UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-Q
Commission file number: 1-31429
Valmont Industries, Inc. (Exact name of registrant as specified in its charter)
(Registrant's telephone number, including area code) 402-963-1000
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES 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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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited)
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands, except per share amounts) (Unaudited)
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) (Unaudited)
1. Summary of Significant Accounting Policies
Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of September 29, 2007 and the Condensed Consolidated Statements of Operations for the thirteen and thirty-nine week periods ended September 29, 2007 and September 30, 2006 and the Condensed Consolidated Statements of Cash Flows for the 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 29, 2007 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 Annual Report on Form 10-K for the fiscal year ended December 30, 2006. 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 30, 2006, except for the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, in fiscal 2007. The results of operations for the periods ended September 29, 2007 are not necessarily indicative of the operating results for the full year.
Inventories
At September 29, 2007, approximately 48.2% 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 finished goods. The excess of replacement cost of inventories over the LIFO value was approximately $35,800 and $37,400 at September 29, 2007 and December 30, 2006, respectively.
Inventories consisted of the following:
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Stock and Deferred Compensation 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, non-vested stock awards and bonuses of common stock. At September 29, 2007, 1,236,257 shares of common stock remained available for issuance under the plans. Shares and options issued and available for issuance 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 recorded $367 and $1,264 of compensation expense (included in selling, general and administrative expenses) for the thirteen and thirty-nine weeks ended September 29, 2007, respectively and $444 and $1,157 of compensation expense for the thirty-nine weeks ended September 30, 2006. The associated tax benefits recorded for the thirteen and thirty-nine weeks ended September 29, 2007 were $141 and $487, respectively and the $171 and $445 for the thirteen and thirty-nine weeks ended September 30, 2006.
During the thirty-nine weeks ended September 29, 2007, $13,374 was distributed from the Company's non-qualified deferred compensation plan to participants under the transition rules of section 409A of the Internal Revenue Code. The distributions were made in the amounts of $9,186 in cash and $4,188 in-kind.
Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on December 31, 2006. The result of the implementation was immaterial to the financial statements. The gross amount of unrecognized tax benefits as of the date of adoption was $4,325. Included in this amount was an aggregate of $760 of interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $3,775 and $1,779 at December 30, 2006 and September 29, 2007, respectively. The Company's policy is to record interest and penalties directly related to income taxes as income tax expense in the Condensed Consolidated Statements of Operations. In the third quarter of 2007, the Company recorded a reduction of its unrecognized tax benefits of $2,696, with $2,388 recorded as a reduction of income tax expense, due to the expiration of statutes of limitation in the United States.
The Company files income tax returns in the U.S. and various states as well as foreign jurisdictions. Tax years 2004 and forward remain open under U.S. statutes of limitation. Generally, tax years 2003 and forward remain open under state statutes of limitation. The Company has extended statutes of limitation for pending examinations in Nebraska for years prior to 2003.
There is approximately $630 of uncertain tax positions for which reversal is reasonably possible during the next 12 months due to the closing of the statute of limitation. The nature of these uncertain tax positions is generally the classification of a transaction as tax exempt or the computation of a tax deduction or tax credit.
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Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement 157 ("SFAS 157"), Fair Value Measurements. This Statement establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. While SFAS 157 does not require any new fair value measurements, it may change the application of fair value measurements embodied in other accounting standards. SFAS 157 will be effective at the beginning of the Company's 2008 fiscal year. The Company is currently assessing the effect of this pronouncement on the consolidated financial statements.
2. Acquisition
On April 26, 2007, the Company acquired 70% of the outstanding shares of Tehomet Oy (Tehomet), a Finnish manufacturer of lighting poles. Tehomet's operations are included in the Company's condensed consolidated financial statement since the acquisition date. The total purchase price amounted to $12,336 in cash (including transaction costs). Goodwill of $5,990 was recognized as part of the purchase price allocation and was assigned to the Engineered Support Structures segment. The Company allocated the purchase price as follows: current assets, $4,834; current liabilities, $1,950; plant, property and equipment; $3,259, finite-lived intangible assets, $3,168; indefinite-lived intangible assets, $1,262; goodwill, $5,990 and long term liabilities, $4,227. The Company acquired Tehomet to expand its geographical presence in Europe and to leverage product lines offerings of both companies across the Company's collective market areas for lighting structures.
