UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
Commission File Number: 1-31429
Valmont Industries, Inc.
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o
23,921,297
Index is located on page 2.
Total number of pages 35.
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
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See accompanying notes to condensed consolidated financial statements.
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The Condensed Consolidated Balance Sheet as of September 25, 2004 and the Condensed Consolidated Statements of Operations for the thirteen and thirty-nine week periods ended September 25, 2004 and September 27, 2003 and the Condensed Consolidated Statements of Cash Flows for the thirteen and thirty-nine week periods then ended have been prepared by the Company, without audit. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) have been made to present fairly the financial statements as of September 25, 2004 and for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto included in the Company’s December 27, 2003 Annual Report to shareholders. The accounting policies and methods of computation followed in these interim financial statements are the same as those followed in the financial statements for the year ended December 27, 2003. The results of operations for the periods ended September 25, 2004 are not necessarily indicative of the operating results for the full year.
At September 25, 2004, approximately 53% of inventory is valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market. All other inventory is valued at the lower of cost, determined on the first-in, first-out (FIFO) method or market. Finished goods and manufactured goods inventories include the costs of acquired raw materials and related factory labor and overhead charges required to convert raw materials to manufactured and finished goods. The excess of replacement cost of inventories over the LIFO value was $29,694 and $9,772 at September 25, 2004 and December 27, 2003, respectively.
Inventories consisted of the following:
Property, plant and equipment are recorded at historical cost. The Company uses the straight-line method in computing depreciation and amortization for financial reporting purposes and generally uses accelerated methods for income tax purposes. The annual provisions for depreciation and amortization have been computed principally in accordance with the following ranges of asset lives: buildings 15 to 40 years, machinery and equipment 3 to 12 years, transportation equipment 3 to 24 years, office furniture and equipment 3 to 7 years and intangible assets 5 to 20 years.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
An impairment loss is recognized if the carrying amount of an asset may not be recoverable and exceeds estimated future undiscounted cash flows of the asset. A recognized impairment loss reduces the carrying amount of the asset to its fair value
Revenue is recognized upon shipment of the product or delivery of the service to the customer, which coincides with passage of title and risk of loss to the customer. Customer acceptance provisions are at the design stage of the Company’s products and no general right of return exists with respect to products delivered. The Company’s installation obligations for the products it sells are not material. Installation revenue is recognized upon completion of the installation process, as the sale of the product and the related installation are separate units of accounting under EITF 00-21.
The Company maintains stock-based compensation plans approved by the shareholders, which provide that the Compensation Committee of the Board of Directors may grant incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards and bonuses of common stock. At September 25, 2004, 1,383,075 shares of common stock remained available for issuance under the plans. Shares and options issued and available are subject to changes in capitalization.
Under the plans, the exercise price of each option equals the market price at the time of the grant. Options vest beginning on the first anniversary of the grant in equal amounts over three to six years or on the fifth anniversary of the grant. Expiration of grants is from six to ten years from the date of grant.
The Company accounts for those plans under the recognition and measurement principles of APB Opinion 25,Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
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On April 16, 2004, the Company acquired all the outstanding shares of Newmark International, Inc. (Newmark), a manufacturer of concrete and steel pole structures serving primarily the electrical utility industry. The results of Newmark are included in the condensed consolidated financial statements of the Company since that date. The Company finalized the purchase price allocation process in the third quarter of 2004. The total cost of the acquisition (including transaction costs) was $110,147 in cash, plus the assumption of $11,506 of interest-bearing debt. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of the acquisition.
Of the $48,107 of acquired intangible assets, $11,111 was assigned to trademarks and trade names that are not subject to amortization. The assets that make up the remainder of the acquired intangible assets are customer relationships of $34,068 (20-year useful life), patents and proprietary technology of $1,969 (weighted average useful life of 14.7 years), and computer software of $959 (7-year useful life). The goodwill related to the acquisition was $23,669 and was assigned to the Concrete Support Structures segment. The reasons for the acquisition included broadening the Company’s product line to include concrete support structures and combinations of steel and concrete structures to better meet customer needs, acquiring an integrated workforce and capable management team, and providing certain synergies to help the Company compete more effectively in the utility transmission and distribution structures industry.
