distributors and end-users. For example, in recent years we developed and sold structures for tramway applications in Europe. The customers for this product line include many of the state and local governments that purchase our lighting structures. Another example is the development and expansion of decorative product concepts for lighting applications that have been introduced to our existing customer base.
Developing New Products for New Markets to Further Diversify our Business. Our strategy is to increase our sales and diversify our business by developing new products for new markets. For example, we have been expanding our offering of specialized decorative lighting poles in the U.S. The decorative lighting market has different customers than our traditional markets and the products to serve that market are different than the poles we manufacture for the transportation and commercial markets. The acquisition of Delta gives us a presence in highway safety systems and industrial access systems, products that we believe are complementary to our existing products and provide us with future growth opportunities.
Engineered Infrastructure Products Segment
Products Produced —We manufacture steel and aluminum poles and structures to which lighting and traffic control fixtures are attached for a wide range of outdoor lighting applications, such as streets, highways, parking lots, sports stadiums and commercial and residential developments. The demand for these products is driven by infrastructure, commercial and residential construction and by consumers' desire for well-lit streets, highways, parking lots and common areas to help make these areas safer at night and to support trends toward more active lifestyles and 24-hour convenience. In addition to safety, customers want products that are visually appealing. In Europe, we are a leader in decorative lighting poles, which are attractive as well as functional. We are leveraging this expertise to expand our decorative product sales in North America and China. Traffic poles are structures to which traffic signals are attached and aid the orderly flow of automobile traffic. While standard designs are available, poles are often engineered to customer specifications to ensure the proper function and safety of the structure. Product engineering takes into account factors such as weather (e.g. wind, ice) and the products loaded on the structure (e.g. lighting fixtures, traffic signals, signage) to determine the design of the pole. This product line also includes roadway safety systems, including guard rail barrier systems, wire rope safety barriers, crash attenuation barriers and other products designed to redirect vehicles when off course and to prevent collisions between vehicles. Highway safety systems are also designed and engineered to absorb collisions and ultimately reduce roadway fatalities and injury.
We also manufacture and distribute of a broad range of structures (poles and towers) and components serving the wireless communication market. In the wireless communication market, a wireless communication cell site mainly consists of a steel pole or tower, shelter (enclosure where the radio equipment is located), antennas (devices that receive and transmit data and voice information to and from wireless communication devices) and components (items that are used to mount antennas to the structure and to connect cabling and other parts from the antennas to the shelter). For a given cell site, we provide poles, towers and components. We offer a wide range of structures to our customers, including solid rod, tubular and guyed towers, poles (tapered and non-tapered) and disguised products to minimize the visual impact of an antenna on an area. Structures are engineered and designed to customer specifications, which include factors such as the number of antennas on the structure and wind and soil conditions. Due to the size of these structures, design is important to ensure each structure meets performance and safety specifications. We do not provide any significant installation services on the structures we sell.
We also produce access systems, which includes the manufacture and distribution of a broad range of structures and components used in the erection of infrastructure, industrial and commercial access systems, including floor gratings, handrails, barriers and sunscreens.
Markets —The key markets for our lighting, traffic and roadway safety products are the transportation and commercial lighting markets and public roadway building and improvement. The transportation market includes street and highway lighting and traffic control, much of which is driven by government spending programs. For example, the U.S. government funds highway and road improvement through the federal highway program. This program provides funding to improve the nation's roadway system, which includes roadway lighting and traffic control enhancements. Matching funding from the various states may be required as a condition of federal funding. The current highway program is now expired and operating under extensions issued by Congress and we do not expect that the next multi-year highway spending program will be enacted until at least 2013. In North America, governments desire to improve road and highway systems by reducing traffic congestion. In the United States, there are approximately 4 million miles of public roadways, with approximately 24% carrying over 80% of the traffic. Accordingly, the need to improve traffic flow through traffic controls and lighting is a priority for many communities. Transportation markets in other areas of the world are also heavily funded by local and national governments. The commercial lighting market is mainly funded privately and includes lighting for applications such as parking lots, shopping centers, sports stadiums and business parks. The commercial lighting market is driven by macro economic factors such as general economic growth rates, interest rates and the commercial construction economy.
The main markets for our communication products have been the wireless telephone carriers and build-to-suit companies (organizations that own cell sites and attach antennas from multiple carriers to the pole or tower structure). We also sell products to state and federal governments for two-way radio communication, radar, broadcasting and security applications. We believe long-term growth should mainly be driven by increased usage, technologies such as 4G (including applications for smart phones, such as streaming video and internet) and demand for improved emergency response systems, as part of the U.S. Homeland Security initiatives. Subscriber growth should continue to increase, although at a lower rate than in the past. In general, as the number of subscribers and usage of wireless communication devices increase, we believe this will result in demand for communication structures and components.
Markets for access systems are typically driven by infrastructure, industrial and commercial construction spending and can be cyclical depending on economic conditions in the markets in which we compete. Customers consist of construction firms or installers who participate in infrastructure, industrial and commercial construction projects, resellers such as steel service centers and end users.
All of the products that we manufacture in this segment are customer investments in basic infrastructure and the total cost of these products can be substantial for our customers. Therefore, access to capital is important to their ability to fund future infrastructure needs. Due to the nature of these markets, demand can be cyclical as spending projects sometimes can be delayed due to funding or other issues.
Competition —Our competitive strategy in all of the markets we serve is to provide high value to the customer at a reasonable price. We compete on the basis of product quality, high levels of customer service, timely, complete and accurate delivery of the product and design capability to provide the best solutions to our customers. There are numerous competitors in our markets, most of which are relatively small companies. Companies compete on the basis of price, product quality, reliable delivery and unique product features. Pricing can be very competitive, especially when demand is weak or when strong local currencies typically result in increased competition from imported products.
Distribution Methods —Sales and distribution activities are handled through a combination of a direct sales force and commissioned agents. Lighting agents represent Valmont as well as lighting fixture companies and sell other related products. Sales are typically to electrical distributors, who provide the pole, fixtures and other equipment to the end user as a complete package. Commercial lighting and highway safety sales are normally made through Valmont sales employees, who work on a salary plus incentive, although some sales are made through independent, commissioned sales agents.
