UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 2005 or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-31429
VALMONT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
47-0351813
(State or other jurisdiction ofincorporation or organization )
(I.R.S. EmployerIdentification No.)
One Valmont Plaza, Omaha, Nebraska
68154-5215
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
402-963-1000
(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. x Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). x Yes o No
24,371,551
Outstanding shares of common stock as of April 27, 2005
Index is located on page 2.
Total number of pages 29.
VALMONT INDUSTRIES, INC. AND SUBSIDIARIESINDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations for the thirteen weeks ended March 26, 2005 and March 27, 2004
3
Condensed Consolidated Balance Sheets as of March 26, 2005 and December 25, 2004
4
Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended March 26, 2005 and March 27, 2004
5
Notes to Condensed Consolidated Financial Statements
6-18
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19-25
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
25
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
26
Item 4
Submission of Matters to a Vote of Security Holders
Item 6.
Exhibits
SIGNATURES
27
2
VALMONT INDUSTRIES, INC. AND SUBSIDIARIESPART I. FINANCIAL INFORMATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Dollars in thousands, except per share amounts)(Unaudited)
Thirteen Weeks Ended
March 26,2005
March 27,2004
Product sales
$
247,792
196,648
Services sales
17,949
19,249
Net sales
265,741
215,897
Product cost of sales
190,010
149,454
Services cost of sales
14,070
15,163
Total cost of sales
204,080
164,617
Gross profit
61,661
51,280
Selling, general and administrative expenses
45,554
39,531
Operating income
16,107
11,749
Other income (deductions):
Interest expense
(4,827
)
(2,398
Interest income
237
276
Miscellaneous
(148
14
(4,738
(2,108
Earnings before income taxes, minority interest and equity in losses of nonconsolidated subsidiaries
11,369
9,641
Income tax expense (benefit):
Current
2,612
5,845
Deferred
1,532
(2,316
4,144
3,529
Earnings before minority interest and equity in losses of nonconsolidated subsidiaries
7,225
6,112
Minority interest
(349
(455
Equity in losses of nonconsolidated subsidiaries
(66
(156
Net earnings
6,810
5,501
Earnings per share—Basic:
Earnings per share—Basic
0.28
0.23
Earnings per share—Diluted:
Earnings per share—Diluted
0.27
0.22
Cash dividends per share
0.08
Weighted average number of shares of common stock outstanding (000 omitted)
24,111
23,846
Weighted average number of shares of common stock outstanding plus dilutive potential common shares (000 omitted)
25,042
24,520
See accompanying notes to condensed consolidated financial statements.
VALMONT INDUSTRIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(Dollars in thousands)(Unaudited)
December 25,2004
ASSETS
Current assets:
Cash and cash equivalents
37,031
30,210
Receivables, net
172,681
188,512
Inventories
176,424
186,988
Prepaid expenses
11,809
8,408
Refundable and deferred income taxes
12,472
14,387
Total current assets
410,417
428,505
Property, plant and equipment, at cost
494,264
493,997
Less accumulated depreciation and amortization
294,235
288,342
Net property, plant and equipment
200,029
205,655
Goodwill
106,058
106,022
Other intangible assets, net
62,435
63,337
Other assets
32,231
32,589
Total assets
811,170
836,108
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt
7,373
7,962
Notes payable to banks
1,806
4,682
Accounts payable
69,354
69,979
Accrued expenses
58,793
66,506
Dividends payable
1,945
1,932
Total current liabilities
139,271
151,061
Deferred income taxes
44,547
42,639
Long-term debt, excluding current installments
293,482
314,813
Other noncurrent liabilities
23,663
22,833
Minority interest in consolidated subsidiaries
9,928
10,107
Shareholders’ equity:
Preferred stock
—
Common stock of $1 par value
27,900
Retained earnings
330,498
324,748
Accumulated other comprehensive income
763
3,499
Treasury stock
(56,694
(59,200
Unearned restricted stock
(2,188
(2,292
Total shareholders’ equity
300,279
294,655
Total liabilities and shareholders’ equity
VALMONT INDUSTRIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands)(Unaudited)
Cash flows from operations:
Adjustments to reconcile net earnings to net cash flows from operations:
Depreciation and amortization
9,751
8,520
(Gain)/loss on sale of property, plant and equipment
(50
48
66
156
349
455
Other adjustments
(684
20
Changes in assets and liabilities:
Receivables
13,996
1,364
8,821
(16,039
(3,504
976
614
1,359
(7,143
(3,510
828
(136
Income taxes payable
2,420
1,779
Net cash flows from operations
33,806
(1,823
Cash flows from investing activities:
Purchase of property, plant & equipment
(4,045
(3,428
Investment in nonconsolidated subsidiary
(2,450
Proceeds from sale of property and equipment
376
160
Dividends to minority interests
(90
(596
Other, net
562
(218
Net cash flows from investing activities