On May 24, 2004, the Company acquired all the outstanding shares of W.J. Whatley, Inc. (Whatley), a manufacturer of fiberglass poles primarily serving street and area lighting customers. Whatley’s operations are included in the Company’s condensed consolidated financial statements since the acquisition date. The total purchase price amounted to $9,327 in cash (including transaction costs). Goodwill of $6,233 was recognized as part of the purchase price allocation and was assigned to the Engineered Support Structures segment. The Company acquired Whatley to broaden its product line in lighting structures to include fiberglass poles, to acquire an integrated and trained workforce, and to gain leverage from combining the respective sales distribution groups.
On August 2, 2004, the Company acquired substantially all the net assets of Sigma Industries, Inc. (Sigma), a manufacturer of overhead sign structures mainly serving the eastern United States. Sigma’s operations are included in the Company’s condensed consolidated financial statements since the acquisition date. The purchase price for the net assets of this business was $6,285 in cash. Goodwill of $391 was recognized as part of the purchase price allocation and was assigned to the Engineered Support Structures
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segment. The Company acquired Sigma to broaden its expertise in and coverage of the sign structures industry.
The Company’s summary proforma results of operations for the thirteen and thirty-nine weeks ended September 25, 2004 and September 27, 2003, assuming that the transactions occurred at the beginning of the periods presented are as follows:
The Company’s annual impairment testing on its reporting units was performed during the third quarter of 2004. As a result of that testing, it was determined the goodwill and other intangible assets on the Company’s Consolidated Balance Sheet at September 25, 2004 were not impaired.
The components of amortized intangible assets at September 25, 2004 and December 27, 2003 were as follows:
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Amortization expense for intangible assets during the third quarter of 2004 and 2003 was $858 and $322, respectively. Amortization expense for intangible assets for the thirty-nine weeks ended September 25, 2004, and September 27, 2003 was $1,951 and $966, respectively. Estimated amortization expense related to amortized intangible assets is as follows:
Non-amortized intangible assets
Under the provisions of SFAS 142, intangible assets with indefinite lives are not amortized. The carrying value of the PiRod, Newmark, and Sigma trade names are $4,750, $11,111, and $405 respectively. The Newmark and Sigma amounts arose from the 2004 acquisitions and the PiRod amount has not changed in the thirteen or thirty-nine weeks ended September 25, 2004.
The indefinite lived intangible assets were tested for impairment separately from goodwill in the third quarter of 2004. The value of the trade names were determined using the relief from royalty method. Based on this evaluation, the Company determined that its trade names were not impaired as of September 25, 2004.
Goodwill
The carrying amount of goodwill as of September 25, 2004 was as follows:
The Company considers all highly liquid temporary cash investments purchased with a maturity of three months or less to be cash equivalents. Cash payments for interest and income taxes (net of refunds) for the thirty-nine weeks ended were as follows:
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The lending agreements place certain restrictions on working capital, capital expenditures, payment of dividends, purchase of Company stock and additional borrowings. The company was in compliance with all debt covenants at September 25, 2004.
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The following table provides a reconciliation between Basic and Diluted earnings per share:
Results of operations for foreign subsidiaries are translated using the average exchange rates during the period. Assets and liabilities are translated at the exchange rates in effect on the balance sheet dates. Currency translation adjustment is the Company’s only component of other comprehensive income.
The Company reports its businesses as five reportable segments:
Engineered Support Structures: This segment consists of the manufacture of engineered metal structures and components for the lighting, traffic, utility and wireless communication industries;
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Concrete Support Structures: The Company added this reportable segment in the second quarter of fiscal 2004 as a result of the April 2004 acquisition of Newmark. This segment consists of the manufacture of engineered concrete structures primarily for the utility industry;
Coatings: This segment consists of galvanizing, anodizing and powder coating services;
Irrigation: This segment consists of the manufacture of agricultural irrigation equipment and related parts and services; and
Tubing: This segment consists of the manufacture of tubular products.