Utility Support Structures Segment
Products Produced —We manufacture steel and concrete pole structures for electrical transmission, substation and distribution applications. Our products help move electrical power from where it is produced to where it is used. We produce tapered steel and pre-stressed concrete poles for high-voltage transmission lines, substations (which transfer high-voltage electricity to low-voltage transmission) and electrical distribution (which carry electricity from the substation to the end-user). In addition, we produce hybrid structures, which are structures with a concrete base section and steel upper sections. Utility structures can be very large, so product design engineering is important to the function and safety of the structure. Our engineering process takes into account weather and loading conditions, such as wind speeds, ice loads and the power lines attached to the structure, in order to arrive at the final design.
Markets —Our sales in this segment are mainly in North America, where the key drivers in the utility business are significant upgrades in the electrical grid to support enhanced reliability standards, policy changes encouraging more generation from renewable energy sources, interconnection of regional grids to share more efficient generation to the benefit of the consumer and increased electrical consumption which has outpaced the transmission investment in the past decades. According to the Edison Electric Institute, the electrical transmission grid in the U.S. requires significant investment in the coming years to respond to the compelling industry drivers and lack of investment over the past 25 years. The expected increase in electrical consumption around the world should also require substantial investment in new electricity generation capacity which will prompt further international growth in transmission grid development. We expect these factors to result in increased demand for electrical utility structures to transport electricity from source to user.
Competition —Our competitive strategy in this segment is to provide high value solutions to the customer at a reasonable price. We compete on the basis of product quality, engineering expertise, high levels of customer service and reliable, timely delivery of the product. There are many competitors. Companies compete on the basis of price, quality and service. Utility sales are often made through a competitive bid process, whereby the lowest bidder is awarded the contract, provided the competitor meets all other qualifying criteria. In weak markets, price is a more important criterion in the bid process.
Irrigation Segment
Products Produced —We manufacture and distribute mechanical irrigation equipment and related service parts under the "Valley" brand name. A Valley irrigation machine usually is powered by electricity and propels itself over a farm field and applies water and chemicals to crops. Water and, in some instances, chemicals are applied through sprinklers attached to a pipeline that is supported by a series of towers, each of which is propelled via a drive train and tires. A standard mechanized irrigation machine (also known as a "center pivot") rotates in a circle, although we also manufacture and distribute center pivot extensions that can irrigate corners of square and rectangular farm fields as well as conform to irregular field boundaries (referred to as a "corner" machine). Our irrigation machines can also irrigate fields by moving up and down the field as opposed to rotating in a circle (referred to as a "linear" machine). Irrigation machines can be configured to irrigate fields in size from 4 acres to over 500 acres, with a standard size in the U.S. configured for a 160-acre tract of ground. One of the key components of our irrigation machine is the control system. This is the part of the machine that allows the machine to be operated in the manner preferred by the grower, offering control of such factors as on/off timing, individual field sector control, rate and depth of water and chemical application. We also offer growers options to control multiple irrigation machines through centralized computer control or mobile remote control. The irrigation machine used in international markets is substantially the same as the one produced for the North American market.
There are other forms of irrigation available to farmers, two of the most prevalent being flood irrigation and drip irrigation. In flood irrigation, water is applied through a pipe or canal at the top of the field and allowed to run down the field by gravity. Drip irrigation involves plastic pipe or tape resting on the surface of the field or buried a few inches below ground level, with water being applied gradually. We estimate that center pivot and linear irrigation comprises one-third of the irrigated acreage in North America. International markets use predominantly flood irrigation, although all forms are used to some extent.
Markets —Market drivers in North American and international markets are essentially the same. Since the purchase of an irrigation machine is a capital expenditure, the purchase decision is based on the expected return on investment. The benefits a grower may realize through investment in mechanical irrigation include improved yields through better irrigation, cost savings through reduced labor and lower water and energy usage. The purchase decision is also affected by current and expected net farm income, commodity prices, interest rates, the status of government support programs and water regulations in local areas. In many international markets, the relative strength or weakness of local currencies as compared with the U.S. dollar may affect net farm income, since export markets are generally denominated in U.S. dollars.
General
Certain information generally applicable to each of our four reportable segments is set forth below.
Suppliers and Availability of Raw Materials.
Hot rolled steel coil and plate, zinc and other carbon steel products are the primary raw materials utilized in the manufacture of finished products for all segments. We purchase these essential items from steel mills, zinc producers and steel service centers and are usually readily available. While we may experience increased lead times to acquire materials and volatility in our purchase costs, we do not believe that key raw materials would be unavailable for extended periods. We have not experienced extended or wide-spread shortages of steel during this time, due to what we believe are strong relationships with some of the major steel producers. In the past several years, we experienced volatility in zinc and natural gas prices, but we did not experience any disruptions to our operations due to availability.
Patents, Licenses, Franchises and Concessions.
We have a number of patents for our manufacturing machinery, poles and irrigation designs. We also have a number of registered trademarks. We do not believe the loss of any individual patent would have a material adverse effect on our financial condition, results of operations or liquidity.
Seasonal Factors in Business.
Sales can be somewhat seasonal based upon the agricultural growing season and the infrastructure construction season. Sales of mechanized irrigation equipment and tubing to farmers are traditionally higher during the spring and fall and lower in the summer. Sales of infrastructure products are traditionally higher summer and fall and lower in the winter.
Customers.
We are not dependent for a material part of any segment's business upon a single customer or upon very few customers. The loss of any one customer would not have a material adverse effect on our financial condition, results of operations or liquidity.
CEO BACKGROUND
Glen A. Barton , age 72, was Chairman and Chief Executive Officer of Caterpillar, Inc. (manufacturer of construction and mining equipment, engines and gas turbines) from 1999 to January 2004. He is currently a director of Newmont Mining Corporation and previously served as a director of Inco Limited. Mr. Barton held numerous management positions with Caterpillar from 1961 to 2004, including responsibilities for operations in North America, South America, Latin America and Japan. Mr. Barton was formerly a global advisor to The Conference Board and formerly served as a director of the U.S.-Japan Business Counsel. Mr. Barton has a degree in civil engineering. His background in manufacturing and experience in international business is an asset for Valmont's board of directors. Mr. Barton has served as a director of the Company since October 2004.
