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TMCNet:  VALMONT INDUSTRIES INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

[February 26, 2013]

VALMONT INDUSTRIES INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

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



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

24 -------------------------------------------------------------------------------- Table of Contents General Change Change 2012 2011 2012 - 2011 2010 2011 - 2010 Dollars in millions, except per share amounts Consolidated Net sales $ 3,029.5 $ 2,661.5 13.8 % $ 1,975.5 34.7 % Gross profit 802.5 666.8 20.4 % 519.6 28.3 % as a percent of sales 26.5 % 25.1 % 26.3 % SG&A expense 420.2 403.5 4.1 % 341.2 18.3 % as a percent of sales 13.9 % 15.2 % 17.3 % Operating income 382.3 263.3 45.2 % 178.4 47.6 % as a percent of sales 12.6 % 9.9 % 9.0 % Net interest expense 23.4 26.9 (13.0 )% 26.1 3.1 % Effective tax rate 35.2 % 2.0 % 36.0 % Net earnings 234.1 228.3 2.5 % 94.4 141.8 % Diluted earnings per share $ 8.75 $ 8.60 1.7 % $ 3.57 140.9 % Engineered Infrastructure Products Segment Net sales $ 833.3 $ 792.6 5.1 % $ 669.2 18.4 % Gross profit 210.0 186.5 12.6 % 179.5 3.9 % SG&A expense 156.0 145.7 7.1 % 127.3 14.5 % Operating income 54.0 40.8 32.4 % 52.2 (21.8 )% Utility Support Structures Segment Net sales 869.7 620.8 40.1 % 472.7 31.3 % Gross profit 206.3 141.8 45.5 % 112.2 26.4 % SG&A expense 77.3 71.2 8.6 % 60.5 17.7 % Operating income 129.0 70.6 82.7 % 51.7 36.6 % Coatings Segment Net sales 282.1 280.8 0.5 % 208.4 34.7 % Gross profit 104.4 93.5 11.7 % 67.8 37.9 % SG&A expense 32.8 34.9 (6.0 )% 25.2 38.5 % Operating income 71.6 58.6 22.2 % 42.6 37.6 % Irrigation Segment Net sales 750.6 665.9 12.7 % 443.4 50.2 % Gross profit 216.1 178.6 21.0 % 118.8 50.3 % SG&A expense 72.4 70.8 2.3 % 56.8 24.6 % Operating income 143.7 107.8 33.3 % 62.0 73.9 % Other Net sales 293.9 301.4 (2.5 )% 181.8 65.8 % Gross profit 65.7 65.9 (0.3 )% 43.4 51.8 % SG&A expense 19.1 20.2 (5.4 )% 14.9 35.6 % Operating income 46.6 45.7 2.0 % 28.5 60.4 % Net corporate expense Gross profit - 0.5 (100.0 )% (2.1 ) (123.8 )% SG&A expense 62.6 60.7 3.1 % 56.5 7.4 % Operating loss (62.6 ) (60.2 ) 4.0 % (58.6 ) 2.7 % 25 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS FISCAL 2012 COMPARED WITH FISCAL 2011 Overview On a consolidated basis, the increase in net sales in fiscal 2012, as compared with 2011, was due to the following factors: º • º Unit sales volumes increased approximately $353 million in fiscal 2012, as compared with 2011. All reportable segments contributed to the higher sales volumes, with the most significant unit sales increases within the Utility Support Structures and Irrigation segments. Depending on the segment, unit volumes are measured in tons, units or some other physical measure of volume.

º • º Sales prices and mix in fiscal 2012, as compared with 2011, were favorable, resulting in increased sales of approximately $50 million.

As many of our products are either built to order or configured to customer specifications, sales mix can be due to a number of factors, in addition to pricing. These factors may include product specifications, options and other factors that may affect the unit price at which a product is sold. In some cases, pricing and mix may affect our cost of the product sold.

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

Foreign currency translation factors, in the aggregate, resulted in lower net sales and operating income in fiscal 2012, as compared with 2011. On average, the U.S. dollar strengthened against most currencies in 2012. The most significant currencies that contributed to this movement were the euro, Brazilian real and the South African rand. On a segment basis, the approximate currency effects on net sales and operating income in fiscal 2012, as compared with 2011, were as follows (in millions of dollars): Operating Net Sales Income Engineered Infrastructure Products $ (14.8 ) $ (0.6 ) Utility Support Structures 0.5 - Coatings - - Irrigation (15.0 ) (2.5 ) Other (5.7 ) (0.6 ) Corporate - - Total $ (35.0 ) $ (3.7 ) The increase in gross profit margin (gross profit as a percent of sales) in fiscal 2012, as compared with 2011, was primarily due to improved sales pricing and mix and moderating raw material costs in 2012 as compared with 2011. Steel prices and zinc prices in 2012 were down slightly as compared with 2011. LIFO expense in fiscal 2012 was $10.7 lower than 2011, contributing to the comparatively higher gross profit margin in 2012, as compared with 2011.

Selling, general and administrative (SG&A) expense in fiscal 2012, as compared with 2011, increased mainly due to the following factors: º • º Increased compensation expenses of approximately $8.0 million, associated with increased employment levels and increased employee benefit costs; 26 -------------------------------------------------------------------------------- Table of Contents º • º Increased employee incentive accruals of approximately $10.6 million, due to improved operating results; and º • º Deferred compensation expense of $2.4 million incurred in fiscal 2012 associated with the increase in deferred compensation plan liabilities. The corresponding increase in deferred compensation plan assets was recorded as a decrease in "Other" expense.

