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)
402-963-1000(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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
26,151,080 Outstanding shares of common stock as of October 20, 2008
VALMONT INDUSTRIES, INC. AND SUBSIDIARIESINDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements:
Condensed Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended September 27, 2008 and September 29, 2007
Condensed Consolidated Balance Sheets as of September 27, 2008 and December 29, 2007
Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 27, 2008 and September 29, 2007
Notes to Condensed Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
Signatures
2
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Other income (expense):
Interest expense
Interest income
Miscellaneous
Earnings before income taxes, minority interest and equity in earnings of nonconsolidated subsidiaries
Income tax expense (benefit):
Current
Deferred
Earnings before minority interest and equity in earnings of nonconsolidated subsidiaries
Minority interest
Equity in earnings of nonconsolidated subsidiaries
Net earnings
Earnings per share—Basic
Earnings per share—Diluted
Cash dividends per share
Weighted average number of shares of common stock outstanding (000 omitted)
Weighted average number of shares of common stock outstanding plus dilutive potential common shares (000 omitted)
See accompanying notes to condensed consolidated financial statements.
3
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
Receivables, net
Inventories
Prepaid expenses
Refundable and deferred income taxes
Total current assets
Property, plant and equipment, at cost
Less accumulated depreciation and amortization
Net property, plant and equipment
Goodwill
Other intangible assets, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt
Notes payable to banks
Accounts payable
Accrued expenses
Accrued employee compensation and benefits
Dividends payable
Total current liabilities
Deferred income taxes
Long-term debt, excluding current installments
Other noncurrent liabilities
Minority interest in consolidated subsidiaries
Shareholders' equity:
Preferred stock of $1 par valueAuthorized 500,000 shares; none issued
Common stock of $1 par valueAuthorized 75,000,000 shares; issued 27,900,000 shares
Retained earnings
Accumulated other comprehensive income
Treasury stock
Total shareholders' equity
Total liabilities and shareholders' equity
4
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization
Stock-based compensation
Loss/(gain) on sale of assets
Other adjustments
Payment of deferred compensation
Changes in assets and liabilities, net of business acquisitions:
Receivables
Income taxes payable/refundable
Net cash flows from operating activities
Cash flows from investing activities:
Purchase of property, plant & equipment
Proceeds from sale of assets
Acquisitions, net of cash acquired
Dividends to minority interests
Other, net
Net cash flows from investing activities
Cash flows from financing activities:
Net borrowings under short-term agreements
Proceeds from long-term borrowings
Principal payments on long-term obligations
Dividends paid
Proceeds from exercises under stock plans
Excess tax benefits from stock option exercises
Purchase of common treasury shares—stock plan exercises
Net cash flows from financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents—beginning of year
Cash and cash equivalents—end of period
5
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 27, 2008 and the Condensed Consolidated Statements of Operations for the thirteen and thirty-nine week periods ended September 27, 2008 and September 29, 2007 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 27, 2008 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 29, 2007. 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 29, 2007. The results of operations for the periods ended September 27, 2008 are not necessarily indicative of the operating results for the full year.
At September 27, 2008, approximately 50.1% 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 $66,500 and $35,800 at September 27, 2008 and December 29, 2007, respectively.
Inventories consisted of the following:
Raw materials and purchased parts
Work-in-process
Finished goods and manufactured goods
Subtotal
LIFO reserve
Inventory
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, non-vested stock awards and bonuses of common
6
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
1. Summary of Significant Accounting Policies (Continued)
stock. At September 27, 2008, 1,698,000 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's compensation expense related to stock options (included in selling, general and administrative expenses) and associated tax benefits in fiscal 2008 and 2007 were as follows:
Compensation expense
Related tax benefits
Fair Value
On December 30, 2007, the Company adopted SFAS No. 157, Fair Value Measurements ("SFAS 157") which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 apply to other accounting pronouncements that require or permit fair value measurements. As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In February 2008, the FASB issued FASB Staff Position No. 157-2 (FSP 157-2), "Effective Date of FASB Statement 157." FSP 157-2 delayed for one year the applicability of SFAS 157's fair-value measurements to certain nonfinancial assets and liabilities. The Company adopted SFAS 157 in 2008, except as it applies to those nonfinancial assets and liabilities affected by the one-year delay.