On July 13, 2007, the Company paid $3,827 in cash for the remaining 20% of the outstanding shares of its Canadian lighting structure manufacturing facility. The purchase price in excess of the $1,425 of net assets acquired was allocated as follows: plant, property and equipment, $116; finite-lived intangible assets, $556; indefinite-lived intangible assets, $172; goodwill, $1,828 and long term liabilities, $270.
3. Goodwill and Intangible Assets
Amortized Intangible Assets
The components of amortized intangible assets at September 29, 2007 and December 30, 2006 were as follows:
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Amortization expense for intangible assets for the thirteen weeks ended September 29, 2007 and September 30, 2006 was $919 and $756, respectively. Amortization expense for intangible assets for the thirty-nine weeks ended September 29, 2007, and September 30, 2006 was $2,602 and $2,572, respectively. Estimated amortization expense related to finite-lived intangible assets is as follows:
The useful lives assigned to finite-lived intangible assets included consideration of factors such as the Company's past and expected experience related to customer retention rates, the remaining legal or contractual life of the underlying arrangement that resulted in the recognition of the intangible asset and the Company's expected use of the intangible asset.
Non-amortized intangible assets
Under the provisions of SFAS 142, intangible assets with indefinite lives are not amortized. The carrying value of the PiRod and Newmark trade names are $4,750 and $11,111 as of September 29, 2007 and December 30, 2006. These indefinite-lived intangible assets were tested for impairment separately from goodwill in the third quarter of 2007. The carrying value of the Tehomet and Feralux trade names were $1,262 and $172, respectively, as of September 29, 2007. The Newmark trade name arose from the 2004 acquisition, the PiRod trade name arose from the 2001 acquisition and the Tehomet and Feralux trade names arose from 2007 acquisitions. The values 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 29, 2007.
In its determination of these intangible assets as indefinite-lived, the Company considered such factors as its expected future use of the intangible asset, legal, regulatory, technological and competitive factors that may impact the useful life or value of the intangible asset and the expected costs to
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maintain the value of the intangible asset. The Company has determined that these intangible assets are expected to maintain their value indefinitely and, therefore, these assets are not amortized.
Goodwill
The carrying amount of goodwill as of September 29, 2007 was as follows:
The Company's annual impairment testing on its reporting units was performed during the third quarter of 2007. As a result of that testing, it was determined the goodwill and other intangible assets on the Company's Condensed Consolidated Balance Sheet were not impaired.
4. 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 thirty-nine weeks ended were as follows:
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5. Earnings Per Share
The following table provides reconciles Basic and Diluted earnings per share:
6. 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. The Company's other comprehensive income for the thirteen and thirty-nine weeks ended September 29, 2007 and September 30, 2006, respectively, were as follows:
7. Business Segments
The Company aggregates its operating segments into five reportable segments. Aggregation is based on similarity of operating segments as to economic characteristics, products, production processes, types or classes of customer and the methods of distribution. 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.
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Reportable segments are as follows:
ENGINEERED SUPPORT STRUCTURES: This segment consists of the manufacture of engineered metal structures and components for the lighting and traffic and wireless communication industries, certain international utility industries and for other specialty applications;
UTILITY SUPPORT STRUCTURES: This segment consists of the manufacture of engineered steel and concrete structures primarily for the North American 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 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. In the fourth quarter of 2006, the Company decided to suspend its efforts related to the wind energy industry.
The accounting policies of the reportable segments are the same as those described in Note 1. The Company evaluates the performance of its business segments based upon operating income and invested capital. The Company does not allocate interest expense, non-operating income and deductions, or income taxes to its business segments.
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8. Guarantor/Non-Guarantor Financial Information
On May 4, 2004, the Company completed a $150,000,000 offering of 67/8% 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.