Daniel P. Neary , age 60, has been Chairman and Chief Executive Officer of Mutual of Omaha (full service and multi-line provider of insurance and financial services) since December 2004. Mutual of Omaha's revenues were in excess of $5 billion in 2011. He was previously President of the Group Insurance business unit of Mutual of Omaha. Mr. Neary's training as an actuary and knowledge of the financial services industry provides valuable background for board oversight of the Company's accounting matters. His experience in strategic development and risk assessment for the Mutual of Omaha insurance companies are well suited to membership on Valmont's board of directors. Mr. Neary has been a director of the Company since December 2005.
Kenneth E. Stinson , age 69, has been Chairman of Peter Kiewit Sons', Inc. (construction and mining) since March 1998. He was Chief Executive Officer of Peter Kiewit Sons', Inc. from 1998 to 2004. He previously served as Chairman and CEO of Kiewit Construction Group, Inc. Peter Kiewit Sons', Inc. revenues were in excess of $9 billion in 2011. Mr. Stinson also serves as a director of ConAgra Foods, Inc. Mr. Stinson has a civil engineering degree and had management responsibility at Kiewit for the construction of highways, bridges, transit systems, power plants and refineries for commercial, industrial and governmental customers. His extensive experience in the United States infrastructure business aids the board's oversight of Valmont's engineered infrastructure products segment and utility support structures segment. Mr. Stinson has served as a director of the Company since December 1996.
Catherine James Paglia , age 59, has been a director of Enterprise Asset Management, Inc., a New York based privately-held real estate and asset management company since September 1998. Ms. Paglia previously spent eight years as a managing director at Morgan Stanley, ten years as a managing director of Interlaken Capital, and served as chief financial officer of two public corporations. Ms. Paglia serves on the board of directors of the Columbia Funds and is a member of the board of trustees of the Carnegie Endowment for International Peace. Her extensive Wall Street experience and prior service as a chief financial officer of public companies provide an excellent background for membership on Valmont's Audit Committee. Ms. Paglia has served as a director of the Company since February 2012.
Mogens C. Bay , age 63, has been Chairman and Chief Executive Officer of the Company since January 1997. He was president and Chief Executive Officer of the Company from August 1993 through December 1996. Mr. Bay currently serves as a director of ConAgra Foods, Inc. and Peter Kiewit Sons', Inc. Mr. Bay is the only Valmont officer who serves on the Company's board of directors.
Mr. Bay's 33 years of experience with Valmont provides an extensive knowledge of Valmont's operating companies and its lines of business, its long-term strategies and domestic and international growth opportunities. Mr. Bay has served as a director of the Company since October 1993.
Walter Scott, Jr. , age 80, has been Chairman of Level 3 Communications, Inc. (communications and information services) since March 1998. Mr. Scott previously served as Chairman of the Board and President of Peter Kiewit Sons', Inc. Mr. Scott is a director of Berkshire Hathaway, Inc. and MidAmerican Energy Holdings Company. He previously served as a director of Commonwealth Telephone Enterprises and Burlington Resources. Mr. Scott is a civil engineer with management experience of infrastructure construction operations at Kiewit. His extensive board experience provides a valuable resource of strategic and oversight input to the Valmont board of directors. He has served as a director of the Company since April 1981.
Clark T. Randt, Jr ., age 66, is currently President of Randt & Co. LLC (business consulting) and has lived and worked in Asia for more than thirty years. Ambassador Randt served as the United States Ambassador to the Peoples Republic of China from July 2001 to January 2009. He currently serves as a director of United Parcel Service, Inc. Ambassador Randt was formerly a partner with the international law firm of Shearman & Sterling in Hong Kong where he headed the firm's China practice. Ambassador Randt is a member of the New York bar association and was admitted to the Hong Kong bar association and has over 25 years of experience in cross-border corporate and finance transactions. He is a member of the Council on Foreign Relations. His international experience and knowledge of Asian business operations and experience with U.S. investment in China serves the Company well as it expands its operations in Asia. Ambassador Randt has served as a director of the Company since February 2009.
Dr. Stephen R. Lewis, Jr. , age 73, has been Chairman of Columbia Funds (a mutual fund group with $130 billion of assets under management) since January 2007. Mr. Lewis was president of Carleton College from 1987 to 2002, and has been President Emeritus and Professor Emeritus Economics at Carleton College since 2002. Mr. Lewis has lived and worked in Pakistan, Kenya and Botswana and has received honorary degrees from universities in Japan and Hong Kong. Mr. Lewis has more than thirty years' experience in Asia and Africa, primarily advising governments on economic policy and negotiations of foreign investment and financing agreements. Mr. Lewis is a member of the Council on Foreign Relations, the Dean's Advisory Council of the Hubert H. Humphrey Institute of Public Affairs, and Vice Chairman of the board of trustees of the Carnegie Endowment for International Peace. Mr. Lewis' international economic background provides a valuable source of input for Valmont as the Company grows throughout the world. Mr. Lewis has served as a director of the Company since October 2002.
Kaj den Daas , age 62, retired in 2009 as Executive Vice President of Philips Lighting B.V. of the Netherlands (manufacturer of lighting fixtures and related components) and Chairman of its North American Lighting Operations. Mr. den Daas was responsible for oversight of the manufacturing, distribution, sales and marketing of Philips products in the United States, Canada and Mexico, with prior Philips experience in the Asia Pacific area. Mr. den Daas, a native of the Netherlands, has more than 30 years of international experience in the lighting industry. His extensive international business experience provides value to the Valmont board of directors. Mr. den Daas has been a director of the Company since October 2004.