SFAS 157 establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refers broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value.
7
Trading Securities: The assets and liabilities recorded for the investments held in the Valmont Deferred Compensation Plan represent mutual funds, invested in debt and equity securities, classified as trading securities in accordance with Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities, considering the employee's ability to change investment allocation of their deferred compensation at any time. Quoted market prices are available for these securities in an active market and therefore categorized as a Level 1 input.
Assets:
Trading Securities
Liabilities:
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued Statement 141R ("SFAS No. 141R"), Business Combinations. This Statement amends accounting and reporting standards associated with business combinations. This Statement requires the acquiring entity to recognize the assets acquired, liabilities assumed and noncontrolling interests in the acquired entity at the date of acquisition at their fair values, including noncontrolling interests. In addition, SFAS No. 141R requires that direct costs associated with an acquisition be expensed as incurred and sets forth various other changes in accounting and reporting related to business combinations. This Statement is effective for business combinations completed by the Company after December 27, 2008. The effect of this Statement on the Company's consolidated financial statements is expected to result in lower net income in years when it has acquisitions, since acquisition costs are expensed as incurred and higher values of intangible assets will be recorded in cases where the Company acquires less than 100% of a company.
In December 2007, the FASB issued Statement 160 ("SFAS No. 160"), Noncontrolling Interests in Consolidated Financial Statements. This Statement amended the accounting and reporting for noncontrolling interests in a consolidated subsidiary and for the deconsolidation of a subsidiary. Included in this statement is the requirement that noncontrolling interests be reported in the equity section of the balance sheet. This Statement is effective at the beginning of the Company's 2009 fiscal year. The Company expects that the effect of this Statement on its consolidated financial statements will increase shareholders' equity in that minority interest will be classified as part of shareholders' equity under this Statement.
Subsequent Event
In October 2008, the Company replaced its revolving credit agreement and the term loan with a new five-year $280 million revolving credit agreement described below. The Company repaid the
8
outstanding balances of its revolving credit agreement and the term loan with borrowings from the new revolving credit agreement.
On October 16, 2008, the Company entered into a new five-year $280 million revolving credit agreement with a group of banks. The Company may increase the credit agreement by up to an additional $100 million at any time, subject to the participating banks increasing the amount of their lending commitments. The interest rate on outstanding borrowings will be, at the Company's option, either:
The new revolving credit agreement has maintenance covenants that may limit the Company's additional borrowing capability under the agreement, similar to the covenants in the prior revolving credit agreement.
2. Acquisitions
In January 2008, the Company acquired substantially all of the assets of Penn Summit LLC (Penn Summit), a manufacturer of steel utility and wireless communication poles located in Hazelton, Pennsylvania, for approximately $57,904, including transaction costs. In addition, the Company assumed $96 of interest-bearing debt as part of the acquisition. The Company recorded $31,440 of goodwill as part of the purchase price allocation and assigned the goodwill to the Utility Support Structures segment. The Company financed the acquisition with cash balances and approximately $7,500 of borrowings through its revolving credit agreement. The Company acquired Penn Summit to expand its geographic presence in the United States for steel utility support structures.
In February 2008, the Company acquired 70% of the outstanding shares of West Coast Engineering Group, Ltd. (West Coast), a Canadian and U.S. manufacturer of steel and aluminum structures for the lighting, transportation and wireless communication industries headquartered in Delta, British Columbia, for $31,431 Canadian dollars ($31,472 U.S. dollars). In addition, $6,304 of interest-bearing debt was assumed as part of the acquisition. The purchase price was financed through the Company's revolving credit agreement. The Company recorded $19,438 of goodwill as part of the preliminary purchase price allocation and assigned the goodwill to the Engineered Support Structures (ESS) segment. The Company acquired West Coast to expand its geographic presence in Canada and the United States for lighting and transportation structures.
