UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
Commission File Number: 0-3701
VALMONT INDUSTRIES, INC. (Exact name of registrant as specified in its charter)
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o
23,857,338 Outstanding shares of common stock as of April 24, 2003
Index is located on page 2.
Total number of pages 20.
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
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PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Dollars in thousands, except per share amounts)(Unaudited)
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of March 29, 2003 and the Condensed Consolidated Statements of Operations for the thirteen week periods ended March 29, 2003 and March 30, 2002 and the Condensed Consolidated Statements of Cash Flows for the thirteen 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 March 29, 2003 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 28, 2002 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 28, 2002. The results of operations for the period ended March 29, 2003 are not necessarily indicative of the operating results for the full year.
Stock Plans
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 March 29, 2003, 1,709,993 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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2. Goodwill and Intangible Assets
Effective December 30, 2001 the Company adopted Statement of Financial Accounting Standards No. 142 (SFAS 142) Goodwill and Other Intangible Assets. This standard established new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS 142, all amortization of goodwill and intangible assets with indefinite lives ceased effective December 30, 2001. Also, recorded goodwill was tested for impairment at December 31, 2001 by comparing the fair value to its carrying value. Based on the initial impairment test, the Company recorded a cumulative effect of change in accounting principle of $0.5 million loss ($0.02 per diluted share) on the Condensed Consolidated Statement of Operations for the thirteen weeks ended March 30, 2002 related to its investment in a consulting business in the Irrigation segment that provides environmental and wastewater management consulting services. Fair value was determined using a discounted cash flow methodology.
The Company's annual impairment testing on its reporting units was performed during the third quarter of 2002. As a result of that testing, it was determined the goodwill and other intangible assets on the Company's Consolidated Balance Sheet at December 28, 2002 were not impaired.
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Amortized Intangible Assets
The components of amortized intangible assets at March 29, 2003 and December 28, 2002 are as follows:
Amortization expense for intangible assets during the first quarter of 2003 and 2002 was $322 and $335, 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 trade name is $4,750 and has not changed in the thirteen weeks ended March 29, 2003.
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Goodwill
The carrying amount of goodwill as of March 29, 2003 is as follows:
The carrying amount of goodwill as of March 30, 2002 is as follows:
3. Cash Flows
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 thirteen weeks ended were as follows:
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4. Earnings Per Share
The following table provides a reconciliation between Basic and Diluted earnings per share:
5. Comprehensive Income
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.
6. Business Segments
The Company has aggregated its businesses into five reportable segments:
Poles: This segment consists of the manufacture of engineered metal structures for the lighting and traffic and utility industries;
Wireless Communication: This segment consists of the manufacture of tower and pole structures and components for the wireless telephone industry;
Coatings: This segment consists of coatings services for industrial customers;
Irrigation: This segment consists of the manufacture of irrigation equipment and related parts and services to agricultural customers; and
Tubing: This segment consists of the manufacture of tubular products for industrial customers.
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.
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIESPART 1. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. 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, actions and policy changes of domestic and foreign governments and other risks described from time to time in the Company's reports to the Securities and Exchange Commission are examples of factors, among others, that could cause results to differ materially from those described in the forward-looking statements.
We report our businesses as five reportable segments. See Note 6 to the Condensed Consolidated Financial Statements. After the end of the first quarter of fiscal 2003, we reorganized the management reporting structure of the Wireless Communication segment in order to reduce costs and better utilize the talents and capabilities inside that segment. As a result, Wireless Communication will report to and become part of the Poles segment. The new organization will be named the Engineered Support Structures segment and will commence reporting in the second quarter of fiscal 2003.
Results of Operations
Dollars in thousands, except per share amounts
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Consolidated
Net sales for the first quarter of 2003 were virtually unchanged as compared with the same period in 2002, as increased sales in the Irrigation, Tubing and Coatings segments were offset by decreases in the Poles and Wireless Communication segments. Gross profit as a percent of sales decreased, as higher margins in the Irrigation segment were more than offset by lower margins in the other segments. Lower sales volumes and pricing pressures negatively impacted gross profit margins in the Wireless Communication segment and the Utility product line in the Poles segment. The Coatings segment's gross profit margins were impacted by an unfavorable sales mix and lower sales volumes in our galvanizing plants. Lower sales and production volumes negatively impact gross profit as fixed factory costs are incurred despite the decrease in production levels. The decrease in selling, general and administrative (SG&A) expenses primarily related to reduced provisions for incentive payments this year. The decrease in net interest expense was due to lower average borrowing levels in 2003 as compared with 2002. The improvement in net earnings is mainly due to lower operating income offset by:
Poles segment
In the Poles segment, the sales decrease was due to lower North American Utility sales, offset to a degree by improved Lighting and Traffic sales. In North America, an economic slowdown and high debt levels in utility companies and independent power producers have resulted in reduced capital spending for electrical transmission and distribution. Accordingly, we have experienced lower demand for poles used for electrical transmission, distribution and substations. Lower market demand has also resulted in increased pricing pressures and lower gross profit margins. Also, 2002 sales were aided by a large order
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to replace storm-damaged poles and a record backlog starting off the year. Utility backlogs at year-end 2002 were nearly 70% lower than at year-end 2001. In the Lighting and Traffic product line, sales improved over the first quarter of 2002, as funding for government road and highway programs continue to support sales volumes.