In addition to these five reportable segments, the Company has other businesses that individually are not more than 10% of consolidated sales. These businesses, which include wind energy development, machine tool accessories and industrial fasteners, are reported in the “Other” category.
In the first quarter of fiscal 2004, the Company changed its methodology regarding the reporting of net corporate expense, which is now reported separately rather than allocated to the respective reportable segments. The Company believes this provides for better reporting of the operational performance of its segments. Net corporate expense is net of certain service-related expenses that are allocated to business units generally on the basis of employee headcounts and sales dollars. Figures for 2003 have been reclassified to conform to the 2004 presentation.
The Company is reorganizing its management structure to better serve the electrical utility structures industry. This reorganization will result in a change in the Company’s segment reporting structure. The Company’s plan is to change its segment reporting structure in the fourth quarter of 2004. The future reportable segments are expected to be as follows: Irrigation, Tubing, Coatings, Engineered Support Structures, and Utility (including the prior Utility product line and the current Concrete Support Structures segment).
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On May 4, 2004, the Company completed a $150,000,000 offering of 6 7/8% Senior Subordinated Notes. The Notes are guaranteed, jointly, severally, fully and unconditionally, on a senior subordinated basis by certain of the Company’s current and future direct and indirect domestic subsidiaries (collectively the “Guarantors”), excluding its other current domestic and foreign subsidiaries which do not guarantee the debt (collectively referred to as the “Non-Guarantors”). All Guarantors are 100% owned by the parent company.
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Condensed consolidated financial information for the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries is as follows:
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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For the Thirty-nine Weeks Ended September 25, 2004
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For the Thirteen Weeks Ended September 27, 2003
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For the Thirty-nine Weeks Ended September 27, 2003
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CONDENSED CONSOLIDATED BALANCE SHEETS
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December 27, 2003
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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PART 1. FINANCIAL INFORMATION
Management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on assumptions that management has made in light of experience in the industries in which the Company operates, as well as management’s perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond the Company’s control) and assumptions. Although 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.
We report our businesses as five reportable segments. See Note 8 to the Condensed Consolidated Financial Statements. In the first quarter of fiscal 2004, we changed our methodology for reporting net corporate expense in the segment reporting. Starting in 2004, we are reporting net corporate expense separately rather than allocating net corporate expense to the operating segments, as we believe this provides for better reporting of the operational of our segments. Figures for 2003 have been reclassified to conform to the 2004 presentation. We plan to change our segment reporting structure in the fourth quarter of 2004. The future reportable segments are expected to be as follows: Irrigation, Tubing, Coatings, Engineered Support Structures and Utility (including the prior Utility product line and the current Concrete Support Structures segment).
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial position. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related notes.
Results of Operations
Dollars in thousands, except per share amounts
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Overview
In 2004, we completed three acquisitions. On April 16, 2004, we completed the purchase of Newmark International, Inc. (Newmark), a manufacturer of concrete and steel pole structures mainly for the utility industry. The purchase price was approximately $110.2 million in cash (including transaction costs), plus the assumption of approximately $11.5 million in interest-bearing debt. On May 24, 2004, we completed the purchase of W.J. Whatley, Inc. (Whatley), a manufacturer of fiberglass poles principally for outdoor lighting applications. The purchase price for the Whatley shares was approximately $9.3 million in cash (including transaction costs), plus the assumption of approximately $0.7 million in interest-bearing debt. On August 2, 2004 we completed the purchase of all the net assets of Sigma Industries, Inc. (Sigma), a manufacturer of overhead sign structures mainly serving the eastern United States. The purchase price for the net assets of this business was approximately $6.3 million, plus the assumption of approximately $0.4 million in interest-bearing debt. The results of these operations are included in our consolidated results starting on the closing dates of the acquisitions. The funds used for acquisitions were borrowed through our existing credit facilities. See also “Liquidity and Capital Resources”.