9
2. Acquisitions (Continued)
In July 2008, the Company acquired the assets of Site Pro 1, Inc. (Site Pro), a company that distributes wireless communication components for the U.S. market for $22,460 in cash. Site Pro is reported as part of the ESS segment. The acquisition was financed through the Company's revolving credit agreement. The Company recorded $703 of goodwill as part of the purchase price allocation and assigned the goodwill to the ESS segment. The Site Pro acquisition was completed to expand the Company's geographic distribution and service levels in wireless communication components.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the date of acquisition.
Current Assets
Property, plant and equipment and other long-term assets
Intangible assets
Total assets acquired
Current liabilities
Long-term debt
Minority Interest
Total liabilities assumed
Net assets acquired
The purchase price allocation on the West Coast acquisition was not finalized in the third quarter of 2008, as the fair value determinations on the real estate and other intangible assets acquired was not complete. The Company expects to finalize the purchase price allocations in the fourth quarter of 2008.
In the third quarter of 2008, the Company acquired the assets of Matco, Inc. (Matco), a company that provides consulting services related to corrosion protection, for $3,700 in cash. Matco is reported as part of the Utility Support Structures segment. The fair values of the assets and liabilities recorded as part of the Matco acquisition included: current assets, $693; current liabilities, $154; property, plant and equipment, $914; intangible assets, $914; and goodwill, $1,333. In addition, the Company formed a 51% owned joint venture in Turkey with a Turkish company to manufacture and sell pole structures. The Company's contribution for its 50% ownership was $4,472 in cash. This joint venture is reported as part of the ESS segment. The Company acquired Matco to expand its expertise in corrosion protection technologies. The Turkish joint venture was established to build its manufacturing base and distribution of pole structures in the Middle East and Central Asia.
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. In June 2008, the
10
Company acquired the remaining 30% of the outstanding shares of a North American Irrigation dealership from its minority shareholder for $848.
The Company's proforma results of operations for the thirteen and thirty-nine weeks ended September 29, 2007, assuming that the transaction occurred at the beginning of the periods presented are as follows:
Net income
Earnings per share—diluted
3. Goodwill and Intangible Assets
The Company's annual impairment testing of goodwill and intangible assets was performed during the third quarter of 2008. As a result of that testing, it was determined the goodwill and other intangible assets on the Company's Consolidated Balance Sheet were not impaired. The Company continues to monitor changes in the global economy that could impact future operating results of its reporting units and related components.
Amortized Intangible Assets
The components of amortized intangible assets at September 27, 2008 and December 29, 2007 were as follows:
Customer Relationships
Proprietary Software & Database
Patents & Proprietary Technology
Non-compete Agreements
11
3. Goodwill and Intangible Assets (Continued)
Amortization expense for intangible assets for the thirteen weeks ended September 27, 2008 and September 29, 2007 was $1,768 and $919, respectively. Amortization expense for intangible assets for the thirty-nine weeks ended September 27, 2008, and September 29, 2007 was $4,600 and $2,602, respectively. Estimated amortization expense related to amortized intangible assets is as follows:
2008
2009
2010
2011
2012
The useful lives assigned to amortized 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
Intangible assets with indefinite lives are not amortized. The carrying values of trade names at September 27, 2008 and December 29, 2007 were as follows:
PiRod
Newmark
Tehomet
Feralux
West Coast
Site Pro
Matco
The PiRod, Newmark, Tehomet and Feralux trade names were tested for impairment separately from goodwill in the third quarter of 2008. 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 27, 2008.
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 maintain the value of the intangible asset. The Company expects that these intangible assets will maintain their value indefinitely. Accordingly, these assets are not amortized.
12
The carrying amount of goodwill as of September 27, 2008 was as follows:
Balance December 29, 2007
Acquisitions
Foreign currency translation
Balance September 27, 2008
In January 2008, the Company acquired substantially all of the net operating assets of a steel utility pole manufacturer in Hazelton, Pennsylvania. This acquisition increased the goodwill in the Utility Support Structures segment by $31,440. In February 2008, the Company acquired 70% of the outstanding shares of a Canadian and U.S. manufacturer of steel and aluminum structures for the lighting, transportation and wireless communication industries headquartered in Delta, British Columbia. This acquisition increased the goodwill in the ESS segment by $19,438. In June 2008, the Company acquired the minority owner's shares in a North American irrigation dealership, resulting in a $202 increase of goodwill in the Irrigation segment. In the third quarter 2008, the Company acquired the assets of Site Pro and Matco that increased the goodwill of the ESS segment and the Utility Support Structures segment by $703 and $1,333, respectively.