(3,197
(6,532
Cash flows from financing activities:
Net borrowings (payments) under short-term agreements
(2,845
5,446
Principal payments on long-term obligations
(21,916
(4,698
Dividends paid
(1,932
(1,921
Proceeds from exercises under stock plans
3,861
620
Purchase of common treasury shares-Stock plan exercises
(78
Net cash flows from financing activities
(23,050
(631
Effect of exchange rate changes on cash and cash equivalents
(738
(162
Net change in cash and cash equivalents
6,821
(9,148
Cash and cash equivalents—beginning of period
33,345
Cash and cash equivalents—end of period
24,197
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited)
1. Summary of Significant Accounting Policies
Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of March 26, 2005 and the Condensed Consolidated Statements of Operations for the thirteen week periods ended March 26, 2005 and March 27, 2004 and the Condensed Consolidated Statements of Cash Flows for the thirteen week periods then ended have been prepared by the Company, without audit. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) have been made to present fairly the financial statements as of March 26, 2005 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 25, 2004. 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 25, 2004. The results of operations for the periods ended March 26, 2005 are not necessarily indicative of the operating results for the full year.
At March 26, 2005, approximately 52% 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 $30,300 and $30,700 at March 26, 2005 and December 25, 2004, respectively.
Inventories consisted of the following:
Raw materials and purchased parts
110,172
121,484
Work-in-process
18,648
20,696
Finished goods and manufactured goods
77,905
75,526
Subtotal
206,725
217,706
LIFO reserve
30,301
30,718
Net 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, restricted stock awards and bonuses of common
6
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands) (Unaudited)
stock. At March 26, 2005, 1,146,593 shares of common stock remained available for issuance under the plans. Shares and options issued and available are subject to changes in capitalization.
Under the plans, the exercise price of each option equals the market price at the time of the grant. Options vest beginning on the first anniversary of the grant in equal amounts over three to six years or on the fifth anniversary of the grant. Expiration of grants is from six to ten years from the date of grant.
The Company accounts for those plans under the recognition and measurement principles of APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations. No compensation cost associated with stock options is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Thirteen weeks ended
Net earnings as reported
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
109
65
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
433
487
Pro forma net earnings
6,486
5,079
Earnings per share
As reported: Basic
Diluted
Pro forma: Basic
0.21
0.26
Recently Issued Accounting Pronouncements
On December 16, 2004, the FASB issued Statement No. 123 (revised 2004) (“SFAS No. 123R”), Share-Based Payment. SFAS No. 123R will require the Company to measure the cost of all employee stock-based compensation awards based on the grant date fair value of those awards and to record that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). Excess tax benefits, as defined by this Statement, will be recognized as an addition to paid-in capital. SFAS No. 123R is effective at the beginning of the Company’s first quarter of fiscal 2006. The Company is currently evaluating the expected impact that the adoption of SFAS No. 123R will have on results of operations and cash flows.
7
2. Acquisitions
On April 16, 2004, the Company acquired all the outstanding shares of Newmark International, Inc. and the results of Newmark are included in the condensed consolidated financial statements of the Company since that date.
On May 24, 2004, the Company acquired all the outstanding shares of W.J. Whatley, Inc and Whatley’s operations are included in the Company’s condensed consolidated financial statements since the acquisition date.
On August 2, 2004, the Company acquired substantially all the net assets of Sigma Industries, Inc. and Sigma’s operations are included in the Company’s condensed consolidated financial statements since the acquisition date.
The Company’s summary proforma results of operations for the thirteen weeks ended March 27, 2004, assuming that these transactions occurred at the beginning of the periods presented are as follows:
Thirteen Weeks EndedMarch 27, 2004
243,036
Net income
5,678
Earnings per share-diluted
3. Goodwill and Intangible Assets
The Company’s annual impairment testing on its reporting units was performed during the third quarter of 2004. As a result of that testing, it was determined the goodwill and other intangible assets on the Company’s Consolidated Balance Sheet at September 25, 2004 were not impaired.