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Net sales increased on a quarterly and year-to-date basis in 2004 as compared with 2003, for all segments except the Coatings segment. The increase in sales came from a combination of acquisitions completed in 2004, sales price increases to offset rising steel costs and overall increased sales in the Irrigation, Engineered Support Structures (ESS) and Tubing segments. The acquisitions of Newmark, Whatley and Sigma collectively contributed $30.5 and $48.0 million to consolidated net sales in the thirteen and thirty-nine weeks, respectively, ended September 25, 2004. Sales increases in the Irrigation, Tubing and ESS segments in 2004 were also the result of generally higher selling prices. In response to rapidly rising steel costs this year, we increased our selling prices where possible to offset the impact of higher steel costs. We estimate that the net negative impact of rising steel prices on gross profit was approximately $3.0 million and $7.0 million for the thirteen and thirty-nine weeks ended September 25, 2004, respectively. Steel prices continued to increase in the third quarter of 2004, but at a lower rate than the first six months of this year. The increase in selling, general and administrative (SG&A) spending on a quarterly and year-to-date basis in 2004 principally related to the addition of the operations of Newmark, Whatley and Sigma this year ($3.7 million and $6.2 million, respectively), increased employee incentives in 2004 ($2.1 million and $5.7 million, respectively), and higher sales commissions associated with the increase in sales ($1.0 million and $1.5 million, respectively).
Interest expense increased in the third quarter of 2004 as compared with 2003, mainly due to increased borrowing levels this year associated with the Newmark, Whatley and Sigma acquisitions. The $9.9 million in 2004 year-to-date “Debt prepayment expenses” relates to a charge we incurred in the second quarter as part of the refinancing of our long-term debt. The refinancing included prepaying our promissory notes, issuing $150 million in senior subordinated notes, and entering into a new $225 million bank financing arrangement, consisting of a $75 million term loan and a $150 million revolving credit agreement. The charge to earnings mainly was related to the prepayment of our promissory notes. Our share of the earnings in our nonconsolidated subsidiaries improved from last year, due to improvement in the operations of our Mexican joint venture, which manufactures utility and wireless communication structures, and in the operations of our irrigation distributor in Argentina.
Engineered Support Structures (ESS) segment
In the ESS segment, sales improved in North America and Europe, both on a quarterly and year-to-date basis. While sales in China were down in the third quarter, year-to-date sales for 2004 increased as compared with 2003. The sales increases were due to pricing increases passed on to the marketplace as well as improvements in industry conditions that led to increased sales volumes.
In the North American lighting and traffic product line, road and highway spending programs have continued, despite delays in the passage of new federal highway legislation. However, the current bill funding has been extended until mid-2005, which should provide some stability for lighting and traffic pole sales in the short term. Sales to commercial lighting customers improved over the last several months, the result of generally improving economic conditions in the U.S. and a low interest rate environment. Lighting sales were also positively impacted by the Whatley acquisition, which was completed in the second quarter of 2004. In Europe, lighting sales were higher than 2003, both on a quarterly and year-to-date basis, due mainly to improving economic conditions and a strike last year at our main galvanizing supplier in France, which hampered third quarter 2003 sales.
The improvement in utility product sales resulted from better market conditions in North America this year as compared with 2003. Industry conditions continued to improve, as utility companies and independent power producers have increased spending for transmission, distribution and substation structures. In 2003, our order rates fell early in the year, as industry pricing became extremely competitive due to relatively weak industry conditions and the number of competitors increased. We did not follow pricing down immediately, but we ultimately decreased prices to gain orders. In 2004, competitive conditions have improved, resulting in higher sales than at this time in 2003. In China, utility structure sales were down slightly from 2003, but up from 2003 on a year-to-date basis. Spending on electrical transmission structures has been curtailed recently, as China has taken fiscal actions to control the growth of its economy. Over the long-term, we believe that, as China increases its electrical generation and transmission capabilities, the demand for utility structures will grow.