Condensed consolidated financial information for the Company ("Parent"), the Guarantor subsidiaries and the Non-Guarantor subsidiaries is as follows:
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Thirteen Weeks Ended September 29, 2007
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For the Thirty-nine Weeks Ended September 29, 2007
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Thirteen Weeks Ended September 30, 2006
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For the Thirty-nine Weeks Ended September 30, 2006
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CONDENSED CONSOLIDATED BALANCE SHEETS September 29, 2007
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CONDENSED CONSOLIDATED BALANCE SHEETS December 30, 2006
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Thirty-nine Weeks Ended September 29, 2007
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Thirty-nine Weeks Ended September 30, 2006
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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES PART 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 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.
This discussion should be read in conjunction with the financial statements and the notes thereto, and the management's discussion and analysis, included in the Company's annual report on Form 10-K for the fiscal year ended December 30, 2006. We aggregate our businesses as five reportable segments. See Note 7 to the Condensed Consolidated Financial Statements.
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Results of Operations
Dollars in thousands, except per share amounts
NM = Not meaningful
Overview
The net sales increase for the thirteen week period ended September 29, 2007, as compared with the same period of 2006, was due to increased sales volumes in all reportable segments and selling price increases in our Utility Support Structures and Coatings segments offset to some extent by selling
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price decreases in our Tubing segment. The year-to-date sales increase was due to increased volume in all reportable segments and sales price increases in all reportable segments except the Tubing segment. The improvement in gross profit for the thirteen and thirty-nine week periods ended September 29, 2007, as compared with the same periods of 2006, resulted from higher sales volumes and slightly lower material costs in 2007, as compared with 2006. The increases in selling, general and administrative (SG&A) expenses for the third quarter and year-to-date periods ended September 29, 2007, as compared with the same periods in 2006, mainly resulted from higher employee incentives related to improved operating performance (approximately $2.3 million and $5.2 million, respectively), increased salary and benefit costs to support the increase in sales activity (approximately $2.1 million and $5.2 million, respectively) higher sales commissions associated with the increased sales volumes (approximately $0.8 million and $3.2 million, respectively), acquisitions (approximately $0.9 million and $1.5 million, respectively) and currency fluctuations (approximately $0.8 million and $2.2 million, respectively).
All reportable segments contributed to the improved operating income in 2007 for the thirteen and thirty-nine weeks ended September 29, 2007, as compared with the same periods in 2006. In November 2006, we acquired the remaining 51% ownership in a previously non-consolidated Mexican manufacturing facility that is reported under the Utility Support Structures segment. In April 2007, we acquired 70% ownership in Tehomet Oy (Tehomet), a Finnish manufacturer of lighting structures that is reported under the Engineered Support Structures segment. In July 2007, we acquired the remaining 20% of our Canadian lighting structure manufacturing facility. The impact of these acquisitions on our operating results for the thirteen and thirty-nine week periods ended September 29, 2007 was not significant.
Net interest expense for the thirteen and thirty-nine weeks ended September 29, 2007 were comparable with the same periods in 2006, as average borrowing levels and interest rates in 2007 were similar to 2006.
Our effective tax rates for the third quarter and year-to-date periods ended September 29, 2007 were lower than the same periods in 2006. The most significant reason for the lower rates was approximately $2.2 million ($0.6 million in 2006) in certain unrecognized income tax benefits related to activities in prior tax years that were recorded as a reduction of income tax expense, due to the expiration of United States statutes of limitation. We had previously determined that these tax benefits were not likely to be realized and therefore had not recognized these benefits in prior years. In addition, our income tax rate in 2007 has been favorably impacted by our stronger earnings from international operations, which are generally taxed at lower rates than the U.S., and an increase in various tax credits and manufacturer's deductions that were available to us in 2007, as compared with 2006.