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

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

The decrease in net interest expense in fiscal 2012, as compared with 2011, was the net effect of lower interest expense of $4.5 million and lower interest income of $1.0 million. The decrease in interest expense was attributable to interest savings realized from the refinancing of our $150 million of senior subordinated debt in June 2011 and approximately $2.8 million of expense incurred in the second quarter of 2011 related to the refinancing of our $150 million of senior subordinated notes. The decrease in interest income was due to interest received on certain income tax refunds in 2011. Average borrowing levels in 2012 were comparable with 2011.

The decrease in "Other" expenses in fiscal 2012, as compared with 2011, of $3.0 million was mainly due to investment returns in the assets held in our deferred compensation plan of $2.4 million. The increase in the value of these assets was offset by a corresponding increase in our deferred compensation 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 of 35.2% was higher than the 2011 effective rate of 2.0%. Our effective tax rate in 2011 was abnormally low, mainly due to tax benefits associated with the legal entity restructuring of Delta Ltd. in the fourth quarter of 2011. Aside from these non-recurring benefits, our 2011 effective tax would have been approximately 33%. Our effective tax rate in 2012 was affected by the following factors that contributed to increased income tax expense: º • º In 2012, the U.K. reduced its income tax rate from 26% to 24%. As a result, our income tax expense increased in 2012 by $4.8 million, mainly due to the revaluation of deferred income tax assets, and; º • º Adjustments to the final accounting calculations related to the 2011 legal restructuring of Delta Ltd. resulted in a $2.4 million unfavorable adjustment.

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 effective tax rate to approximate 34%.

Earnings attributable to noncontrolling interests was lower in 2012, as compared with 2011, mainly due to lower net earnings in those consolidated operations that are less than 100% owned, the most significant of what was the manganese dioxide operation. In addition, $2.4 million of the 2012 decrease was 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.

Our cash flows provided by operations were $197.1 million in 2012, as compared with $149.7 million in 2011. While net earnings in fiscal 2012 was comparable with 2011, $66.0 million of fiscal 2011 earnings was due to tax benefits resulting from the Delta Ltd. legal reorganization, which were non-cash in nature.

27 -------------------------------------------------------------------------------- Table of Contents Engineered Infrastructure Products (EIP) segment The increase in EIP segment net sales in fiscal 2012, as compared with 2011, was due to improved sales volumes of approximately $33 million, $22 million of favorable pricing and sales mix changes, offset to a degree by unfavorable foreign exchange translation effects of approximately $15 million. The pricing increases largely followed raw material inflation realized in 2011.

In the lighting product line, North American sales in 2012 were up modestly from 2011. The increase in sales resulted from higher sales prices and favorable sales mix. The transportation market for lighting and traffic structures continues to be steady but not particularly strong. While a two-year extension to the current U.S. highway funding legislation was enacted in the third quarter of 2012, this event has not yet affected the market for lighting and traffic structures. We also believe that state budget issues are limiting roadway project activity. Sales in other market channels such as sales to lighting fixture manufacturers and commercial construction projects in 2012 were comparable with 2011. In Europe, lighting sales in fiscal 2012 were lower than 2011. We divested our Turkish and Italian operations in late 2011, resulting in lower sales in 2012, as compared with 2011, of $17.5 million. Current economic conditions in Europe are weak and uncertain. As a result, public spending for streets and highways is under pressure, as governments cope with lower tax receipts and budget deficits. However, lighting sales in local currency were higher in 2012, as compared with 2011. Stronger sales in France, Scandinavia and the U.K. were offset somewhat by weaker sales volumes in northern Europe.

Lighting sales in the Asia Pacific region in fiscal 2012 were comparable with 2011.

Communication product line sales in fiscal 2012 were improved over 2011.

North America sales in 2012 were $27 million higher than 2011. The increase in sales was attributable to improved market conditions (somewhat attributable to the build out of 4G wireless technology) 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 2012 were slightly higher than 2011.

While public spending on roadways in Australia did not grow in 2012, establishment of sales channels in other countries in the Asia Pacific region contributed to sales volume increases for the product line.

Operating income for the segment in fiscal 2012 was higher than 2011.

Improved operating income resulted from higher sales volumes, improved sales prices and moderating raw material costs (including $2.7 million of lower LIFO expense). These improvements were offset by factory productivity issues that negatively affected operating income by approximately $14.3 million. The productivity matters mainly were due to excessive start-up costs associated with capacity expansions in the U.S. and various factory productivity matters in the Europe and Asia Pacific regions. The increase in SG&A spending in 2012, as compared with 2011, mainly was attributable to higher compensation costs of $7.6 million and increased employee incentives of $5.0 million. These increases were offset to a degree by a $3.0 million write down in a trade name recorded in 2011 and currency translation effects of $2.6 million.

Utility Support Structures (Utility) segment In the Utility segment, the sales increase in the 2012, as compared with 2011, was primarily due to improved unit sales volumes of approximately $239 million. In U.S. markets, investments in the electrical grid by utility companies is increasing, resulting in improved sales of transmission and substation structures. The effect of sales mix was favorable in 2012, as compared with 2011, by approximately $10 million. Sales mix was mainly related to certain large orders that were taken in 2010 and early 2011, when market pricing was particularly low. As market conditions improved, pricing 28 -------------------------------------------------------------------------------- Table of Contents recovered to a degree, resulting in improved pricing and mix as the year progressed. Sales in international markets in fiscal 2012 were improved over 2011. Sales in the Asia Pacific region are higher, offset to some extent by lower sales in Europe and the Middle East.