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Sales in Specialty Structures products improved due to improvement in the North American wireless communication marketplace and continued growth in the sales of sign structures. General industry conditions continue to be stronger than in 2003. Quotations, orders and sales all are improved over 2003, as wireless carriers have improved their financial performance and are increasing spending for structures and components to improve their networks and overall service levels. Sales of wireless communication poles in China decreased in the third quarter of 2004 as compared to 2003, but year-to-date sales are higher in 2004 as compared with 2003. We believe the decrease in third quarter sales relates to the very strong growth experienced in the first half of 2004 in that wireless carriers reduced spending in the near term to focus on bringing their new capacity on line to generate revenue. China’s continued actions to build out their wireless networks to accommodate growing demand for wireless communication services is driving demand for wireless communication poles.
The increases in profitability in the ESS segment for the thirteen and thirty-nine weeks ended September 25, 2004 as compared with the same periods in 2003 were driven by increased sales volumes and improved pricing in the North American utility industry, offset to some extent by the impact of steel price increases that could not be passed on in the form of sales price increases and lower earnings in China. The increase in SG&A expenses for the third quarter as compared with 2003 related primarily to sales commissions on the sales increase. On a year-to-date basis, the increase in SG&A expenses related mainly to increased sales commissions ($1.7 million), currency translation effects ($1.6 million) and costs related to SG&A headcount reductions and management reorganizing activities in Europe ($1.4 million).
Concrete Support Structures segment
This segment includes the operations of Newmark since the closing of the acquisition on April 16, 2004. Similar to the Utility product line in the ESS segment, utility companies are increasing their spending for electrical utility structures in Newmark’s sales areas, which is mainly in the southern U.S. The operating income for the third quarter and year-to-date 2004 includes $0.9 million and $1.7 million, respectively, in charges related to depreciation and amortization expenses resulting from the allocation of the purchase price of the acquisition to assets acquired.
Coatings segment
Third quarter and year-to-date sales in 2004 decreased as compared with the same periods in 2003, which was a result in lower anodizing sales to a large customer, offset by stronger sales in our galvanizing locations. The increase in galvanizing sales resulted from generally stronger economic conditions this year as compared with 2003 in our sales areas and improved demand from the ESS and Irrigation segments. The third quarter and year-to-date decreases in operating income in 2004 as compared with 2003 are related to increased workers compensation costs in our California operations (approximately $0.6 million in the third quarter) and the effects of overall lower sales volumes.
Irrigation segment
Sales volumes were up from 2003 levels on both a quarterly and year-to-date basis. In the third quarter, the sales increase resulted mainly from increased sales in international markets. Year-to-date sales increases were realized in both domestic and international markets. In North America, third quarter sales were essentially flat compared with 2003, as sales price increases associated with rising steel costs were offset by lower unit sales. Market conditions in the third quarter of 2004 were impacted by generally lower farm commodity prices, higher fuel costs for farmers and a late start in the fall harvest in some of our key sales areas. We also believe that some buying decisions were taken earlier in the year to avoid future price increases related to rapidly rising steel prices. On a year-to-date basis, the sales increase was the result of increased selling prices and improved unit volume realized earlier in the year. International sales were up slightly from 2003 levels on a quarterly and year-to-date basis, after taking into account currency translation effects. Sales in Brazil were down slightly from last year’s record sales, but this decrease was offset by sales improvements in other regions. Our worldwide network of factory and distribution locations enables us to compete effectively in all major markets and maintain solid profitability despite changing market and economic conditions in any given sales region.
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Operating income for the thirteen weeks ended September 25, 2004 was slightly down as compared with the same period in 2003. The profitability decrease related mainly related to decreased unit sales in North America. On a year-to-date basis, the increase in operating income was the result of higher sales volumes, offset to a degree by increased steel costs that were not passed on the marketplace.