Amortized Intangible Assets
The components of amortized intangible assets at March 26, 2005 and December 25, 2004 were as follows:
As of March 26, 2005
GrossCarryingAmount
AccumulatedAmortization
WeightedAverageLife
Customer Relationships
47,691
5,631
18 years
Proprietary Software & Database
2,609
1,451
6 years
Patents & Proprietary Technology
2,839
170
14 years
Non-compete Agreements
331
49
5 years
53,470
7,301
8
As of December 25, 2004
4,911
1,335
120
33
6,399
Amortization expense for intangible assets during the first quarter of 2005 and 2004 was $902 and $322, respectively. Estimated amortization expense related to amortized intangible assets is as follows:
EstimatedAmortizationExpense
2005
3,606
2006
3,359
2007
3,276
2008
2009
3,244
2010
3,210
Non-amortized intangible assets
Under the provisions of SFAS 142, intangible assets with indefinite lives are not amortized. The carrying value of the PiRod, Newmark, and Sigma trade names are $4,750, $11,111, and $405 respectively. The Newmark and Sigma amounts arose from the 2004 acquisitions and the PiRod amount (which arose from a 2001 acquisition) has not changed in the thirteen weeks ended March 26, 2005.
The indefinite lived intangible assets were tested for impairment separately from goodwill in the third quarter of 2004. 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 25, 2004.
The carrying amount of goodwill as of March 26, 2005 was as follows:
EngineeredSupportStructuresSegment
UtilitySupportStructuresSegment
CoatingsSegment
IrrigationSegment
TubingSegment
Total
Balance December 25, 2004
19,959
42,628
42,192
981
262
Foreign Currency Translation
36
Balance March 26, 2005
19,995
9
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 thirteen weeks ended were as follows:
Interest
2,292
2,280
Income Taxes
175
4,015
5. Earnings Per Share
The following table provides a reconciliation between Basic and Diluted earnings per share:
BASICEPS
DILUTIVEEFFECTOFSTOCKOPTIONS
DILUTEDEPS
March 26, 2005:
Shares outstanding
931
Per share amount
.01
March 27, 2004:
674
At March 26, 2005 and March 27, 2004, there were 0.1 million and 0.5 million options outstanding, respectively, with exercise prices exceeding the market value of common stock that were therefore excluded from the computation of shares contingently issuable upon exercise of the options.
10
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 weeks ended March 26, 2005 and March 27, 2004, respectively, were as follows:
Net derivative adjustment
35
Currency translation adjustment
(2,771
(942
Total comprehensive income
4,074
4,559
7. Business Segments
The Company reports its businesses as five reportable segments:
Engineered Support Structures: This segment consists of the manufacture of engineered metal structures and components for the lighting 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.
11
In the fourth quarter of fiscal 2004, the Company reorganized its management reporting structure to better serve the electrical utility structure market. The Company’s North American Utility business, formerly included within the Utility product line in the Engineered Support Structures segment, was combined with the Concrete Support Structures segment and is collectively referred to as the Utility Support Structures segment. Figures for 2004 have been reclassified to conform to the 2005 presentation.