James B. Milliken , age 55, has been President of the University of Nebraska since August 2004. The University of Nebraska is a public university with an annual budget of over $2 billion. Mr. Milliken led the University of Nebraska education efforts in China, India, Brazil and other countries. Mr. Milliken has a law degree from New York University, has served on the American Council on Education's Blue Ribbon Panel on global engagement, the Council on Foreign Relations Higher Education Advisory Group, and chairs a national commission on Innovation, Competitiveness and Economic Prosperity. Mr. Milliken's experience in managing a large organization which has expanded internationally provides value to the Valmont board of directors as the Company grows internationally. Mr. Milliken has served as a director of the Company since December 2011.
MANAGEMENT DISCUSSION FROM LATEST 10K
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.
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 prices in the U.S. and 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. The sales pricing environment is slowly improving but continues to be very competitive. Our sales in 2011 were somewhat reflective of market conditions in 2010 when certain utility structures projects were awarded at relatively low prices. In total, we experienced slightly lower average selling prices on our 2011 sales, as compared with 2010 (approximately $14 million). In international markets, the sales decrease was mainly due to lower project sales into emerging markets of approximately $25 million.
Operating income in fiscal 2011, as compared with 2010, increased due to the substantial increase in North America sales volume and associated operational leverage. Gross profit margins were negatively affected by the competitive pricing environment in North America and higher raw material costs. The increase in SG&A expense for the segment in fiscal 2011 was higher than in 2010, mainly due to increased employee incentives ($6.7 million) associated with the increase in operating income and $2.0 million in increased compensation expenses.
Coatings segment
Net sales in the Coatings segment increased in fiscal 2011, as compared with 2010, mainly due to the full year effect of the Delta operations and currency translation effects and improved sales volumes in North America and Asia Pacific. Unit pricing effects on sales for the segment were not significant in 2011, as compared with 2010.
The increase in segment operating income in fiscal 2011, as compared with 2010, was mainly due to the effects of currency translation and improved productivity and operating leverage through volume increases. Higher average zinc costs in 2011, as compared with 2010, were largely recovered through productivity improvements. The increase in operating income in fiscal 2011, as compared with 2010, also was due to the effect of the acquired Delta operations. SG&A expenses for the segment in fiscal 2011 were higher than the comparable periods in 2010, mainly due to the effect of the Delta businesses ($7.2 million), incentives due to improved operating income ($1.0 million) and the write down of the Industrial Galvanizers of America trade name ($0.8 million) in 2011.
In 2011, one of our galvanizing facilities in Australia incurred damages from a storm and a fire later in the year. A property damage and business interruption claim was filed with our insurance carrier and settlement of the claim is ongoing. We made the necessary capital expenditures to restore the facility and operations commenced late in the fourth quarter of 2011. The insurance claim proceeds agreed to with the insurance carrier in 2011 exceeded the net book value of the assets damaged. The financial effect of this event resulted in an improvement in segment operating results in the fourth quarter of 2011 of approximately $1.5 million.
Irrigation segment
The increase in Irrigation segment net sales in fiscal 2011, as compared with 2010, was mainly due to improved sales volumes of approximately $195 million. The remainder of the sales increase was associated with pricing (to recover higher raw material costs) and favorable product mix (approximately $20 million) and currency translation effects (approximately $3 million). In global markets, the sales growth was due to a very strong agricultural economies around the world. Farm commodity prices were generally favorable throughout 2011 and net farm income was at record levels in the United States and favorable in most markets. 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. 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 in Asia Pacific and South America.
Operating income for the segment improved in 2011 over 2010, due to improved sales unit volumes in North America and the associated operational leverage. The most significant reasons for the increase in SG&A expense in 2011, as compared with 2010, was related to employee compensation costs to support the increase in sales activity and future initiatives ($5.4 million) and increased employee incentives due to improved operating performance in 2011 ($3.0 million).
Other
This unit includes the Delta grinding media and electrolytic manganese operations and our industrial tubing and fasteners operations. The increase in sales in fiscal 2011, as compared with 2010, was mainly due improved sales volumes in all of these operations and currency translation effects (approximately $13.9 million). Fiscal 2011 operating income improved due to the full year effect of the Delta operations, improved operating results in the manganese dioxide and tubing operations and currency translation (approximately $1.7 million).
Net corporate expense
Net corporate expense in fiscal 2011 was comparable to 2010. Corporate expenses decreased in fiscal 2011, as compared with 2010, due to Delta acquisition and integration costs that were incurred in 2010 ($13.2 million) but not 2011 and lower deferred compensation expense ($1.5 million). These decreases were offset somewhat by the full year effect of Delta's administration costs ($5.2 million) and higher employee incentive expense associated with improved profitability in 2011 as compared with 2010 ($9.7 million) and increased compensation expenses ($2.7 million).
FISCAL 2010 COMPARED WITH FISCAL 2009
Acquisition of Delta plc
On March 4, 2010, we made an offer to acquire all the ordinary shares of Delta plc ("Delta"), a public company traded on the London Stock exchange under the symbol "DLTA". The offer price was £1.85 per ordinary share, with a total estimated purchase price of $436.7 million. To manage the foreign exchange risk associated with the offer, we executed a forward foreign exchange contract with a multinational bank, whereby, if the acquisition was completed, the required British pound sterling would be delivered to us at a fixed exchange rate of $1.5353/£ to complete the acquisition. In accordance with takeover rules in the United Kingdom, we established funding for the purchase price and related acquisition costs by a combination of $264 million in restricted cash (comprised of cash balances of $83 million and $181 million in borrowings under our revolving credit agreement) and a $200 million bank bridge loan commitment. In April 2010, we issued $300 million of senior unsecured notes, terminated the bridge loan and reduced our revolving credit agreement borrowings to approximately $85 million. We completed the acquisition on May 12, 2010 and we now own 100% of Delta's ordinary shares. In December 2010, we acquired all of Delta's preference shares for approximately £2.9 million (approximately $4.4 million).