"Miscellaneous" income was lower for the thirty nine week period ended September 29, 2007, as compared to the same period in 2006, due to a $1.1 million settlement associated with a retirement plan of a former subsidiary in the first quarter of 2006. Our share of the profitability of our nonconsolidated subsidiaries was much improved in 2007, as compared with 2006, due mainly to a $2.1 million after-tax loss in our Mexican structures manufacturing operation in the third quarter of 2006. This entity is now 100% owned by us and is reported as part of the Utility Support Structures segment. Our cash flows provided by operations were $55.2 million for the thirty-nine weeks ended September 29, 2007, as compared with $29.0 million of cash provided by operations for the same period in 2006. The higher operating cash flows in 2007 primarily resulted from increased net earnings in 2007
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Engineered Support Structures (ESS) segment
All geographic regions contributed to the improvement in ESS segment sales in the thirteen and thirty-nine week periods ended September 29, 2007, as compared with the same periods in 2006. In North America, lighting and traffic structure sales in 2007 were higher than 2006, due to a combination of increased volume and sales price increases. In the transportation market channel, sales were up modestly in 2007, as compared with 2006, primarily the result of sales price increases. We believe that delays in funding appropriations through federal highway legislation have contributed to some sluggishness in sales orders in this market channel in 2007. Sales in the commercial market channel in 2007 increased as compared with 2006 through expanded relationships with lighting fixture manufacturers and expansion into new markets, such as lighting structures for decorative applications. In Europe, improved sales volumes in traditional lighting structures more than offset lower sales of tramway structures. The acquisition of Tehomet in the second quarter 2007 also contributed to the increase in European lighting structure sales. Sales of lighting structures in China in 2007 were higher than 2006, on both a quarterly and year-to-date basis, mainly due to continued market expansion and increased sales efforts.
Sales of Specialty Structures products increased in 2007 as compared with 2006, on both a quarterly and year-to-date basis. In North America, structure sales were slightly better in the third quarter of 2007 as compared to 2006 and somewhat less year to date than in 2006. Weakness in wireless communication components and highway sign sales offset modest sales gains in the telecommunication tower product line in 2007, as compared with 2006. Sales of wireless communication poles in China continued to be very strong as Chinese wireless carriers continue the development of their wireless market.
The increases in operating income of the ESS segment for the thirteen and thirty-nine weeks ended September 29, 2007, as compared with the same periods in 2006, were related to the sales growth in all regions. Also, in the second quarter of 2006 there were charges related to a sign structure warranty claim and production equipment disposals in Europe ($1.1 million) and the write off of the Sigma trade name ($0.4 million) which contributed to the improvement in segment operating income for the thirty-nine weeks ended September 29, 2007, as compared with the same period in 2006. The main reasons for the increases in SG&A expense for the thirteen and thirty-nine weeks ended September 29, 2007, as compared with the same periods in 2006, were increased salary and employee benefits (approximately $1.0 million and $2.4 million, respectively), commissions related to higher sales volumes (approximately $0.8 million and $2.3 million, respectively), and foreign currency translation (approximately $0.7 million and $1.9 million, respectively).
Subsequent to the end of the third quarter of fiscal 2007, we are taking certain actions to consolidate our North American specialty structures operations to improve our cost competitiveness and enhance operational efficiency. We expect that most of these actions will be completed in the fourth quarter of 2007, with an anticipated pre-tax expense of $1 to $2 million to be recorded in the fourth quarter of 2007.
Utility Support Structures segment
In the Utility Support Structures segment, the sales increases for both the thirteen and thirty-nine weeks ended September 29, 2007, as compared with the same periods of 2006, were due to higher sales volumes and sales price increases to recover higher material costs. These increases were the result of improved demand for steel and concrete electrical transmission, substation and distribution pole structures by utility companies as they continue to improve the electrical transmission and distribution infrastructure in the U.S.
Gross profit increased for the thirteen and thirty-nine weeks ended September 29, 2007, as compared with 2006, due to improved operating leverage from the higher sales volumes and
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improvement in sales prices. The improvement in gross profit in 2007, as compared with 2006, was also attributable to certain large orders that were at lower gross profit margins than normal in 2006.
The increase in SG&A spending for the thirteen and thirty-nine weeks ended September 29, 2007 was due to increased salary, benefits, incentive expenses and commissions related to the higher sales activity and profit levels ($0.5 million and $2.9 million, respectively) and the SG&A for our manufacturing facility in Mexico ($0.4 million and $0.8 million, respectively).