13
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:
Interest
Income taxes
5. Earnings Per Share
The following table reconciles Basic and Diluted earnings per share (EPS):
Thirteen weeks ended September 27, 2008:
Shares outstanding
Per share amount
Thirteen weeks ended September 29, 2007:
Thirty-nine weeks ended September 27, 2008:
Thirty-nine weeks ended September 29, 2007:
At September 27, 2008 and September 29, 2007 there were no outstanding options with exercise prices exceeding the market prices of common stock. Accordingly, no option shares were excluded from the computations of diluted earnings per share for the periods presented.
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. Currency translation adjustment is the Company's only component of accumulated other
14
6. Comprehensive Income (Continued)
comprehensive income. The Company's total comprehensive income for the thirteen and thirty-nine weeks ended September 27, 2008 and September 29, 2007, respectively, were as follows:
Currency translation adjustment
Total comprehensive income
7. Business Segments
The Company aggregates its operating segments into four 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 based on employee headcounts and sales dollars.
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; and
IRRIGATION: This segment consists of the manufacture of agricultural irrigation equipment and related parts and services
In addition to these four reportable segments, the Company has other businesses that individually are not more than 10% of consolidated sales. These businesses, which include the manufacture of tubular products and the distribution of industrial fasteners, are reported in the "Other" category.
In 2007, the Company determined that its Tubing business did not meet the quantitative thresholds as a reportable segment. Accordingly, the Tubing business and its financial results are included in "Other". The Company reclassified information related to the Tubing business for 2007 to conform to the 2008 presentation.
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
15
7. Business Segments (Continued)
invested capital. The Company does not allocate interest expense, non-operating income and deductions, or income taxes to its business segments.
Sales:
Engineered Support Structures segment
Lighting & Traffic
Specialty
Utility
Utility Support Structures segment
Steel
Concrete
Coatings segment
Irrigation segment
Other
Intersegment Sales:
Engineered Support Structures
Utility Support Structures
Coatings
Irrigation
Net Sales
Consolidated Net Sales
Operating Income
Net corporate expense
Total Operating Income
16
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 27, 2008
Other income (deductions):
Earnings before income taxes, minority interest, and equity in earnings of nonconsolidated subsidiaries
Income tax expense:
Earnings before minority interest, and equity in earnings of nonconsolidated subsidiaries
17
8. Guarantor/Non-Guarantor Financial Information (Continued)
For the Thirty-nine Weeks Ended September 27, 2008
18
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSFor the Thirteen Weeks Ended September 29, 2007
19
For the Thirty-nine Weeks Ended September 29, 2007
20
CONDENSED CONSOLIDATED BALANCE SHEETSSeptember 27, 2008
Other intangible assets
Investment in subsidiaries and intercompany accounts
Common stock of $1 par value
Additional paid-in capital
Accumulated other comprehensive loss
21
CONDENSED CONSOLIDATED BALANCE SHEETS December 29, 2007
22
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Thirty-nine Weeks Ended September 27, 2008
Adjustments to reconcile net earnings to net cash flows from operations:
Stock based compensation
(Gain)/ Loss on sale of property, plant and equipment
Equity in (earnings)/losses of nonconsolidated subsidiaries
Changes in assets and liabilities:
Income taxes payable
Purchase of property, plant and equipment
23
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Thirty-nine Weeks Ended September 29, 2007
Loss on sale of property, plant and equipment
Acquisitions, net of cash aquired
*****
24
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 29, 2007. We aggregate our businesses into four reportable segments. See Note 7 to the Condensed Consolidated Financial Statements.