Engineered Infrastructure Products (EIP) segment
The increase in net sales in fiscal 2010, as compared with 2009, was mainly due the acquisition of Delta's engineered access systems, poles and highway safety products (approximately $136.2 million), offset to a degree by to lower sales volumes and lower sales prices in the lighting and communication structures product lines. In the Lighting Traffic and Roadway Safety product line, we experienced lower sales and average unit selling prices in North American and international markets in 2010, as compared with 2009 (approximately $40 million). The decrease in North American sales in 2010, as compared with 2009, was due to weaker customer demand for lighting and traffic poles in the transportation market channel. Sales unit volumes in North America in 2010 were slightly lower as compared with 2009. 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. While commercial lighting market sales in 2010 were slightly higher as compared with 2009, demand remains relatively weak, due to continued softness in the commercial and residential construction markets. In Europe, sales were lower in 2010, as compared with 2009. As most economies in Europe are weak, governments have cut spending (including for infrastructure projects) to cope with budgetary deficits. The decrease in European lighting sales in 2010, as compared with 2009, was also related to competitive selling price pressures and certain project sales in developing markets in 2009 that did not repeat in 2010. Lighting structure sales in China, while a relatively small portion of global lighting sales, improved in 2010, as compared with 2009, due to increased sales efforts.
Sales in the communication structures product line were lower in fiscal 2010, as compared with 2009, in both North America and China. In North America, general slowness in the wireless communication structures market and lower sign structure sales resulted in lower 2010 sales, as compared with 2009. In China, sales of wireless communication structures likewise were lower in 2010, as compared with 2009. In 2010, annual supply contracts with the various carriers were settled later than in the past and we believe there is some continuing coordination of the wireless networks in China that is impacting network development at this time.
Operating income in the EIP segment was higher in fiscal 2010, as compared with 2009, due the impact of the Delta infrastructure businesses (approximately $17.6 million), offset somewhat by lower lighting and wireless communication sales volumes and pricing pressures due to weak market conditions. The impact of lower sales on operating profit was mitigated to an extent by factory operational improvements (approximately $12.0 million). While LIFO expense for the segment was higher in fiscal 2010, as compared with 2009, by approximately $9.6 million, this impact was largely offset by lower average material costs incurred in 2010, as compared with 2009. Aside from the impact of the Delta acquisition, SG&A expenses were approximately $5.3 million lower in 2010, as compared with 2009, due to various cost containment actions in the segment this year.
Utility Support Structures (Utility) segment
In the Utility segment, the sales decrease in 2010, as compared with 2009, was due to the combination of lower sales unit volumes in the U.S. and lower average unit selling prices. The decrease in unit sales (in tons) in fiscal 2010 in the U.S. was approximately 24%, and sales prices were down approximately $94 million from 2009. The record sales performance realized in 2009 was in part related to the large backlog at the end of the 2008 fiscal year, which was the result of substantial order intake in the last half of 2008. At the end of fiscal 2009, our sales order backlog was less than half of the year-end 2008 backlog. During 2009 and continuing into 2010, the economic recession in the U.S. resulted in a drop in electricity demand. Accordingly, our customers reduced their purchases of structures and delayed scheduled projects. In addition, price competition became more significant, especially in light of falling steel prices throughout most of 2009 and generally lower levels of transmission and substation spending this year by utility companies. We believe that utility companies invested at lower levels due to a combination of some falling electricity consumption in the U.S. during the recession and uncertainty that they would generate an adequate financial return on transmission and substation investments. In international markets, sales improved over 2009, the result of increased project sales into new markets, offset by lower sales volumes in China.
The decrease in operating income in 2010, as compared with 2009, was a result of lower sales volumes, lower average selling prices and an unfavorable sales mix. Operating profit also was negatively impacted by $4.0 million in increased LIFO expense in 2010, as compared with 2009. The decrease in SG&A expenses in 2010, as compared with 2009, primarily resulted from lower employee incentives related to the decrease in operating income in 2010 (approximately $5.9 million) and lower sales commission expense (approximately $4.0 million) due to the decrease in net sales in 2010.
Coatings segment
Net sales in the Coatings segment increased in fiscal 2010, as compared with 2009, resulted mainly from the inclusion of Delta's galvanizing sales in this segment (approximately $106.9 million) and improved sales unit volumes. Galvanizing unit volumes in 2010 were approximately 6% higher in 2010 as compared with in 2009. We attribute the increase in sales demand to slightly stronger industrial economic conditions in our geographic market areas.
The increase in segment operating income in 2010, as compared with 2009, was due to the impact of Delta's galvanizing operations (approximately $13.6 million) and improved sales volumes and the associated operating leverage. These effects were offset somewhat by rising zinc costs that were not recovered through sales price increases. Increases in the average cost of zinc in 2010, as compared with 2009, amounted to approximately $3.6 million. These cost increases were largely offset by factory efficiencies and increased sales volume. SG&A expenses for the segment in 2010 were higher as compared with 2009, mainly due to the impact of Delta's galvanizing operations.
Irrigation segment
Irrigation segment net sales in 2010 improved, as compared with 2009, due to stronger sales volumes in North America and International markets and currency translation effects on international sales (approximately $7.0 million). In North America, we believe improved demand for irrigation equipment in 2010 over a weak 2009 resulted from improvement in grower sentiment and expected net farm income. In international markets, the sales improvement in 2010 over 2009 was broad-based, as stronger market conditions drove higher sales in most regions.
Operating income for the segment improved in 2010 over 2009, due to improved sales unit volumes in North America, lower raw material prices (net of increased LIFO expense of $6.8 million) and a stronger international sales mix. SG&A expenses increased mainly due to increased employee incentives associated with improved operating income (approximately $5.2 million) and costs associated with business development activities.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
On a consolidated basis, the increases in net sales in the second quarter and first half of 2012, as compared with 2011, were due to the following factors:
• Unit sales volumes increased approximately $118 million and $259 million in the second quarter and first half of fiscal 2012, respectively, as compared with 2011. In the second quarter of 2012, all reportable segments except Coatings reported higher sales, as compared with the same period in 2011. All reportable segments experienced improved net sales in the first half of 2012, as compared with 2011. The most significant sales increases were in the Irrigation and Utility Support Structures segments.
• Sales prices in the aggregate for the second quarter of 2012 were comparable with 2011. On a year-to-date basis, sales prices and mix in 2012 were higher than 2011 by approximately $7 million.