Operating income in fiscal 2012, as compared with 2011, increased due to the increase in North America sales volume, moderating raw material costs and leverage effects on fixed SG&A and factory expenses. These positive effects were offset to a degree by $12.9 million of additional rework and other unanticipated costs related to certain large orders. The increase in SG&A expense for the segment in fiscal 2012 as compared with 2011, was mainly due to increased employee compensation of $3.1 million and increased sales commissions of $1.0 million, associated with the increase in business levels.

Coatings segment Coatings segment sales to outside customers in fiscal 2012 was comparable with 2011, as improved sales in the United States was offset to a degree by lower sales in the Asia Pacific region. In the United States, we experienced broad-based improved demand from customers, especially in the agriculture, petrochemical and energy economic sectors, which included higher sales for galvanizing services to our other segments. Asia Pacific volumes in 2012 were down from 2011, due to slowness in the Australian industrial economy not related to mining. Average selling prices in 2012 were comparable with 2011.

The increase in segment operating income in 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 segment operating income in 2012, as compared with 2011, was approximately $5.7 million.

SG&A expenses for the segment in 2012, as compared with 2011, were slightly lower, mainly due to a $0.9 million favorable dispute settlement with a vendor in 2012 and a $0.8 million write down of a trade name recorded in 2011. In 2012, we completed the insurance settlement related to the 2011 storm and fire at one of our facilities in Australia. Settlements in 2012 totaled $1.2 million, as compared with $1.5 million in 2011, which were recorded in operating income.

Irrigation segment The increase in Irrigation segment net sales in 2012, as compared with 2011, was mainly due to improved sales volumes of approximately $78 million and favorable pricing and sales mix of approximately $23 million. These increases were offset by unfavorable currency translation effects of approximately $15 million in 2012, as compared with 2011. The pricing and sales mix effect was generally due to sales price increases that took effect in the second 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. We believe the drought conditions in much of the U.S.

this summer contributed to the increased demand for irrigation equipment and related service parts in 2012. The very dry growing conditions throughout much of the U.S. highlight the benefits of irrigation in order to maintain crop yields under these circumstances. In international markets, the sales improvement in fiscal 2012, as compared with 2011, was also realized in most markets due to generally favorable economic conditions in the global farm economy.

Operating income for the segment improved in 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 $4.6 million in lower LIFO expenses in 2012, as compared with 2011. SG&A expenses in 2012 were comparable with fiscal 2011.

29 -------------------------------------------------------------------------------- Table of Contents Other This category includes the grinding media, industrial tubing, electrolytic manganese and industrial fasteners operations. In 2012, sales were lower than 2011, mainly due currency translation effects of $5.7 million and slightly lower sales in grinding media. Operating income in 2012 was comparable with 2011, as improvement in tubing was offset by lower operating earnings in our manganese dioxide operation.

Net corporate expense Net corporate expense in fiscal 2012 was higher than 2011, mainly due to: º • º higher employee incentives of $5.1 million associated with improved net earnings and share price, which affected long-term incentive plans, and; º • º higher deferred compensation expenses (approximately $2.4 million) related to investment returns on assets in the deferred compensation plan. These increases are offset by decreases in "Other" expense.

These increases were offset by lower corporate spending in various areas, including lower expenses for the Delta Pension Plan of $1.2 million.

FISCAL 2011 COMPARED WITH FISCAL 2010 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. On a segment reporting basis, Delta's operations are included in our results as follows: Engineered Infrastructure Products (EIP) Segment-manufacture of poles, roadway safety systems and access systems; Utility Support Structures (Utility) Segment-manufacture of pole structures; Coatings Segment-galvanizing operations in Australia, the U.S. and Asia; and Other-manufacture of steel grinding media and electrolytic manganese dioxide The increases in sales and operating income by segment attributable to a full year effect of Delta in fiscal 2011, as compared with fiscal 2010, were as follows (in millions): Fiscal year ended December 31, 2011 Operating Net Sales Income Engineered Infrastructure Products $ 81.3 $ 6.5 Utility Support Structures 2.1 0.3 Coatings 56.8 6.8 Other 70.9 4.4 Net corporate expense - (5.8 ) Total $ 211.1 $ 12.2 30 -------------------------------------------------------------------------------- Table of Contents Overview On a consolidated basis, the increase in net sales in fiscal 2011, as compared with 2010, was primarily the result of improved sales in all reportable segments, part of which was the result of Delta's financial results being included in our consolidated financial statements for all of 2011. In addition, fiscal 2011 included 53 weeks of operations, as compared with fiscal 2010, which was 52 weeks. This was the result of our fiscal year end being on the last Saturday in December. Accordingly, all fiscal 2011 operational figures were higher than had fiscal 2011 been 52 weeks in length. The estimated impact on our net sales and net earnings due to the extra week of fiscal 2011 was approximately $50 million and $3 million, respectively.

For the company as a whole, without consideration of Delta, our 2011 increase over 2010 was mainly due to increased unit sales volumes of approximately $400 million. On a reportable segment basis, the most significant unit sales volume increase were in the Irrigation and Utility segments. Sales prices overall were up modestly in fiscal 2011, as compared with 2010, mainly in response to rising steel prices. In the aggregate, the sales increase in 2011, as compared with 2010, due to price increases and sales mix changes was approximately $14 million.