25
Results of Operations
Dollars in thousands, except per share amounts
Consolidated
as a percent of sales
SG&A expense
Net interest expense
Effective tax rate
Earnings per share-diluted
Operating income (loss)
26
Overview
General
The sales increases for the thirteen and thirty-nine week periods ended September 27, 2008, as compared with the same periods of 2007, were due to increased selling prices to recover higher raw material costs, acquisitions, currency translation effects and sales unit volume increases. The sales unit volume increases were mainly due to improved sales demand in the Irrigation and Coatings segments. Unit volumes in the Utility Support Structures and Engineered Support Structures (ESS) segments for the thirteen and thirty-nine week periods ended September 27, 2008 were comparable with the same periods in 2007. On a consolidated basis, sales unit volume increased approximately 10% for the thirteen weeks ended September 27, 2008, as compared with the same period in 2007. Year-to-date sales unit volumes in 2008 were approximately 9% over 2007. Our costs for hot-rolled steel products escalated rapidly throughout 2008, resulting in higher costs for the items we manufacture. Where possible, we increased sales prices to our customers to recover these increased costs.
The improvement in gross margin (gross profit as a percent of sales) for the thirteen and thirty-nine week periods ended September 27, 2008, as compared with the same periods of 2007, resulted mainly from improved factory productivity, improved sales pricing and the operational improvements in the North America specialty structures operations. On a segment basis, the most significant gross margin improvement was in the Coatings and Irrigation segments.
The increases in selling, general and administrative (SG&A) expenses for the thirteen and thirty-nine week periods ended September 27, 2008, as compared with the same periods in 2007, mainly resulted from:
These increases were somewhat offset by lower employee benefit costs (especially group medical expenses) for the year-to-date period ended September 27, 2008, as compared with 2007 (approximately $2.0 million) and decreased deferred compensation expense related to the investment performance of the marketable securities underlying the deferred compensation plan ($0.7 and $1.7 million for the thirteen and thirty-nine week periods ended September 27, 2008, respectively). We recorded the investment losses in these securities as "Other Expense" in our condensed consolidated statement of operations for the thirteen and thirty-nine week periods ended September 27, 2008. The impact of these investments on the condensed consolidated statement of operations for the thirteen weeks and thirty-nine weeks ended September 28, 2007 was not significant.
For the thirteen-week period ended September 27, 2008, all reportable segments contributed to the improved operating income in 2008 as compared with 2007 except the ESS segment, which reported slightly lower operating income in 2008. On a year-to-date basis, all reportable segments recorded higher operating income in 2008, as compared with 2007.
Net interest expense for the thirteen and thirty-nine weeks ended September 27, 2008 were comparable with the same periods in 2007, as the effect of higher average borrowing levels in 2008 on interest expense were largely offset by lower interest rates on our variable rate debt in 2008, as compared with 2007.
27
Our effective tax rate for the third quarter and year-to-date periods ended September 27, 2008 was higher as compared with 2007. Our income tax rate in 2007 was lower than normal and was principally associated with the realization of certain income tax benefits on transactions that occurred in prior years. These income tax benefits mainly related to the expiration of statutes of limitation. Other factors that contributed to a higher income tax rate in 2008, as compared with 2007, included higher taxes on our profits generated in China and Mexico due to changes in their respective income tax laws in late 2007 and lower tax credits realized in the U.S. in 2008, as compared with 2007.
Our cash flows provided by operations were $67.0 million for the thirty-nine weeks ended September 27, 2008, as compared with $55.2 million of cash provided by operations for the same period in 2007. The higher operating cash flows in 2008 principally resulted from increased earnings in 2008, partially offset by higher working capital required by the increased net sales realized in 2008, as compared with 2007.
Acquisitions and Divestitures
In 2007 and 2008, we acquired the following businesses:
In addition to these acquisitions, we acquired a small engineering services company located in Pittsburgh, Pennsylvania and formed a pole manufacturing joint venture in Turkey. We completed these acquisitions late in the third quarter of 2008 and they did not have a significant impact on our financial statements in 2008.
We report Tehomet, West Coast and Site Pro as part of the ESS segment and Penn Summit as part of the Utility Support Structures segment. In addition, we divested certain operations that were included as part of our "Other" businesses. These operations included our tubing operation in Waverly, Nebraska, which we closed in late 2007 and our French machine tool accessory operation, which we sold to a third party in January 2008.