These increases were offset to a degree by settlements related to a property insurance claim and a settlement related to a vendor dispute aggregating $2.3 million in the second quarter of 2012. These expense decreases were considered non-recurring in nature. SG&A expense also decreased in the second quarter and first half of 2012, as compared with 2011, due to foreign exchange translation effects of $2.5 million and $2.2 million, respectively.
The increase in operating income on a reportable segment basis in the second quarter and first half of 2012, as compared with 2011, was due to improved operating performance in all reportable segments. The "Other" category also reported improved operating profit in the second quarter and first half of 2012, as compared with 2011.
The decrease in net interest expense in the second quarter and first half of fiscal 2012, as compared with 2011, 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. We did not have any refinancing of debt during 2012. Average borrowing levels in 2012 were comparable with 2011.
The increase in "Other" expenses in the second quarter of fiscal 2012, as compared with 2011, was mainly due to foreign exchange transaction losses associated with the strengthening of the U.S. dollar. On a year-to-date basis, increased investment gains in the assets held in our deferred compensation plan of $1.0 million were recorded as other income. 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 fiscal 2012 was higher than 2011, mainly due to a higher percentage of our total pre-tax earnings realized from U.S. operations, a $4.1 million tax benefit in 2011 related to the acquisition of the 40% of our grinding media operation that we did not own and $1.4 million of income tax contingencies that we reversed in 2011 due to the expiring of statutes of limitation. Income tax rates in the U.S. are higher than in other countries where we operate. As our share of earnings before income taxes from U.S. operations increases, the effective income tax rate normally increases as well. 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 tax rate to approximate 34%.
Earnings attributable to noncontrolling interests was lower in 2012, as compared with 2011, mainly due to our purchase of the noncontrolling interest in our grinding media operation in June 2011. This operation was previously 40% owned by noncontrolling interests. Earnings in non-consolidated subsidiaries improved in 2012, as compared with 2011, as our 49% owned manganese materials operation experienced improved profitability.
Our cash flows used by operations were approximately $3.5 million in 2012, as compared with $19.9 million provided by operations in 2011. The decrease in operating cash flow, despite increased net income in 2012, resulted from increased working capital associated with higher sales levels and timing of income tax payments, as compared with 2011.
Engineered Infrastructure Products (EIP) segment
The increase in net sales in the second quarter and first half of fiscal 2012 as compared with 2011 was due to improved sales volumes of approximately $10 million and $31 million, respectively, and $8 million and $11 million, respectively, of favorable pricing and sales mix changes. These increases were offset to a degree in the second quarter and first half of 2012, as compared with 2011, by unfavorable foreign exchange translation effects of approximately $8 million. Global lighting sales were slightly lower in the second quarter fiscal 2012, as compared with 2011, mainly due to lower sales in Europe. North America lighting sales in the second quarter of 2012 were modestly higher than 2011, while sales in the first half of 2012 were approximately 10% higher than 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 challenging, as the lack of long-term highway funding legislation and state budget challenges we believe are limiting roadway project activity. Sales in other market channels such as sales to lighting fixture manufacturers and commercial construction projects were stronger in 2012, as compared with 2011. In Europe, sales in the second quarter and first half 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 second quarter and first half of 2012, as compared with 2011, of $3.9 million and $8.4 million, respectively. Despite current economic conditions in Europe, sales in other markets (in local currency) were up modestly in the second quarter and approximately $6.7 million in the first half 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 second quarter and first half of fiscal 2012 were improved over 2011. North America sales in the second quarter and first half of 2012 were $5.0 million and $11.9 million, respectively, higher in 2012, as compared with 2011. The increase in sales was attributable to improved market conditions, favorable weather conditions in 2012 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 second quarter and first half of 2012 were higher as compared with 2011. Floods in parts of Australia affected infrastructure spending in the first half 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.
Operating income for the segment in the second quarter and first half of fiscal 2012 was higher than 2011. Improved operating income resulted from higher sales volumes, improved sales prices and moderating raw material costs (including $1.9 million and $3.0 million, respectively, of lower LIFO expense), offset somewhat by factory operational inefficiencies of $3.9 million and $7.1 million, respectively. The factory operational inefficiencies related mainly to start-up costs related to capacity expansion in the U.S. and volume-related inefficiencies in Europe. The increase in SG&A spending in the second quarter and first half of 2012, as compared with 2011, mainly was attributable to higher compensation costs of $2.7 million and $4.1 million, respectively, and increased employee incentives of $1.0 million and $1.7 million, respectively. These increases were offset to a degree by currency translation effects of $1.4 million in the second quarter and $1.2 million in the first half of fiscal 2012, as compared with the same periods in 2011.
Utility Support Structures (Utility) segment
In the Utility segment, the sales increase in the second quarter and first half of 2012, as compared with 2011, was due to improved unit sales volumes in the U.S., offset to a degree by an unfavorable sales mix in the U.S. (approximately $15 million and $20 million, respectively) resulting from shipments on certain large orders that were taken in 2010, when market pricing was particularly low. Sales volumes in international markets in the second quarter and first half of 2012 was slightly lower than the same periods in 2011. In U.S. markets, electrical utility companies are increasing their investment in the electrical grid, as evidenced by a very high order rate throughout 2011 and record backlogs at December 31, 2011. Sales pricing on new orders is slowly improving but continues to be very competitive. In international markets, the sales decrease was mainly due to lower sales through our European operations, offset to a degree by higher sales in the Asia Pacific region.
Operating income in fiscal 2012, as compared with 2011, increased due to the substantial increase in North America sales volume, moderating raw material costs and operational leverage. These positive effects were offset to a degree in the second quarter and first half of 2012 by $5.8 million and $7.1 million, respectively, of additional costs associated with production inefficiencies and unanticipated costs related to one large order. The increase in SG&A expense for the segment in fiscal 2012 as compared with 2011, was mainly due to increased employee compensation ($0.6 million and $1.5 million, respectively) and sales commissions on higher sales volumes ($0.6 million and $1.0 million, respectively) associated with the increase in business levels and operating income.
