Valmont Industries CASE STUDY Presented by Group 3 洪方正/許巧蓁/歐陽玉庭/施昕揚/李瑞祥

AGENDA 1 2 3 4 5 Company Profile EVA Calculation (Corporate & Division) AGENDA 3 Other Information & Concerns 4 Final Decision 5 Other questions from the case

Company Profile

About Company 1946 Est. as the farm-machine manufacturing company. 1953 Started the agricultural-irrigation industry 1960 Manufactured steel poles for Lightening industry 1981 Purchased Gate City Steel, a manufacturer of steel reinforcing bars 1987 Purchased a manufacturer of ballasts from GE NOW: Leading producer and distributor of products and services for the infrastructure and agricultural markets.

Business Segments Divisions Segments Product Lines Valmont Irrigation Industrial Products Industrial & Construction Lightening applications Utility poles Wireless communication towers Valmont Electric Magnetic ballasts Electronic ballasts Business Segments Divisions Segments Product Lines

Problems Earnings fell substantially since the peak of 1989. Even after lots of adjustments, the situation wasn’t recovered. What’s the fundamental problem?

EVA calculation

Corporate EVA dollar: in thousands 1989 1990 1991 1992 NOPAT1 22,649 20,415 (1,037) 17,474 -)Cost of Capital2 17,702 21,214 20,141 19,890 =Corporate EVA 4,947 (799) (21,178) (3,416) 1NOPAT= Sales-Operating Exp.-Taxes +Other income 2Cost of Capital= WACC3 x Invested Capital4 3WACC= 10%，As the case suggested and for the limitation of the information 4Invested Capital= Current long-term debt and notes payable, Long-term debt, other long-term liabilities and All equity

Divisions EVA 1RONA= EBIT x (1-tax%3) /Net asset dollar: in thousands 1RONA= EBIT x (1-tax%3) /Net asset 2WACC= 10%, reason as mentioned previously. Also, we don’t consider to relocate Corp. overhead to each division since these expense has less direct relation toward the division itself. 3 Avg. Corporate Income Tax rate=35% Calculate as following: Industrial Products 1989 1990 1991 1992 (RONA1-WACC2) 5.68% (0.16%) (12.42%) (0.99%) x Net asset 102,148 126,127 115,508 112,167 =Segments EVA 5,806 (203) (14,349) (1,112) dollar: in thousands 1989 1990 1991 1992 Avg. Tax % 31% 40% 35% Irrigation Products 1989 1990 1991 1992 (RONA-WACC) 31.98% 21.43% 10.50% 21.53% x Net asset 31,717 29,431 27,647 23,647 =Segments EVA 10,142 6,306 2,904 5,092 Conclusions: The Industrial Products Division has problem of operation efficiency. We should figure out it might result from which product line.

Industrial/Construction Segments EVA dollar: in thousands Industrial/Construction 1990 1991 1992 (RONA1-WACC2) 3.91% 0.90% 6.25% x Net asset 79,430 77,548 76,020 =Segments EVA 3,107 695 4,748 1 RONA= EBIT x (1-tax% 3)/Net asset 2 WACC= 10%, reason as mentioned previously. 3 Avg. Corporate Income Tax rate=35%, reason as mentioned previously. Conclusions: It’s Valmont Electric product line cause the most losses and affect the performance and even the stock price negatively on Valmont. As financial aspect, we suggest to restructure or shut down the product line. However, we will made our final decision after considering other qualitative information. dollar: in thousands Valmont Electric 1990 1991 1992 (RONA-WACC) (7.22%) (20.27%) (16.29%) x Net asset 46,697 37,960 36,147 =Segments EVA (3,370) (7,696) (5,890)

Other information & Concerns

How should we deal with Valmont Electric ?

1 Industrial Products Industry External factors Construction industry has high debts Maturity Stage is difficult to increase NOPAT Government policy on transportation Analysts predict growth on wireless-communication tower Decrease cost of debts or WACC , While the WACC is difficult to change, we adopt it as bonus Increase the NOPAT due to its highly development

2 Valmont Electrics External factors Internal factors Valmont was the third in the industry ( 12% of market share ) It has potential to growth for the next decades Markets picked up dramatically after the recession during 1989-1991 Had the design technology and production capabilities to improve Restructured its ballast operations in 1991 Moved its operations to a lower-cost location and redesigned the products with cheaper components

However, Valmont Electrics encountered a consecutively negative EVA during 1990-1992. Shall we shout down the division? Or keep running the business?

Final Decision

Valmont had invested 11.3 million on ballast operations. Financial Decision Strategic Decision Electric division’s EVA is negative, which is the reason causing the Valmont industries had negative EVA since 1990. Valmont had invested 11.3 million on ballast operations. Ballast industry might be the growth areas for next decade. Reasons In strategic, We suggested Valmont continue to operate the ballast BU. Internal : The design and production ability, digitalized logistic and service. External : Market is growing, and new product (electronic ballasts) has higher margin. What To do? Using EVA as Valmont financial metric, We decide to close down the lightning ballast business unit (BU), due to it’s poor performance.

Final Decision We decide to keep the ballast BU operating, consider by the strategic decision. Valmont Industry internal competence and external market growth, we suggest ballast BU can keep running for 3 years, than we examine the EVA.

Other Questions from The case

Was EVA a sustainable concept ? 1 Was EVA a sustainable concept ? Can’t estimate the future by using one year data. Might not know the part of cutting investment. Cutting the positive NPV projects down. Problems of EVA Using future cash flow, trends of industry to plan for the future strategy. EVA gives managers directions to work on. Great measure of corporate finance status. Our Comments

Should Valmont implement compensation system by EVA ? 2 Unfair to the electric segments, due to the restructure expense in 1991. Problems To avoid agency problem, set different KPI based on its opportunity and challenge. EVA gives manager better picture of finance.

Suggestion Adjust compensation system different based on different business unit. Leverage the debt to improve WACC Apply employee stock ownership plan

Was using 10% WACC fair enough for all the business segments? 3 Each segments faced different risks, it’s not the best way to use same WACC. Problems Using benchmark of same industry WACC to adjust. Calculate different WACC is challenging, if you can’t find the industry WACC, 10% is fair. Our Comments

Would other means work better than EVA ? 4 Would other means work better than EVA ? NI MVA Better explaining stock prices Difficult to manage, therefore using EVA can better manage employee and improve stock price. Market value – book value Knowing the future EVA EVA gives manager incentives to consider company’s figure the whole picture of finance situation, but if we want to think in long term , we should consider MVA. Apply employee stock ownership plan to avoid agency problem. Our Comments

Q&A Thank you !