The aggregate net increases of our net sales associated with these acquisitions and divestures for the thirteen and thirty-nine weeks ended September 27, 2008, as compared with the same periods in 2007 were approximately $21.0 million and $46.1 million, respectively. The operating income net increases for these periods over 2007 were approximately $4.9 million and $9.5 million, respectively.
Foreign Currency Translation
For the thirteen and thirty-nine week periods ended September 27, 2008, we realized approximately $9.8 million and $31.3 million, respectively, of increased sales related to the financial statement translation of our international operations into U.S. dollars. These translation effects also resulted in an increase in operating income for the thirteen and thirty-nine weeks ended September 27, 2008, as compared with the same periods in 2007 of approximately $1.6 million and $4.2 million, respectively.
28
Foreign currencies such as the Euro and the Brazilian Real were stronger in relation to the U.S. dollar through most of 2008, as compared with 2007. Accordingly, our sales denominated in those currencies translated to a higher amount of U.S. dollars in 2008, as compared with 2007.
The sales increases for the thirteen and thirty-nine week periods ended September 27, 2008, as compared with the same periods in 2007 were due to the increased sales prices to recover higher steel costs, currency translation impacts (approximately $7.1 million and $24.3 million, respectively) and the net effect of acquisitions and divestitures (approximately $10.6 million and $28.9 million, respectively). Unit volumes in all regions in 2008 were comparable with 2007 for the third quarter and on a year-to-date basis.
In North America, lighting and traffic structure sales in 2008 were higher than 2007, due to a combination of the West Coast acquisition, increased sales price increases and a modest increase in unit volume. In the transportation market channel, sales were higher in 2008, as compared with 2007, as highway spending funded through the U.S. and state programs was stronger than in 2007. Sales in the commercial market channel in 2008 were slightly lower than 2007, due predominantly to a weaker commercial construction market in the U.S. Sales of lighting structures to electrical utilities in 2008 lagged 2007, due to the recent weakness in the residential housing market. In Europe, sales in local currency were higher in 2008, as compared with 2007 due mainly to sales price increases to recover higher steel costs and the Tehomet acquisition, offset somewhat by weaker volumes in France. Sales of lighting structures in China in 2008 were higher than 2007, 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 2008, as compared with 2007, on both a quarterly and year-to-date basis. In North America, structure sales in the wireless communication market in 2008 improved over 2007. Sales of wireless communication components increased due to the Site Pro acquisition. Sales of wireless communication poles in China were down in 2008, as compared with 2007, both on a quarterly and year-to-date basis. We believe a major contributing factor to the decrease in wireless communication structures sales was reorganization of the Chinese wireless communication industry, which is causing some delays in ordering patterns for structures.
Segment operating income for the thirteen weeks ended September 27, 2008 was slightly below 2007. On a year-to-date basis, operating income in 2008 improved over 2007. The factors contributing to stronger operating earnings in 2008 included:
These improvements were largely offset by lower factory productivity in our North American lighting structures operations. Operating income from international operations was comparable to 2007, as currency translation effects (approximately $0.6 million and $2.3 million, respectively) offset increased market development expenses and lower operating income in China, which included start-up expenses related to our third plant in China. This manufacturing facility began production in the third quarter of 2008.
29
The increases in SG&A expense for the thirteen and thirty-nine weeks ended September 27, 2008, as compared with the same periods in 2007, were mainly due to:
The sales increases in the Utility Support Structures segment for the thirteen and thirty-nine weeks ended September 27, 2008, as compared with the same periods of 2007, were due to the acquisition of Penn Summit and sales price increases implemented to recover higher steel costs. Unit sales of transmission, substation and distribution pole structures to utility customers in 2008 was slightly lower than 2007, both on a quarterly and year-to-date basis, mainly due to customers delaying shipments to future dates. These delays typically relate to factors such as weather and construction delays. Order flow continues to be strong, as sales backlogs were at record levels as of September 27, 2008. The increase in demand for utility structures was the result of continued investment by utility companies to improve the electrical transmission and distribution infrastructure in the United States.