Coatings segment
Net sales in the Coatings segment decreased slightly in the second quarter of fiscal 2012, as compared with 2011, mainly due to currency translation effects. Year-to-date sales for the segment increased modestly as compared with 2011. On a regional basis, stronger sales in the United States of $6.9 million and $10.1 million in the second quarter and first half of 2012, respectively, were offset by lower sales volumes in Asia Pacific. 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 second quarter of 2012 were down from 2011, due to reduced demand from some of our larger customers, due to weather-related factors and some slowness in the Australian industrial economy not related to mining. Average selling prices in the second quarter and first half of 2012 were comparable with 2011.
The increase in segment operating income in the second quarter and first half 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 operating income for the segment was approximately $1.2 million and $3.6 million, respectively. SG&A expenses for the segment in the second quarter and first half of 2012, as compared with 2011, were slightly lower, due to a $0.9 million favorable dispute settlement with a vendor.
Irrigation segment
The increase in Irrigation segment net sales in the second quarter and first half of 2012, as compared with 2011, was mainly due to improved sales volumes of approximately $6 million and $45 million, respectively, and favorable pricing and sales mix of approximately $8 million and $17 million respectively. These increases were offset by unfavorable currency translation effects of $5 million and $7 million in the second quarter and first half of 2012, respectively, as compared with 2011. The pricing and sales mix effect was generally due to sales price increases that took effect after the first half of 2011 to recover higher material costs in early 2011. In global markets, 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. In addition, weather conditions in North America in the first half of 2012 were generally favorable, further enhancing delivery schedules for irrigation machines and demand for related service parts. 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 second quarter and first half 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 $0.3 million and $5.2 million in lower LIFO expenses in the second quarter and first half of 2012, respectively, as compared with 2011. The most significant reasons for the increase in SG&A expense in the second quarter and first half 2012, as compared with 2011, was related to employee compensation costs to support the increase in sales activity ($0.3 million and $1.8 million, respectively), offset to a degree by currency translation effects of approximately $0.5 million and $0.7 million, respectively.
Other
This category includes the grinding media, industrial tubing, electrolytic manganese and industrial fasteners operations. The increase in sales and operating income in the second quarter and first half of fiscal 2012, as compared with 2011, was mainly due improved sales volumes in the tubing and electrolytic manganese dioxide operations. Sales in the first half of fiscal 2012 were due to improved sales in all operations.
Net corporate expense
Net corporate expense in the second quarter of 2012 was lower than 2011, mainly due insurance settlements related to a fire and storm damage to one of our galvanizing facilities in Australia of $1.4 million and lower expenses in the Delta Pension Plan of $0.5 million. On a year-to-date basis, expenses are slightly higher due to higher employee incentives associated with improved net earnings and share price, which affected long-term incentive plans (approximately $2.1 million), higher deferred compensation expenses of $1.0 million and stamp duties incurred in Australia related to the 2011 Delta legal restructuring of $1.2 million. These increases were offset somewhat by lower expenses related to the Delta Pension Plan of $1.0 million and the insurance settlement that occurred in the second quarter.
Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows —Net working capital was $931.0 million at June 30, 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 used by operations was $3.5 million in fiscal 2012, as compared with $19.9 million provided by operations in fiscal 2011. The decrease in operating cash flow in 2012 was the result of increased net working capital associated with higher sales and higher levels of business activity, especially in the Utility Support Structures and Irrigation businesses, and and timing of income tax payments, offset to an extent by higher net earnings in fiscal 2012, as compared with 2011. Accounts receivable turns in 2012 were improved over 2011. The increase in inventory at the end of the second quarter compared with December 31, 2011 is associated mainly with the Utility Support Structures and EIP segments and is related to general business levels and seasonal factors.
Investing Cash Flows —Capital spending in the fiscal 2012 was $39.2 million, as compared with $27.9 million in 2011. The most significant capital spending projects in 2012 included capacity expansions in the Utility segment. We expect our capital spending for the 2012 fiscal year to be approximately $100 million, compared to $83 million for the 2011 fiscal year. The increase in expected capital spending over 2011 is mainly due to capacity increases to meet the growing need for utility structures in the U.S. and additional manufacturing investment in the Irrigation segment.
Financing Cash Flows —Our total interest-bearing debt increased slightly to $491.2 million at June 30, 2012 from $486.1 million at December 31, 2011. Financing cash flows in 2011 included the purchase of the 40% noncontrolling interest in our grinding operation for $25.3 million, debt issuance costs of $1.3 million and settlement of a financial derivative of $3.6 million associated with the senior unsecured notes issued in the second quarter of 2011.
CONF CALL
Jeff Laudin
Thank you, Holly. Welcome to the Valmont Industries' Second Quarter Earnings Conference Call. With me today are Mogens Bay, Chairman and Chief Executive Officer; Terry McClain, Senior Vice President and Chief Financial Officer; and Mark Jaksich, Vice President and Corporate Controller.
Before we begin please note, this discussion is subject to our disclosure on forward-looking statements, which applies to today's talk and will be read in full at the end of the call. The instructions for accessing a replay of this call can be found in our press release.
I would now like to turn the floor over to our Chairman and Chief Executive Officer, Mogens Bay.
Mogens C. Bay - Chairman and Chief Executive Officer
Thank you, Jeff and good morning everyone, and thank you for joining us. I trust you have all read the press release, so I will focus on some of the highlights for the quarter. The main driver of second quarter results was substantial increase of Utility Support Structure segment sales and operating income, record second quarter Irrigation segment sales and operating income, and record Coatings operating income.
The quality of our earning improved with operating income as percentage of sales increasing from 10.3% to 12.7%. We are pleased with this level of operating income particularly considering our largest segment, the Engineered Infrastructure Products segment continued to face very difficult market conditions in the Lighting and Traffic businesses, particularly in the US and in Europe.
Profitability in the Utility Support Structure segment more than doubled and were 12.5% operating income as a percentage of sales. We absorbed in the quarter a significant financial penalty in connection with one large order experiencing productivity and quality issues. Absent these costs, operating income as a percentage of sales would have been in the mid-teens, which is the level of operating income we’d expect for the balance of the year.