In Europe, lighting sales and profits increased from 2002, as we increased our geographic market coverage. In China, sales and profitability were level with 2002.
Operating income in the Poles segment decreased due to the lower sales volumes and lower profit margins associated with pricing pressures in the Utility product line (which reduced operating income by approximately $0.6 million this quarter) and less efficient factory operations caused by lower production volumes. While we have reduced factory spending in response to lower production volumes, certain fixed costs were incurred despite the volume change, an unfavorable impact on gross profit and operating income of approximately $1.4 million this year. SG&A spending decreased approximately $1.0 million this year, due mainly to lower incentives and sales commissions.
Wireless Communication segment
Sales and profits in the Wireless Communication segment sales decreased as compared with 2002, as the communication market further weakened this year. Wireless service providers continue to restrict their capital spending on poles, towers and components to focus on generating free cash flow and improving their balance sheets by paying down debt. These market conditions have also resulted in continued pricing pressure on current sales, which further hampered profitability. We have continued to reduce spending levels to reduce the impact on earnings caused by these weak market conditions. North America factory and SG&A spending has been reduced by approximately $1.5 million this year, as compared with the first quarter of 2002. Sales and profits in China, while profitable, are down from 2002 first quarter levels. As the Chinese wireless networks are becoming more developed, we believe the growth in spending on new sites will decrease over time.
In order to make better use of the skills and manufacturing capabilities of this segment, our Wireless Communication segment has been working with our Poles segment to provide new sign structures to help us increase our sales in that market. We plan to further pursue this activity by reorganizing the management reporting structure in this segment. Starting in the second quarter of 2003, Wireless Communication will report to the Poles segment, which will be named the Engineered Support Structures segment. This action should help us combine the resources and skills of these two divisions and help us provide a wider range of support structures to new and existing markets, develop and distribute new products more efficiently and reduce our total cost structure.
Coatings segment
Coatings segment sales increased mainly due to sales increases at one location, where we provide assembly services to one customer in addition to coating services. At our other locations, sales decreased due to general weakness in the U.S. industrial economy and lower sales to our other units, mainly the Poles segment. The decrease in operating income was attributable to these generally lower sales and less coverage of fixed factory expenses.
Irrigation segment
The sales increase in the Irrigation segment was due to improved market conditions in most areas around the world. In North America, general dry growing conditions in 2002, improvement in some commodity prices, continued low interest rates and the passage of the U.S. farm bill in 2002 all contributed to higher sales in 2003, as compared with 2002. In International markets, sales were higher in most markets, except the Middle East, where political turmoil and the war in Iraq resulted in lower sales. In Brazil, higher crop prices and favorable government support programs led to better market
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conditions. In South Africa and Australia, dry growing conditions and higher crop prices drove higher sales volumes. Our overall strategy of local manufacturing presence in key center pivot markets has continued to help us be competitive against local competition in light of changing market, economic and political conditions.
The increase in the Irrigation segment's operating income related mainly to the sales increases achieved in 2003. In North America, improved pricing conditions and SG&A expense control also contributed to the improved to the operating income increase. The net impact of pricing and operational actions to improve margins is estimated at approximately $1.0 million.
Tubing segment
Tubing segment sales increased mainly due to new product introductions. These sales increases led to improved earnings, although pricing pressures in certain cases resulted in lower gross profit margins. Good factory performance and SG&A expense control also contributed to the increase in earnings.
Other
Other businesses include the manufacture of machine tool accessories, distribution of industrial fasteners and the development of wind energy structures. The increase in sales this year was the result of higher sales in the machine tool accessory business. The decrease in earnings relates to increased spending for wind energy development activities.