Gross profit increased in the third quarter of 2008, as compared with 2007 due to improved factory operating performance this year. The increases in SG&A spending for the thirteen and thirty-nine weeks ended September 27, 2008, as compared with the same periods in 2007, were primarily due to the Penn Summit acquisition ($2.6 million and $6.8 million, respectively) and increased salary, benefits and incentive expenses related to the higher sales activity and operating profit levels (approximately $1.1 million and $2.1 million, respectively).
Coatings segment sales for the thirteen and thirty-nine week periods ended September 27, 2008 were above 2007 levels, mainly due to increased demand for galvanizing services, offset to an extent by lower selling prices. In our galvanizing operations, pounds of steel galvanized (including intersegment sales) in 2008 for the thirteen and thirty-nine weeks ended September 27, 2008 increased over the same periods in 2007 by approximately 12% and 11%, 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.
The increases in operating income for the thirteen and thirty-nine weeks ended September 27, 2008 as compared with the same periods in 2007 were principally due to lower zinc costs, the impact of higher galvanizing volumes and improvement in our utilization of zinc. The main reason for the SG&A spending increases for the third quarter and year-to-date periods ended September 27, 2008, as compared with the same periods in 2007, were higher incentive expenses associated with increased operating profit this year.
For the thirteen and thirty-nine weeks ended September 27, 2008 the sales increases in the Irrigation segment, as compared with the same periods in 2007, were mainly due to higher sales volumes, although selling prices also increased in 2008, as compared with 2007, to recover higher steel costs. In global markets, higher farm commodity prices and net farm income in 2008 and 2007 resulted in improved demand for irrigation machines. Sales demand in international markets was stronger in 2008, as compared with 2007, in most geographic regions, with the most significant sales increases
30
taking place in Brazil, the Middle East and the Pacific Rim. In North America, demand for irrigation machines and service parts in 2008 was also enhanced due to machines that were damaged by a pattern of severe storms in the U.S.
The increase in operating income for the thirteen and thirty-nine weeks ended September 27, 2008, as compared with the same periods in 2007, was due to improved sales volumes, sales price increases to offset steel cost increases and operating leverage realized through control of SG&A spending. The increases in SG&A spending for the thirteen and thirty-nine weeks ended September 27, 2008, as compared with the same periods in 2007 were mainly attributable to increased employee incentives associated with improved operational performance ($0.9 million and $2.2 million, respectively) and increased salary and benefit expense for additional administrative personnel ($1.2 million and $3.2 million, respectively).
This mainly includes our tubing, industrial fastener and French machine tool accessories operations. The decreases in sales for the thirteen and thirty-nine weeks ended September 27, 2008, as compared with the same periods in 2007, was due to the sale of our machine tool accessory operation in early 2008 and the closure of a small tubing facility in late 2007. The impact of these actions on our operating income was not significant.
The increase in net corporate expenses for the thirteen weeks ended September 27, 2008, as compared with 2007, were due to higher compensation costs. On a year-to-date basis, net corporate expense was comparable with 2007. Items of lower expense in 2008 included:
Items of greater expense in the year to date period in 2008 included higher employee incentives due to improved earnings and common stock price (which is used to value certain long-term management incentives) this year (approximately $1.1 million) and increased stock-based compensation expense in 2008 (approximately $0.6 million).
Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows—Net working capital was $410.7 million at September 27, 2008, as compared with $350.6 million at December 29, 2007. The ratio of current assets to current liabilities was 2.20:1 at September 27, 2008, as compared with 2.29:1 at December 29, 2007. The increase in net working capital and the current ratio mainly relates to increases in accounts receivable and inventories associated with higher sales activity and increased backlogs in 2008, as compared with 2007. Cash flow provided by operations was $67.0 million for the thirty-nine week period ended September 27, 2008, as compared with $55.2 million provided by operations for the same period in 2007. The increase in operating cash flows in 2008, as compared with 2007, related primarily to increased net earnings offset by an increase in working capital in 2008, as compared with 2007. In 2008 and 2007, we distributed $589 and $9,186, respectively, from our non-qualified deferred compensation plan to participants under the transition rules of section 409A of the Internal Revenue Code.
31
Investing Cash Flows—Capital spending during the thirty-nine weeks ended September 27, 2008 was $38.9 million, as compared with $42.9 million for the same period in 2007. Our capital spending in 2008 and 2007 included additional manufacturing capacity for ESS, Utility Support Structures and Irrigation segments. We expect that our capital spending for the 2008 fiscal year will be between $55 million and $60 million.