Our fiscal 2011 sales and operating income in comparison to 2010 were enhanced by foreign currency translation. On average, the U.S. dollar was weaker than most global currencies in 2011 as compared with 2010. These effects by segment were as follows (in millions of dollars): Operating Net Sales Income Engineered Infrastructure Products $ 30.0 $ 2.7 Utility Support Structures 3.5 0.2 Coatings 10.3 1.3 Irrigation 3.4 0.5 Other 13.8 1.7 Corporate - (1.2 ) Total $ 61.0 $ 5.2 The decrease in gross profit margin (gross profit as a percent of sales) in fiscal 2011, as compared with 2010, was due to higher average raw material costs in 2011 as compared with 2010. In particular, steel prices rose significantly in the first quarter of 2011 before moderating somewhat in the following two quarters. Average zinc costs also were higher in 2011 than in 2010. These higher costs were not recovered entirely through increased selling prices, mainly due to a competitive selling price environment, especially in the EIP and Utility segments. In the aggregate, we estimate that the impact of these factors in 2011, as compared with 2010, was approximately $29 million.

Selling, general and administrative (SG&A) spending in fiscal 2011, as compared with 2010, increased due to the following factors: º • º Expenses associated with the full year Delta operations ($32.5 million) in our consolidated accounts in 2011; º • º Increased employee incentive accruals of $20.9 million, due to improved operating results, and; º • º Increased compensation expenses of $12.1 million, associated with increased employment levels and salary increases.

These increases were somewhat offset by $13.2 million in lower acquisition and integration costs in the fiscal 2011, as compared with 2010, associated with the Delta acquisition.

31 -------------------------------------------------------------------------------- Table of Contents The increase in operating income on a reportable segment basis in 2011, as compared with 2010, was due to improved operating performance in the Irrigation, Utility and Coatings segments reported improved operating income in fiscal 2011, as compared with 2010. The EIP segment operating income in 2011 was lower than fiscal 2010. The "Other" category also reported improved operating profit in 2011, as the grinding media, tubing and manganese dioxide operations were improved over 2010. Currency translation effects also contributed to the increase in operating income in fiscal 2011, as compared with 2010, of approximately $5.2 million.

The increase in interest expense in fiscal 2011, as compared with 2010, was attributable to: º • º $2.8 million of expense incurred when we redeemed our senior subordinated debt; º • º $5.0 million of expense related to the full year effect of interest expense associated with the $300 million in senior unsecured notes issued in April 2010, less; º • º $2.9 million of bank fees incurred in the first quarter of fiscal 2010 to provide the required bridge loan funding commitment for the Delta acquisition and the full year effect of interest income from Delta's cash balances (approximately $2 million).

The increase in "Other" expense in fiscal 2011, as compared with 2010, was mainly due to investment losses in the assets held in our deferred compensation plan of $1.5 million. The decrease in the value of these assets was offset by a corresponding decrease in our deferred compensation liabilities, which were reflected as a decrease in net corporate expense. Accordingly, there was no effect on net earnings from these investment losses. In addition, we incurred approximately $1.5 million of currency translation losses due the dissolution of our joint venture in Turkey.

Our effective income tax rate in fiscal 2011 was substantially lower than 2010. This reduction was mainly due to tax benefits associated with a legal restructuring of Delta in the fourth quarter of 2011. The restructuring was completed to gain certain operational efficiencies and resulted in an aggregate income tax benefit of $66.0 million related to an increase in the tax basis of assets in Australia and removing valuation allowances to certain U.K. deferred tax assets associated with tax loss carryforwards. The restructuring will allow us to generate U.K.-based income sufficient to utilize those tax loss carryforwards. See "Critical Accounting Policies-Income Taxes" for a more detailed discussion of the legal restructuring and the associated tax. In 2010, we realized an unfavorable effect in 2010 related to non-deductibility of a portion of the Delta acquisition expenses (approximately $3.2 million). In 2011, the following items resulted in favorable effects to income taxes: º • º income tax benefits associated with our 2011 acquisition of the remaining 40% of Donhad that we did not own ($4.1 million); º • º income tax provisions in our South African manganese dioxide operation that were no longer needed due to a favorable tax authority ruling ($3.2 million); º • º net effect of certain income tax contingencies in 2011 that were reduced due to expiration of statutes of limitation ($1.4 million).

Aside from these events that are non-recurring in nature, we believe our effective tax rate in fiscal 2011 and 2010 would have been approximately 32.0-33.0%.

Earnings attributable to noncontrolling interests was higher in 2011, as compared with 2010, mainly due to improved earnings in our manganese dioxide operation, which is 45% owned by noncontrolling interests. Earnings in non-consolidated subsidiaries improved in 2011, as compared with 2010, as our 49% owned manganese materials operation experienced improved profitability.

The improvement in net earnings and earnings per share in 2011, as compared with 2010, were mainly attributed to the improved operating income and the tax benefits associated with the legal entity restructuring in 2011 ($66.0 million and $2.49 per share, respectively). See "Critical Accounting 32 -------------------------------------------------------------------------------- Table of Contents Policies-Income Taxes" for a more detailed discussion of the legal restructuring and the associated tax effects.

Our cash flows provided by operations were approximately $149.7 million in 2011, as compared with $152.2 million in 2010. While net earnings increased in 2011, as compared with 2010, operating cash flow was slightly lower than 2010 due mainly to the following factors: º • º higher levels of working capital to support increased business activity in the Utility and Irrigation segments in 2011; º • º the income tax benefits associated with the legal entity restructuring completed in the fourth quarter of 2011 ($66.0 million) were non-cash in nature, and; º • º contributions to the Delta Pension Plan of $11.9 million in 2011.

Engineered Infrastructure Products (EIP) segment The increase in net sales in fiscal 2011 as compared with 2010 was mainly due to the full year effect of the Delta operations and currency translation effects. Global lighting markets continue to experience relatively weak demand, resulting in increased price competition, despite higher raw material prices. In the Lighting product line, 2011 North American sales in 2011 were down slightly as compared with 2010. Market conditions in North America continue to be weak, especially in the transportation market, where funding is 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. Sales in other market channels helped to offset the lower transportation market sales in 2011, as compared with 2010. In Europe, sales unit volumes were approximately $22 million higher in fiscal 2011, as compared with 2010. However, sales pricing and product mix generally were unfavorable in light of higher material costs, due to weaker infrastructure spending in Europe related to budget deficit control measures and public debt issues.