Tubing segment
The increase in Tubing sales for the third quarter and the year-date 2004 as compared with last year was due to increased sales and production volume of approximately 15%, including increased internal production volume for the Irrigation and ESS segments, as well as sales price increases associated with increased steel costs. Increases in the amount of tubing sold in 2004 are related to improving industrial production levels in the U.S., favorable market conditions in the agricultural economy and purchases by customers attempting to avoid future price increases. In addition, we believe that we have gained some sales due to our stable source of steel. The increase in 2004 operating income as compared with 2003 was due to increased sales volume and improved factory operations associated with higher production levels and factory expense control. SG&A spending in 2004 increased on a quarterly and year-to-date basis as compared with 2003, mainly due to increased employee incentives associated with increased profitability ($0.6 million and $1.3 million, respectively) and higher sales commissions related to increased sales ($0.2 million and $0.5 million, respectively).
Other
This includes our industrial fastener business, our machine tool accessories operation in France and the development costs associated with our wind energy structure initiative. The main reason for the decrease in profitability this year was weak demand for machine tools in Europe. Wind energy development efforts are continuing; expenses were similar this year as compared with 2003 on quarterly and year-to-date basis.
Net corporate expense
Increased net corporate expenses in 2004 as compared with 2003 were mainly related to increased employee incentives due to improved operating earnings this year.
Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows — Net working capital was $260.5 million at September 25, 2004, as compared with $169.6 million at December 27, 2003. The ratio of current assets to current liabilities was 2.45:1 at September 25, 2004, as compared with 2.12:1 at December 27, 2003. The increase in net working capital included approximately $25.1 million of working capital that was acquired in the Newmark, Whatley and Sigma acquisitions. Operating cash flow was a net outflow of $16.6 million for the thirty-nine week period ended September 25, 2004, as compared with a net inflow of $32.0 million for the same period in 2003. The main reasons for the lower 2004 operating cash flows were lower net income (including a $6.1 million after-tax charge to earnings related to premiums we paid upon prepayment of our promissory notes) and increased receivables and inventories. The increase in receivables related directly to the increase in sales we realized in the second quarter of 2004. Overall, our receivables as a percentage of net sales was similar to past experience. The increase in inventory was associated with overall increased sales levels and the steel industry operating environment in 2004. Backlogs were higher than at the end of 2003, with the increases being in the in the ESS and Tubing segments. Accordingly, we increased our inventories to satisfy this increased sales demand. We believe conditions in the steel industry are stabilizing and availability seems to be improving. As these conditions continue to improve, we are planning to reduce our inventories systematically over the next several months to more historical levels.
Investing Cash Flows — Capital spending the thirty-nine weeks ended September 25, 2004 was $12.3 million, as compared with $13.7 million for the same period in 2003. In addition, we invested $2.5 million in our Mexican nonconsolidated joint venture in 2004 to provide additional capital to support that
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Financing Cash Flows — Our total interest-bearing debt increased from $165.2 as of December 27, 2003 to $343.2 as of September 25, 2004. The increase in borrowings was related to funding the Newmark, Whatley and Sigma acquisitions, which was an aggregate of $138.1 million (including debt assumed as part of the acquisitions) and the increase in working capital, especially inventories.
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 capital at or below 40%. At September 25, 2004, our long-term debt to invested capital ratio was 48.7%.
Our debt financing at September 25, 2004 consisted mainly of long-term debt. We also maintain certain short-term bank lines of credit totaling $26.2 million, $10.2 million which was unused at September 25, 2004. As a result of the Newmark acquisition and to take advantage of a favorable interest rate environment, we refinanced our major long-term credit facilities on May 4, 2004. The refinancing includes $150 million in subordinated senior notes and a new $225 million bank financing arrangement consisting of a $150 million revolving credit facility and a $75.0 million term loan. The proceeds were used to repay the old revolving credit facility, the bridge loan obligation incurred to fund part of the Newmark acquisition and to prepay $79.0 million of promissory notes. The prepaid promissory notes contained yield maintenance provisions that required us to pay as a prepayment premium approximately $9.6 million in addition to the $79.0 million in debt, plus approximately $0.7 million in accrued interest.
