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

2. 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

3. Company Profile

4. 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.

5. 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

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

7. EVA calculation

8. 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

9. 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.

10. 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)

11. Other information & Concerns

12. How should we deal with Valmont Electric ?

13. 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

14. 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
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

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

16. Final Decision

17. 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.

18. 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.

19. Other Questions
from
The case

20. 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

21. 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.

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

23. 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

24. 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

25. Q&A
Thank you !