Communication product line sales in fiscal 2011 were comparable to 2010.

North America sales were slightly higher in 2011 than 2010. While market conditions were generally more favorable in 2011 as compared with 2010, we believe uncertainty surrounding the AT&T/T-Mobile merger has caused demand for communication structures and components to slow down in the last half of 2011.

In China, sales of wireless communication structures were slightly higher in fiscal 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.

Sales in the access systems product line in Australia in 2011 were comparable with 2010, not including the full year effect from the Delta acquisition, as industrial construction was overall stable and mining investment was in the early stages of project feasibility and scope. Asia sales in this product line were higher by approximately $7.5 million in 2011 as compared with 2010, as markets in the region generally were stronger, particularly in China, Indonesia and the Middle East.

Sales of highway safety products in 2011 were comparable with 2010 in local currency terms, not including the full year effect from the Delta acquisition.

Floods in parts of Australia affected infrastructure spending in the first two quarters of 2011, as public spending priorities shifted from roadway development to supporting recovery from the floods.

Operating income for the segment in fiscal 2011 was lower as compared with 2010. While operating income was enhanced by the full year effect of the Delta operations and currency translation 33 -------------------------------------------------------------------------------- Table of Contents effects, the impact of higher raw material costs, slowness in demand and very competitive pricing conditions in most of our lighting markets hampered operating income for the segment by approximately $19 million in 2011, as compared with 2010. The operating income associated with the Delta operations, aside from the full year effect of the acquisition, was comparable with 2010.

The strong Australian dollar led to pricing and margin pressures, as imported products from outside of Australia were more competitive from a pricing standpoint. In Europe, we were affected by competitive pricing pressures that negatively affected segment operating profit by approximately $3.2 million in 2011, as compared with 2010. The increase in SG&A expense in fiscal 2011 was mainly due to the acquisition of the Delta operations ($15.9 million), currency translation effects of $4.8 million and the fourth quarter write down of the PiRod trade name of $3.0 million.

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.

34 -------------------------------------------------------------------------------- Table of Contents 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).

LIQUIDITY AND CAPITAL RESOURCES Cash Flows Working Capital and Operating Cash Flows-Net working capital was $1,013.5 million at December 29, 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.

Operating cash flow was $197.1 million in fiscal 2012, as compared with $149.7 million in fiscal 2011. The increase in operating cash flow in 2012 mainly was the result of the reduction in the non-cash tax benefits associated with the Delta Ltd. legal reorganization recorded as a reduction of income tax expense ($66.0 million) in fiscal 2011.

Investing Cash Flows-Capital spending in fiscal 2012 was $97.1 million, as compared with $83.1 million in fiscal 2011. A significant portion of the capital spending ($39.0 million) for 2012 was to expand our capacity for Utility projects. We expect our capital spending for the 2013 fiscal year to be 35 -------------------------------------------------------------------------------- Table of Contents approximately $110 million. The major sources of capital spending in fiscal 2013 will be additional production capacity in the Irrigation and Utility Support Structures segments. Of the $110 million of planned capital spending, approximately 50% relates to projects that have been approved. Investing cash flows for fiscal 2012 included $45.7 million for the Pure Metal Galvanizing acquisition.

Financing Cash Flows-Our total interest-bearing debt was flat at $486.2 million as of December 29, 2012 and December 31, 2011. Financing cash flows in 2011 included approximately $25.3 million to acquire the remaining 40% of the shares of Donhad Pty. Ltd.

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 December 29, 2012, our long-term debt to invested capital ratio was 23.9%, as compared with 26.8% at December 31, 2011. 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 2013.

Our debt financing at December 29, 2012 consisted primarily of long-term debt. We also maintain certain short-term bank lines of credit totaling $75.6 million, $62.8 million of which was unused at December 29, 2012. Our long-term debt principally consists of: º • º $450 million face value ($463 million carrying value) of senior unsecured notes that bear interest at 6.625% per annum and are due in April 2020. We are allowed to repurchase the notes at specified prepayment premiums. These notes are guaranteed by certain of our subsidiaries.

º • º $400 million revolving credit agreement with a group of banks. We may increase the credit facility by up to an additional $200 million at any time, subject to participating banks increasing the amount of their lending commitments. The interest rate on our borrowings will be, at our option, either: º (a) º LIBOR (based on a 1, 2, 3 or 6 month interest period, as selected by us) plus 125 to 225 basis points (inclusive of facility fees), depending on our ratio of debt to earnings before taxes, interest, depreciation and amortization (EBITDA), or; º (b) º the higher of º • º The higher of (a) the prime lending rate and (b) the Federal Funds rate plus 50 basis points plus in each case, 25 to 125 basis points (inclusive of facility fees), depending on our ratio of debt to EBITDA, or º • º LIBOR (based on a 1 week interest period) plus 125 to 225 basis points (inclusive of facility fees), depending on our ratio of debt to EBITDA At December 29, 2012, we had no outstanding borrowings under the revolving credit agreement. The revolving credit agreement has a termination date of August 15, 2017 and contains certain financial covenants that may limit our additional borrowing capability under the agreement. At December 29, 2012, we had the ability to borrow $384.9 million under this facility, after consideration of standby letters of credit of $15.1 million associated with certain insurance obligations.