Liquidity and Capital Resources
Net working capital was $155.5 million at March 29, 2003, as compared with $154.1 million at December 28, 2002. The ratio of current assets to current liabilities was 2.13:1 at March 29, 2003, as compared with 2.09:1 at December 28, 2002. Operating cash flows were $2.3 million for the thirteen-week period ended March 29, 2003, as compared with $14.7 million for the same period in 2002. The main reasons for the lower 2003 operating cash flows were increased payments for 2002 employee incentives paid in 2003 and higher inventories. Inventory levels were similar to those at December 28, 2002 and up approximately $7 million from March 30, 2002. The inventory increase was mainly due to higher international irrigation inventories to support higher demand, and foreign currency translation impacts this year, as the U.S. dollar has weakened against a number of foreign currencies, including the Euro and the South African Rand. We estimate the impact of currency fluctuations on inventory balances this quarter was an increase of approximately $3.6 million, as compared with March 30, 2002. Capital expenditures and depreciation and amortization expenses for the thirteen-week periods ended March 29, 2003 and March 30, 2002 were as follows (in millions of dollars):
There were no acquisitions completed in the first quarter of either 2003 or 2002.
We have historically funded our growth through a combination of cash generated from operations and debt financing. We have an internal objective to maintain long-term debt at or below 40% of invested capital. At March 29, 2003, our long-term debt to invested capital ratio is 33.4%. Unless we engage in significant acquisition activity, we expect to maintain this ratio below 40%.
Our debt financing consists of a combination of short-term credit facilities and long-term debt. We currently maintain $21.1 million in short-term bank credit lines, of which $2.6 million was unused at
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March 28, 2003. Our long-term debt consists primarily of fixed rate unsecured promissory notes of $90 million with a weighted average interest rate of 7.77% and a variable rate revolving credit line. The revolving credit line is for a maximum of $150 million, of which $46 million was outstanding at March 29, 2003. The interest rate on the revolving credit line was approximately 2.06% at March 29, 2003. We are compliance with all debt covenants at March 29, 2003.
In December 2001, our Board of Directors authorized a repurchase of up to 1.5 million shares of our common stock. As of March 29, 2003, 852,200 shares have been repurchased under this authorization for a total of $14.8 million.
We believe that operating cash flows and our available credit facilities will be adequate for 2003 planned capital spending, dividends and other financial obligations. We also believe we will have adequate financial resources to take advantage of opportunities to grow our businesses and markets. There have been no material changes to our financial and contractual obligations or other commercial commitments disclosed on pages 22 and 23 in our Form 10-K for the fiscal year ended December 29, 2002.
Outlook for Remainder of 2003
In the Engineered Support Structures segment, we expect the Lighting and Traffic product line to be relatively strong, with Utility sales to remain weak for the remainder of 2003. We also do not anticipate that the Wireless Communication markets will improve over the short term. We will continue to focus on lowering our cost structure and broadening our product offerings while looking for new opportunities for this or other markets that Valmont serves. In the Irrigation segment, we are nearing the end of the spring sales season in the U.S. and it is too early to tell what market conditions will be in the 2003 fall selling season. We are expecting lower sales in the Middle East this year, until the political turmoil eases. Otherwise, markets in South Africa and South America are expected to be relatively strong. In summary, due to weak conditions in Wireless Communication and Utility markets, we expect earnings for the 2003 fiscal year to be flat to slightly down as compared with 2002. In the meantime, we plan to use our skills, capabilities, strong market presence and commitment to customer service to attract new customers and take advantage of growth opportunities. We also plan to continue to reduce costs where feasible. Even though some of the markets we participate in are in down cycles, we expect to generate strong cash flows.
Critical Accounting Policies
There have been no changes in the Company's critical accounting policies during the quarter ended March 29, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the first quarter ended March 29, 2003. For additional information, refer to the section "Risk Management" on pages 23 and 24 of our Form 10-K for the fiscal year ended December 28, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, 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-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that 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
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Company (including its consolidated subsidiaries) required to be included in the Company's periodic Securities and Exchange Commission filings. Since the date of the evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect such internal controls.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Valmont's annual meeting of stockholders was held on April 28, 2003. The stockholders elected three directors to serve three-year terms and ratified the appointment of Deloitte & Touch LLP to audit the Company's financial statements for fiscal 2003. For the annual meeting there were 23,883,485 shares outstanding and eligible to vote of which 19,811,538 were present at the meeting in person or by proxy. The tabulation for each matter voted upon at the meeting was as follows:
Election of Directors:
Proposal to ratify the appointment of Deloitte & Touche LLP as independent accountants for fiscal 2003:
ITEM 5. OTHER INFORMATION
On April 28, 2003, the Company's Board of Directors authorized a quarterly cash dividend on common stock of 8.0 cents per share, payable July 15, 2003, to stockholders of record June 27, 2003. The indicated annual dividend rate is 32 cents per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company furnished its press release with earnings information on the Company's quarter ended March 29, 2003 on Form 8-K dated April 21, 2003.
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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.
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CERTIFICATIONS
I, Mogens C. Bay, certify that:
I have reviewed this quarterly report on Form 10-Q of Valmont Industries, Inc.;
Date: May 9, 2003
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I, Terry J. McClain, certify that:
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