Coatings segment
Coatings segment sales for the thirteen and thirty-nine week periods ended September 29, 2007 were above 2006 levels, mainly due to higher sales prices and increased demand for galvanizing services during the third quarter and year-to-date periods ended September 29, 2007, as compared to 2006. In our galvanizing operations, pounds of steel galvanized in 2007 for the thirteen and thirty-nine weeks ended September 29, 2007 increased over the same periods in 2006 by approximately 6.8% and 9.2%, respectively. The volume increases were due to stronger industrial economic conditions in our market areas, including increased galvanizing services provided to our other operations in the U.S.
Operating income for the thirteen and thirty-nine weeks ended September 29, 2007 as compared with the same periods in 2006, increased due to higher production levels and improved production efficiencies, offset to a degree by a gain of $1.1 million on the sale of one of our facilities in the third quarter of 2006. Year-to-date operating income in 2007 was affected by a valuation charge of approximately $0.7 million related to the disposal of manufacturing equipment in our anodizing operation. SG&A spending in the third quarter and year-to-date periods ended September 29, 2007 was comparable to last year.
Irrigation segment
For the thirteen and thirty-nine weeks ended September 29, 2007 the sales increases in the Irrigation segment, as compared with the same periods in 2006, were predominantly due to higher sales volumes. In North America, generally higher farm commodity prices in 2007 resulted in improved demand for irrigation machines. In addition, relatively dry growing conditions during the third quarter of 2007 contributed to increased after-market parts sales in our major North American markets. International sales increased in 2007, as compared with 2006, on both a quarterly and year-to-date basis. The sales increases were mainly due to higher farm commodity prices, which resulted in improved demand for irrigation machines. On a regional basis, stronger third quarter 2007 sales in South Africa and Argentina more than offset weakness in sales in Brazil. On a year-to-date basis, the sales increase was due to improved sales volumes in most of our traditional markets, except Brazil, offset to a degree by lower sales this year in newly-developed irrigation markets.
Operating income for the thirteen and thirty-nine weeks ended September 29, 2007 increased substantially as compared with the same periods in 2006 due to improved sales volumes and factory utilization as well as effective control of SG&A spending. The increases in SG&A spending for the thirteen and thirty-nine weeks ended September 29, 2007, as compared with the same periods in 2006 were mainly attributable to increased employee incentives associated with improved operational performance ($0.2 million and $0.5 million, respectively), increased salary and benefit expense for additional administrative personnel ($0.5 million and $1.0 million, respectively) and increased spending for new product development ($0.4 million and $0.8 million, respectively).
Tubing segment
The increases in Tubing sales for the third quarter and the year-to-date periods ended September 29, 2007 as compared with the same periods in 2006 were due to improved demand for structural tubing products and large diameter products which more than offset lower selling prices.
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Sales volume for these items increased 24% and 17% respectively for the thirteen and thirty nine weeks ended September 29, 2007. In particular, sales demand in 2007 has been stronger from agricultural equipment manufacturers for applications such as grain storage and handling. Volume increases were partially offset by price declines caused by decreasing steel prices. Operating income was significantly higher in 2007 due to improved operating efficiencies and leverage from increased production volumes.
The increase in SG&A expenses for the third quarter and year-to-date periods ended September 29, 2007, as compared with the same periods in 2006 was mainly due to increased employee incentive expense associated with improved operating performance.
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. We made the decision to suspend our wind energy initiative in the fourth quarter of 2006. The main reasons for the improvement in operating income this year was lower spending related to wind energy and improvement in sales and profitability of our machine tool accessory business.
Net corporate expense
The increases in net corporate expenses for the thirteen and thirty-nine weeks ended September 29, 2007, as compared with the same periods in 2006, were mainly related to increased employee incentives due to improved earnings and common stock price (which is used to value certain long-term management incentives) this year (approximately $1.7 million and $3.1 million, respectively).
Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows—Net working capital was $324.3 million at September 29, 2007, as compared with $277.7 million at December 30, 2006. The ratio of current assets to current liabilities was 2.29:1 at September 29, 2007, as compared with 2.28:1 at December 30, 2006. The increase in net working capital mainly relates to increased accounts receivable and inventories associated with higher sales activity in 2007, as compared with 2006. Cash flow provided by operations was $55.2 million for the thirty-nine week period ended September 29, 2007, as compared with $29.0 million provided by operations for the same period in 2006. The increase in operating cash flows in 2007, as compared with 2006, related primarily to increased net earnings and the timing of income taxes payable. In 2007, approximately $9.2 million was distributed from our non-qualified deferred compensation plan to participants under the transition rules of section 409A of the Internal Revenue Code.
Investing Cash Flows—Capital spending during the thirty-nine weeks ended September 29, 2007 was $43.8 million, as compared with $18.8 million for the same period in 2006. The main reason for the increased capital spending in 2007, as compared with 2006, was additional manufacturing capacity to serve the North America ESS markets and the Utility Support Structures segment. Our capital spending for the 2007 fiscal year is expected to be between $55 million and $60 million. In addition, we spent approximately $12.3 million (net of cash acquired) to acquire 70% of the outstanding stock of Tehomet Oy, a Finnish manufacturer of lighting structures, in the second quarter of 2007 and approximately $3.8 million for the remaining 20% of the outstanding shares of our Canadian lighting structure manufacturing facility. The cash used to pay the $9.2 million in distributions from our non-qualified deferred compensation plan was generated from the liquidation of investments, which was classified as "Proceeds from sale of assets" in the statement of cash flows for the thirty-nine week period ended September 29, 2007.
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Financing Cash Flows—Our total interest-bearing debt in-flow increased from $234.3 million as of December 30, 2006 to $238.0 million as of September 29, 2007. The main reasons for the increase in borrowings relate to increased capital spending in 2007 and the Tehomet acquisition, which was funded through borrowings against our revolving credit agreement.
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 29, 2007, our long-term debt to invested capital ratio was 28.3%, as compared with 31.3% at December 30, 2006. Our internal objective of 40% is exceeded from time to time in order to take advantage of opportunities to grow and improve our businesses, such as the Newmark, Whatley and Sigma acquisitions that were completed in 2004. Subject to our level of acquisition activity and steel and zinc 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 2007.
Our debt financing at September 29, 2007 consisted primarily of long-term debt. We also maintain certain short-term bank lines of credit totaling $27.1 million, $16.2 million which was unused at September 29, 2007. Our long-term debt principally consists of:
Under these debt agreements, we are obligated by covenants that require us to maintain certain coverage ratios and may limit us with respect to certain business activities. At September 29, 2007 we were in compliance with all covenants related to these debt agreements.
FINANCIAL OBLIGATIONS AND FINANCIAL COMMITMENTS
There have been no material changes to our financial obligations and financial commitments as described on page 37 in our Form 10-K for the year ended December 30, 2006.
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Off Balance Sheet Arrangements
There have been no changes in our off balance sheet arrangements as described on page 37 in our Form 10-K for the fiscal year ended December 30, 2006.
Critical Accounting Policies
There have been no changes in the Company's critical accounting policies during the quarter ended September 29, 2007. These policies are described on pages 39-42 in our Form 10-K for fiscal year ended December 30, 2006.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There are no material changes in the company's market risk during the quarter ended September 29, 2007. For additional information, refer to the section "Risk Management" on pages 38-39 in our Form 10-K for the fiscal year ended December 30, 2006.
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 are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 is (1) accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. In the third quarter of fiscal 2007, the Company implemented various process and information systems enhancements, principally related to the implementation of enterprise resource planning software and related business improvements in the China operations that are reported as part of the Engineered Support Structures segment. These process and information system enhancements resulted in modifications to internal controls over sales, customer service, inventory management, accounts receivable, and accounts payable processes. Aside from such change, there have been no 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.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
During the third quarter, the only shares reflected above were those delivered to the Company by employees as part of stock option exercises, either to 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
On September 11, 2007, the Company's Board of Directors declared a quarterly cash dividend on common stock of 10.5 cents per share, which was paid on October 15, 2007, to stockholders of record September 28, 2007. The indicated annual dividend rate is 42 cents per share.
Item 6. 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.
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