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 as follows: º • º Interest-bearing debt is not to exceed 3.50x EBITDA of the prior four quarters; and º • º EBITDA over the prior four quarters must be at least 2.50x our interest expense over the same period.

36 -------------------------------------------------------------------------------- Table of Contents At December 29, 2012, we were in compliance with all covenants related to these debt agreements. The key covenant calculations at December 29, 2012 were as follows: Interest-bearing debt $ 486,192 EBITDA-last four quarters 462,417 Leverage ratio 1.05 EBITDA-last four quarters $ 462,417 Interest expense-last four quarters 31,625 Interest earned ratio 14.62 The calculation of EBITDA-last four quarters is presented under the column for fiscal 2012 in footnote (b) to the table "Selected Five-Year Data" in Item 6-Selected Financial Data.

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 for fiscal 2013 and beyond.

We have not made any provision for U.S. income taxes in our financial statements on approximately $586.2 million of undistributed earnings of our foreign subsidiaries, as we intend to reinvest those earnings. Of our cash balances at December 29, 2012, $365.9 million is held in entities outside the United States. 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. The income taxes that we would pay if cash were repatriated depends on the amounts to be repatriated and from which country. If all of our cash outside the United States were to be repatriated to the United States, we estimate that we would pay approximately $44.2 million in income taxes to repatriate that cash.

FINANCIAL OBLIGATIONS AND FINANCIAL COMMITMENTS We have future financial obligations related to (1) payment of principal and interest on interest-bearing debt, (2) Delta pension plan contributions, (3) operating leases and (4) purchase obligations. These obligations at December 29, 2012 were as follows (in millions of dollars): Contractual Obligations Total 2013 2014 - 2015 2016 - 2017 After 2017 Long-term debt $ 460.1 $ 0.2 $ 0.5 $ 0.2 $ 459.2 Interest 254.2 29.9 59.8 59.8 104.7 Delta pension plan contributions 177.4 17.7 35.5 35.5 88.7 Operating leases 118.6 21.7 37.5 21.7 37.7 Unconditional purchase commitments 36.0 36.0 - - - Total contractual cash obligations $ 1,046.3 105.5 133.3 117.2 690.3 Long-term debt mainly consisted of $450.0 million principal amount of senior unsecured notes. At December 29, 2012, we had no outstanding borrowings under our bank revolving credit agreement. Obligations under these agreements may be accelerated in event of non-compliance with debt covenants. The Delta pension plan contributions are related to estimated cash funding commitments to the plan with the plan's trustees, which are currently being negotiated in conjunction with a triennial valuation. Operating leases relate mainly to various production and office facilities and are in the normal course of business.

37 -------------------------------------------------------------------------------- Table of Contents Unconditional purchase obligations relate to purchase orders for zinc, aluminum and steel, all of which we plan to use in 2013, and certain capital investments planned for 2013. We believe the quantities under contract are reasonable in light of normal fluctuations in business levels and we expect to use the commodities under contract during the contract period.

At December 29, 2012, we had approximately $45.2 million of various long-term liabilities related to certain income tax, environmental and other matters. These items are not scheduled above because we are unable to make a reasonably reliable estimate as to the timing of any potential payments.

OFF BALANCE SHEET ARRANGEMENTS We have operating lease obligations to unaffiliated parties on leases of certain production and office facilities and equipment. These leases are in the normal course of business and generally contain no substantial obligations for us at the end of the lease contracts. We also maintain standby letters of credit for contract performance on certain sales contracts.

MARKET RISK Changes in Prices Certain key materials we use are commodities traded in worldwide markets and are subject to fluctuations in price. The most significant materials are steel, aluminum, zinc and natural gas. Over the last several years, prices for these commodities have been volatile. The volatility in these prices was due to such factors as fluctuations in supply and demand conditions, government tariffs and the costs of steel-making inputs. We have also experienced volatility in natural gas prices in the past several years. Our main strategies in managing these risks are a combination of fixed price purchase contracts with our vendors to reduce the volatility in our purchase prices and sales price increases where possible. We use natural gas swap contracts on a limited basis to mitigate the impact of rising gas prices on our operating income.

Risk Management Market Risk-The principal market risks affecting us are exposure to interest rates, foreign currency exchange rates and natural gas. We normally do not use derivative financial instruments to hedge these exposures (except as described below), nor do we use derivatives for trading purposes.

Interest Rates-Our interest-bearing debt at December 29, 2012 was mostly fixed rate debt. Our notes payable and a small portion of our long-term debt accrue interest at a variable rate. Assuming average interest rates and borrowings on variable rate debt, a hypothetical 10% change in interest rates would have affected our interest expense in 2012 and 2011 by approximately $0.1 million and $0.1 million, respectively. Likewise, we have excess cash balances on deposit in interest-bearing accounts in financial institutions. An increase or decrease in interest rates of ten basis points would have impacted our annual interest earnings in 2012 by approximately $0.4 million.

Foreign Exchange-Exposures to transactions denominated in a currency other than the entity's functional currency are not material, and therefore the potential exchange losses in future earnings, fair value and cash flows from these transactions are not material. From time to time, as market conditions indicate, we will enter into foreign currency contracts to manage the risks associated with anticipated future transactions and current balance sheet positions that are in currencies other than the functional currencies of our operations. At December 29, 2012, there were no significant open foreign currency contracts. Much of our cash in non-U.S. entities is denominated in foreign currencies, where fluctuations in exchange rates will impact our cash balances in U.S. dollar terms. A hypothetical 10% change in the value of the U.S. dollar would impact our reported cash balance by approximately $32.4 million in 2012 and $34.0 million in 2011.