The $150 million senior subordinated notes bear interest at 6.875% per annum and are due in May 2014. We may repurchase the notes after five years at specified prepayment premiums and these notes are guaranteed by certain of our U.S. subsidiaries. The new $150 million revolving credit agreement carries an interest rate spread over the LIBOR of 75 to 175 basis points, depending on our ratio of debt to earnings before taxes, interest, depreciation and amortization (EBITDA). At September 25, 2004, we had $74.1 million outstanding under the revolving credit agreement at an interest rate of 3.15% annum. The revolving credit agreement contains certain financial covenants that limit our additional borrowing capability under the agreement. At September 25, 2004, we have the ability to borrow an additional $59.6 million under this facility.
The $75 million term loan accrues interest based on the LIBOR plus a spread of 75 to 175 basis points, depending on our debt to EBITDA ratio, and requires quarterly principal payments beginning in 2005 through 2009. The annualized principal payments beginning in 2005 in millions are: $3.8, $11.2, $18.8, $26.2, and $15.0. The effective interest rate on this loan at September 25, 2004 was 3.4375% per annum.
While our long-term debt to capital ratio is in excess of our 40% objective after the effect of our refinancing, we believe our cash flows will enable us to reduce our debt levels to 40% over the next 18 to 24 months. This estimate is dependent on our level of acquisition activity and steel industry availability and pricing issues, which are causing us to carry more inventory than we customarily maintain.
FINANCIAL OBLIGATIONS AND FINANCIAL COMMITMENTS
There have been no material changes to our financial obligations and financial commitments as described in our Form 10-Q for the quarter ended June 26, 2004.
Off Balance Sheet Arrangements
There have been no changes in our off balance sheet arrangements as described on pages 28-29 in our Form 10-K for the fiscal year ended December 27, 2003.
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Outlook for Remainder of 2004
We believe that the fourth quarter of 2004 will result in improved sales and profitability as compared with 2003, although not to the degree of the third quarter improvement. Steel prices appear to be stabilizing, demand for utility and tubing products is currently strong and the lighting markets appear stable. These positive trends should outweigh the impact of any decline in the irrigation and coatings segments due to falling farm commodity prices, rising fuel and other input costs and weaker anodizing volumes.
Critical Accounting Policies
There have been no changes in the Company’s critical accounting policies during the quarter ended September 25, 2004. The PiRod trade name was tested for impairment separately from goodwill in the third quarter of 2004 in accordance with the Company’s critical accounting policies. The value of the trade name was determined using the relief from royalty method, whereby 2% of projected sales using the trade name are tax-effected and discounted to present value at a rate of 10% per annum. Based on this evaluation, the Company determined that the PiRod trade name was not impaired as of September 25, 2004.
There are no material changes in the company’s market risk during the third quarter ended September 25, 2004. For additional information, refer to the section “Risk Management” in our Form 10-K for the fiscal year ended December 27, 2003.
Item 4. Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures provide reasonable assurance that such disclosure controls and procedures are effective in timely providing them with material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings. There have been no significant changes in the Company’s internal controls over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, such internal controls.
PART II. OTHER INFORMATION
Issuer Purchases of Equity Securities
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During the third quarter, the only shares reflected above were those delivered to the Company by employees as part of stock option exercises, either the cover the purchase price of the option or the related taxes payable by the employee as part of the option exercise. The price paid per share was the market price at the date of exercise.
Item 5. Other Information
The unaudited pro forma combined condensed financial statements, which give effect to the acquisition of Newmark by the Company for the thirty-nine weeks ended September 25, 2004 are attached hereto as Exhibit 99.1.
Item 6. Exhibits
(a) Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf and by the undersigned hereunto duly authorized.
Dated this 1st day of November, 2004.
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