The outlook for our Utility business remains very strong, and we continue to get confirmation from the marketplace that this high level of activity will last for a number of years. We are adding capacity in Oklahoma, in Pennsylvania, in Texas, and in Mexico. These additions are all part of, or adjacent to current facilities. We will continue to rely on some of our overseas plants when economic considerations, such as exchange rates, freight costs, etc, allows us to do so.
Our Irrigation business had a great quarter exceeding last year’s record second quarter both as it relates to sales and operating income. In 2011, we had a later selling season than we experienced in 2012 where we benefited from favorable weather conditions in the first quarter of this year. Currently, summer sales are following a more usual pattern, less business from storm damage, but continued strong part sales as equipment is being utilized aggressively in this very dry environment in North America.
Sales in our International markets were also up as compared to the same period in 2011. In North America, we are experiencing very widespread drought conditions. Such an environment would typically indicate a strong fall selling season. At this time, it is too early to determine whether revenues in the second half of the year will match, or surpass last year's record performance. One concern would be if this drought continues for much longer, it could lead to water pumping restrictions in certain parts of the country.
Our Coatings businesses continue to operate very well. Sales increases in North America basically offset lower revenue in the Asia-Pacific markets. We are seeing a very high quality level of our earnings in this segment benefiting from moderating zinc prices and lower energy costs. Going forward, we expect strong performance from this segment for the rest of the year and we would be pleased if we could match the recent earnings quality.
We have commenced operations in India at our galvanizing facility there, which is built adjacent to our pole plant. And we expect to generate meaningful custom galvanizing in that country, but it will take time to build up volume.
The Engineered Infrastructure Products segment had increased revenue and operating income. In the US, we welcomed the passage of a two year Highway Bill. We would much prefer a longer bill enabling local governments more visibility, but is a start and demonstrates an understanding on both sides of the aisle of the importance of this funding. While the two-year bill reduces uncertainty and probably improves the mood of the market, we do not expect much benefit in the near-term.
Other areas of our North American Structures business improved. With the AT&T and T-Mobile merger off the table, our Wireless Communications and Components businesses saw a meaningful improvement in revenue and earnings. We also saw some improvement in the Commercial Lighting market and we added additional revenue from internal demand for utility structures.
In Europe, the market continues very difficult with too much capacity chasing too little business, resulting in a very competitive pricing environment. In the Asia-Pacific region on the other hand, sales and operating profits were higher, led by increased sales of access systems. In China as the economic growth rate has slowed, we are refining our business model there to put additional focus on export opportunities to some of our International markets.
Those businesses categorized in Other had improved results led by our Tubing business, which benefited from improved industrial and agricultural market demands.
Turning to other financial measures, the tax rate for the quarter increased to 34.3%, reflecting a higher mix of US profits compared to the same period in 2011. Furthermore, last year we realized the one-time tax benefit in the second quarter. The impact of currency translation on operating income was a -$1.7 million as a result of a strengthening US currency.
Inventories increased compared to last year to support the higher sales level.
Depreciation and amortization for the quarter was $17 million and capital expenditures were $19 million. We expect depreciation at about $70 million and capital spending for the year to be around $100 million, which includes capacity additions.
Looking towards the remainder of the year, we continued strength in the Utility Support Structure segment. And the Engineered Infrastructure Segment part, we expect improvement in the Asia-Pacific region but continued weak markets in Europe and North America. In the Irrigation business, we will update you on our third quarter call on the expected impact of the drought in North America on the second half revenue.
We currently maintain our expectations for full year earnings to exceed $8 per share and believe that the existing market consensus is achievable. We will now take your questions.
Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from the line of Julian Mitchell from Credit Suisse.
Unidentified Analyst
Hi, guys. It's actually Charlie for Julian. Just wondering, we saw really strong margins Coating segment. Obviously, you mentioned some lower energy costs and lower zinc prices. Just didn't know if you could quantify on the $19.5 million in operating profit up about $4million or $5 million year-over-year. I didn't know if you could put a dollar number on what the benefit was from lower zinc prices.
Mogens C. Bay - Chairman and Chief Executive Officer
I don't think I can give you a dollar amount but I would say that the majority of the increase in the earnings quality in the quarter came from a better input environment.
Unidentified Analyst
Okay. Great. And then you had spoken before about lower priced orders kind of in your Utility backlog. One question on Utility is how much longer will that last? Obviously, you guys had a high earnings number, but just from an incremental standpoint it looked a little low. So how long will take for the low priced orders to kind of work through the P&L? And then also given the capacity additions and seeing new competitors emerge, how do you see the pricing environment? I know you guys had touched on that last quarter. Thanks.
Mogens C. Bay - Chairman and Chief Executive Officer
Well, I must start by saying over the last number of quarters I have indicated that we would expect the earnings quality in the Utility business to be in the mid-teens on average in a good market environment and we are seeing a good market environment. I mentioned in my prepared remarks that absent the one-time costs in connection with a big order, we would have been at the mid-teens in the second quarter, and we expect third and fourth quarters to be in the mid-teens. So basically that doesn't mean that we'll never have a low priced order, but we think we are through the period of time where the low priced orders from ‘10 and ‘11 had such an impact that we could not reach the mid-teens.
Unidentified Analyst
Perfect. And then how about the pricing environment? I know that you had said normally in an environment where there was not enough capacity to supply the market that you would get kind of better pricing, but some of that you were not realizing just from new competitors. Has that changed?
Mogens C. Bay - Chairman and Chief Executive Officer
Well, I think that as the market has continued to strengthened, we have seen a better pricing environment, which is what will take our operating income percentage to the mid-teens and hopefully stay there. Now in a market as buoyant as the one we see in Utility, we also continue to see new players entering the market, or players from other structural businesses try their hand in the Utility business. So there will be a competitive pricing environment going forward, but we expect that on balance and with a number of orders that probably better priced than others that on balance we will be around the mid-teens in operating income percentage.
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Fund Letters