38 -------------------------------------------------------------------------------- Table of Contents We manage our investment risk in foreign operations by borrowing in the functional currencies of the foreign entities where appropriate. The following table indicates the change in the recorded value of our most significant investments at year-end assuming a hypothetical 10% change in the value of the U.S. Dollar.

2012 2011 (in millions) Australian dollar $ 27.3 $ 26.7 Chinese renminbi 13.9 12.7 Canadian dollar 8.8 3.7 Euro 6.8 6.0 Brazilian real 3.3 2.5 U.K. pound 2.3 5.4 Commodity risk-Natural gas is a significant commodity used in our factories, especially in our Coatings segment galvanizing operations, where natural gas is used to heat tanks that enable the hot-dipped galvanizing process. Natural gas prices are volatile and we mitigate some of this volatility through the use of derivative commodity instruments. Our current policy is to manage this commodity price risk for 0-50% of our U.S. natural gas requirements for the upcoming 6-12 months through the purchase of natural gas swaps based on NYMEX futures prices for delivery in the month being hedged. The objective of this policy is to mitigate the impact on our earnings of sudden, significant increases in the price of natural gas. At December 29, 2012, we have open natural gas swaps for 70,000 MMBtu.

CRITICAL ACCOUNTING POLICIES The following accounting policies involve judgments and estimates used in preparation of the consolidated financial statements. There is a substantial amount of management judgment used in preparing financial statements. We must make estimates on a number of items, such as provisions for bad debts, warranties, contingencies, impairments of long-lived assets, and inventory obsolescence. We base our estimates on our experience and on other assumptions that we believe are reasonable under the circumstances. Further, we re-evaluate our estimates from time to time and as circumstances change. Actual results may differ under different assumptions or conditions. The selection and application of our critical accounting policies are discussed annually with our audit committee.

Allowance for Doubtful Accounts In determining an allowance for accounts receivable that will not ultimately be collected in full, we consider: º • º age of the accounts receivable º • º customer credit history º • º customer financial information º • º reasons for non-payment (product, service or billing issues).

If our customer's financial condition was to deteriorate, resulting in an impaired ability to make payment, additional allowances may be required.

Warranties All of our businesses must meet certain product quality and performance criteria. We rely on historical product claims data to estimate the cost of product warranties at the time revenue is 39 -------------------------------------------------------------------------------- Table of Contents recognized. In determining the accrual for the estimated cost of warranty claims, we consider our experience with: º • º costs to correct the product problem in the field, including labor costs º • º costs for replacement parts º • º other direct costs associated with warranty claims º • º the number of product units subject to warranty claims In addition to known claims or warranty issues, we estimate future claims on recent sales. The key assumptions in our estimates are the rates we apply to those recent sales (which is based on historical claims experience) and our expected future warranty costs for products that are covered under warranty for an extended period of time. Our provision for various product warranties was approximately $15.3 million at December 29, 2012. If our estimate changed by 50%, the impact on operating income would be approximately $7.6 million. If our cost to repair a product or the number of products subject to warranty claims is greater than we estimated, then we would have to increase our accrued cost for warranty claims.

Inventories We use the last-in first-out (LIFO) method to determine the value approximately 43% of our inventory. The remaining 57% of our inventory is valued on a first-in first-out (FIFO) basis. In periods of rising costs to produce inventory, the LIFO method will result in lower profits than FIFO, because higher more recent costs are recorded to cost of goods sold than under the FIFO method. Conversely, in periods of falling costs to produce inventory, the LIFO method will result in higher profits than the FIFO method.

In 2012, we experienced lower costs to produce inventory than in the prior year, due mainly to lower cost for steel and steel-related products. This resulted in lower cost of goods sold (and higher operating income) in 2012 of approximately $3.7 million, than had our entire inventory been valued on the FIFO method. In 2011 and 2010, we experienced higher costs compared to previous years and operating income was lower by approximately $7.0 million and $3.0 million, respectively, than had our entire inventory been valued on the FIFO method.

We write down slow-moving and obsolete inventory by the difference between the value of the inventory and our estimate of the reduced value based on potential future uses, the likelihood that overstocked inventory will be sold and the expected selling prices of the inventory. If our ability to realize value on slow-moving or obsolete inventory is less favorable than assumed, additional inventory write downs may be required.

Depreciation, Amortization and Impairment of Long-Lived Assets Our long-lived assets consist primarily of property, plant and equipment, goodwill and intangible assets acquired in business acquisitions. We have assigned useful lives to our property, plant and equipment and certain intangible assets ranging from 3 to 40 years.

We identified eleven reporting units for purposes of evaluating goodwill and we annually evaluate our reporting units for goodwill impairment during the third fiscal quarter, which usually coincides with our strategic planning process. We assess the value of our reporting units using after-tax cash flows from operations (less capital expenses) discounted to present value and as a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). The key assumptions in the discounted cash flow analysis are the discount rate and the projected cash flows. We also use sensitivity analysis to determine the impact of changes in discount rates and cash flow forecasts on the valuation of the reporting units. As allowed for under current accounting standards, we rely on our previous valuations 40 -------------------------------------------------------------------------------- Table of Contents for the annual impairment testing provided that the following criteria for each reporting unit are met: (1) the assets and liabilities that make up the reporting unit have not changed significantly since the most recent fair value determination and (2) the most recent fair value determination resulted in an amount that exceeded the carrying amount of the reporting unit by a substantial margin.

The valuation of our reporting units exceeded their respective carrying values. Accordingly, no further valuation of our reporting units was necessary.