Investing cash flows in 2008 also reflected the aggregate of $119.0 million of cash paid for the acquisitions completed in 2008. In 2007, we spent approximately $16.9 million (net of cash acquired) to acquire 70% of the outstanding stock of Tehomet Oy, a Finnish manufacturer of lighting structures and the remaining 20% of our Canadian aluminum pole manufacturing operation.
The cash used to pay the 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 periods ended September 27, 2008 and September 29, 2007, respectively.
Financing Cash Flows—Our total interest-bearing debt increased from $238.3 million as of December 29, 2007 to $295.7 million as of September 27, 2008, which was reported as an increase in financing cash flows for the thirty-nine weeks ended September 27, 2008. The main reasons for the increase in borrowings relate to the debt that we incurred to fund the 2008 acquisitions (approximately $70 million) and approximately $6.4 million of debt that we assumed as part of the West Coast and Penn Summit acquisitions. We funded the Penn Summit acquisition in part through approximately $50 million of our cash balances.
Sources of Financing and Capital
We have historically funded our growth, capital spending and acquisitions through a combination of operating cash flows and debt financing. We have an internal long-term objective to maintain long-term debt as a percent of invested capital at or below 40%. At September 27, 2008, our long-term debt to invested capital ratio was 27.0%, as compared with 27.3% at December 29, 2007. We may exceed our internal objective of 40% 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 we completed in 2004. Subject to our level of acquisition activity and steel industry operating conditions (which could affect the levels of inventory we need to fulfill customer commitments), we plan to maintain this ratio below 40% in 2008.
Our debt financing at September 27, 2008 consisted primarily of long-term debt. We also maintain certain short-term bank lines of credit totaling $32.5 million, $20.5 million which was unused at September 27, 2008. Our long-term debt at September 27, 2008 principally consisted of:
32
rate on borrowings outstanding under this agreement at September 27, 2008 was 3.30% per annum.
These debt agreements include certain covenants that require us to maintain certain coverage ratios and may limit us with respect to certain business activities. At September 27, 2008, we were in compliance with all covenants related to our debt agreements.
Subsequent to September 27, 2008, we replaced the revolving credit agreement and the term loan with a new $280 million revolving credit facility described below. We repaid the outstanding balances of the revolving credit agreement and the term loan with borrowings from the new revolving credit facility.
On October 16, 2008, we entered into a new five-year $280 million revolving credit agreement with a group of banks. We may increase the credit facility by up to an additional $100 million at any time, subject to participating banks increasing the amount of their lending commitments. The interest rate on our borrowings will be, at our option, either:
The new revolving credit agreement has maintenance covenants that may limit our additional borrowing capability under the agreement, similar to the covenants in our prior revolving credit agreement.
FINANCIAL OBLIGATIONS AND FINANCIAL COMMITMENTS
Other than our new revolving credit agreement, 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 29, 2007.
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 29, 2007.
Critical Accounting Policies
There have been no changes in the Company's critical accounting policies during the quarter ended September 27, 2008. These policies are described on pages 39-42 in our Form 10-K for fiscal year ended December 29, 2007.
33
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There were no material changes in the company's market risk during the quarter ended September 27, 2008. For additional information, refer to the section "Risk Management" on pages 38-39 in our Form 10-K for the fiscal year ended December 29, 2007.
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 2008, the Company implemented various process and information systems enhancements, principally related to the implementation of enterprise resource planning software and related business improvements in its Brenham, Texas operation that is part of the ESS 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, the Company's internal control over financial reporting.
34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
June 29, 2008 to July 26, 2008
July 27, 2008 to Aug. 30, 2008
Aug. 31, 2008 to Sept. 27, 2008
Total
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 July 28, 2008, the Company's Board of Directors declared a quarterly cash dividend on common stock of 13 cents per share, which was paid on October 15, 2008, to stockholders of record September 26, 2008. The indicated annual dividend rate is 52 cents per share.
Item 6. Exhibits
35
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.
36
List of Exhibits
37
QuickLinks