If our assumptions on discount rates and future cash flows change as a result of events or circumstances, and we believe these assets may have declined in value, then we may record impairment charges, resulting in lower profits. Our reporting units are all cyclical and their sales and profitability may fluctuate from year to year. In the evaluation of our reporting units, we look at the long-term prospects for the reporting unit and recognize that current performance may not be the best indicator of future prospects or value, which requires management judgment.

Our indefinite-lived intangible assets consist of trade names. We assess the values of these assets apart from goodwill as part of the annual impairment testing. We use the relief-from-royalty method to evaluate our trade names, under which the value of a trade name is determined based on a royalty that could be charged to a third party for using the trade name in question. The royalty, which is based on a reasonable rate applied against estimated future sales, is tax-effected and discounted to present value. The most significant assumptions in this evaluation include estimated future sales, the royalty rate and the after-tax discount rate. For our evaluation purposes, the royalty rates used vary between 0.5% and 1.5% of sales and the after-tax discount rate of 17.5% to 18.5%, which we estimate to be the after-tax cost of capital for such assets. The Company's trade names were tested for impairment in the third quarter of 2012 and the Company determined that the value of its trade names were not impaired. In 2011, the Company determined the PiRod and Industrial Galvanizers of America trade names were impaired. The evaluations of these trade names were completed in the fourth quarter of 2011, which resulted in a write down of $3.8 million.

Income Taxes We record valuation allowances to reduce our deferred tax assets to amounts that are more likely than not to be realized. We consider future taxable income expectations and tax-planning strategies in assessing the need for the valuation allowance. If we estimate a deferred tax asset is not likely to be fully realized in the future, a valuation allowance to decrease the amount of the deferred tax asset would decrease net earnings in the period the determination was made. Likewise, if we subsequently determine that we are able to realize all or part of a net deferred tax asset in the future, an adjustment reducing the valuation allowance would increase net earnings in the period such determination was made.

At December 29, 2012, we had approximately $161.3 million in deferred tax assets relating mainly to operating loss and tax credit carryforwards, with a valuation allowance of $121.0 million. As a result of a legal entity restructuring within the Delta group in fiscal 2011, we released of a portion of valuation allowances previously established. Prior to the legal entity restructuring, because these tax losses were generated in the U.K. and Delta had no operations or future income taxable in the U.K., Delta historically did not establish a value on its financial statements for deferred tax assets associated with net operating losses and book and tax basis differences in its pension plan liability. Also, at December 29, 2012, $113.2 million in valuation allowances remain in the Delta entities related to capital loss carryforwards, which are unlikely ever to be realized. If circumstances related to our deferred tax assets change in the future, we may be required to increase or decrease the valuation allowance on these assets, resulting in an increase or decrease in income tax expense and a reduction or increase in net income.

41 -------------------------------------------------------------------------------- Table of Contents During 2012 we recorded $0.9 million in income tax expense on $3.7 million of undistributed earnings of foreign subsidiaries which we determined are not permanently invested. Foreign subsidiaries not considered permanently invested had total cash of $16.0 million at December 29, 2012. We have not made any U.S.

income tax provision in our financial statements for $586.2 million of undistributed earnings of our foreign subsidiaries, as we intend to reinvest those earnings. Foreign subsidiaries considered permanently invested had total cash of $353.9 million at December 29, 2012. If circumstances change and we determine that we are not permanently invested, we would need to record an income tax expense on our financial statements for the resulting income tax that would be paid upon repatriation. The amount of that income tax would depend on how much of those earnings were repatriated but could range from a low of $44.2 million to a high of $129.5 million.

We are subject to examination by taxing authorities in the various countries in which we operate. The tax years subject to examination vary by jurisdiction.

We regularly consider the likelihood of additional income tax assessments in each of these taxing jurisdictions based on our experiences related to prior audits and our understanding of the facts and circumstances of the related tax issues. We include in current income tax expense any changes to accruals for potential tax deficiencies. If our judgments related to tax deficiencies differ from our actual experience, our income tax expense could increase or decrease in a given fiscal period.

Pension Benefits Delta Ltd. maintains a defined benefit pension plan for qualifying employees in the United Kingdom. There are no active employees as members in the plan.

Independent actuaries assist in properly measuring the liabilities and expenses associated with accounting for pension benefits to eligible employees. In order to use actuarial methods to value the liabilities and expenses, we must make several assumptions. The critical assumptions used to measure pension obligations and expenses are the discount rate and expected rate of return on pension assets.

We evaluate our critical assumptions at least annually. Key assumptions are based on the following factors: º • º Discount rate is based on the yields available on AA-rated corporate bonds with durational periods similar to that of the pension liabilities.

º • º Expected return on plan assets is based on our asset allocation mix and our historical return, taking into consideration current and expected market conditions. Most of the assets in the pension plan are invested in corporate bonds, the expected return of which are estimated based on the yield available on AA rated corporate bonds.

The long-term expected returns on equities are based on historic performance over the long-term.

º • º Inflation is based on the estimated change in the consumer price index ("CPI") or the retail price index ("RPI"), depending on the relevant plan provisions.

The following tables present the key assumptions used to measure pension expense for 2013 and the estimated impact on 2013 pension expense relative to a change in those assumptions: Assumptions Pension Discount rate 4.60 % Expected return on plan assets 4.20 % Inflation-CPI 2.70 % Inflation-RPI 3.20 % 42 -------------------------------------------------------------------------------- Table of Contents Increase in Pension Assumptions In Millions of Dollars Expense 0.50% increase in discount rate $ 0.4 0.50% decrease in expected return on plan assets $ 2.6 0.50% increase in inflation $ 1.6 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information required is included under the captioned paragraph, "Risk Management" on page 38 of this report.

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