Sales:
Engineered Support Structures segment:
Lighting & Traffic
88,278
68,259
Specialty
16,148
15,323
Utility
4,416
3,955
108,842
87,537
Utility Support Structures segment
Steel
43,572
22,939
Concrete
15,461
59,033
Coatings segment
18,993
22,656
Irrigation segment
69,946
80,099
Tubing segment
22,067
17,323
Other
4,819
4,360
283,700
234,914
Intersegment Sales:
Engineered Support Structures
9,072
9,947
Utility Support Structures
517
1,093
Coatings
3,611
3,682
Irrigation
152
Tubing
3,810
3,315
942
17,959
19,017
Net Sales
99,770
77,590
58,516
21,846
15,382
18,974
69,939
79,947
18,257
14,008
3,877
3,532
Consolidated Net Sales
Operating Income (loss):
5,624
3,662
4,388
(2,221
766
466
7,220
11,845
3,259
2,085
(759
(492
Net corporate expense
(4,391
(3,596
Total Operating Income
12
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 our 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 Parent Company, the Guarantor subsidiaries and the Non-Guarantor subsidiaries is as follows:
Condensed Consolidated Statements of OperationsFor the Thirteen Weeks Ended March 26, 2005
Parent
Guarantors
Non-Guarantors
Eliminations
154,301
43,013
68,175
(17,697
11,779
7,443
2,339
(3,612
166,080
50,456
70,514
(21,309
120,295
36,016
51,823
(18,124
9,598
6,346
1,738
129,893
42,362
53,561
(21,736
36,187
8,094
16,953
427
24,808
7,950
12,796
11,379
144
4,157
(4,716
(11
(124
24
231
(24
(13
(141
(4,703
(1
(34
Earnings before income taxes, minority interest and equity in earnings / (losses) of nonconsolidated subsidiaries
6,676
143
4,123
Income tax expense:
877
129
1,606
1,888
(91
(265
2,765
38
1,341
Earnings before minority interest, and equity in earnings / (losses) of nonconsolidated subsidiaries
3,911
105
2,782
Equity in earnings / (losses) of nonconsolidated subsidiaries
2,472
(82
(2,456
6,383
2,351
(2,029
13
Condensed Consolidated Statements of Operations
For the Thirteen Weeks Ended March 27, 2004
133,921
23,847
49,398
(10,518
11,786
8,453
2,692
(3,682
145,707
32,300
52,090
(14,200
103,501
19,709
36,830
(10,586
9,605
7,295
113,106
27,004
38,775
(14,268
32,601
5,296
13,315
68
23,554
6,274
9,703
9,047
(978
3,612
(2,202
(81
(158
43
44
264
(43
(12
21
(2,170
(65
127
6,877
(1,043
3,739
4,813
(947
1,979
304
(418
2,611
(643
1,561
4,266
(400
2,178
1,167
(1,323
5,433
1,723
(1,255
CONDENSED CONSOLIDATED BALANCE SHEETS
March 26, 2005
9,323
1,533
26,175
76,980
23,870
71,855
77,961
40,897
57,566
3,450
842
7,517
7,209
3,297
1,966
174,923
70,439
165,079
322,455
73,691
98,118
205,826
26,363
62,046
116,629
47,328
36,072
20,370
73,376
12,312
Other intangible assets
819
58,952
2,664
Investment in subsidiaries and intercompany accounts
340,669
40,046
(6,614
(374,101
32,660
1,471
(1,900
686,070
290,141
210,984
(376,025
4,844
2,503
21,865
7,799
39,690
36,657
4,625
17,535
65,311
12,450
61,534
18,894
21,774
3,879
292,127
87
3,168
22,445
1,218
14,248
10,344
(24,592
Additional paid-in capital
159,082
71,825
(230,907
318,275
82,500
48,325
(118,602
287,293
255,830
131,257
15
VALMONT INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands)(Unaudited)
December 25, 2004
966
3,694
25,550
79,280
28,310
80,975
(53
95,922
38,488
53,802
(1,224
2,382
915
5,111
9,389
3,042
1,956
187,939
74,449
167,394
(1,277
321,074
72,727
100,196
201,559
24,403
62,380
119,515
48,324
37,816
73,375
12,277
832
59,771
2,734
352,291
35,367
(8,566
(379,092
32,554
41
1,894
713,501
291,327
213,549
(382,269
4,860
3,076
21,382
10,312
38,285
41,692
5,771
19,096
69,866
16,109
65,139
16,854
21,610
4,175
313,368
94
3,251
21,600
1,233
325,405
80,184
43,976
(124,817
291,813
253,514
129,644
(380,316
16
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Thirteen Weeks Ended March 26, 2005
5,367
2,613
1,771
(Gain) / loss on sale of property, plant and equipment
(5
(49
Equity in (earnings) / losses of nonconsolidated subsidiaries
(16
82
(247
(437
2,301
4,439
7,256
17,962
(2,410
(6,306
(425
(1,067
73
(2,510
483
(2,514
2,645
(5,040
(1,146
(933
845
(17
2,334
86
31,197
1,064
4,023
(2,478
Purchase of property, plant and equipment
(2,042
(801
(1,202
Proceeds from sale of property, plant and equipment
367
Proceeds from minority interests
(1,254
(2,424
1,762
2,478
(3,294
(3,218
837
Net repayments under short-term agreements
Principal payments on long-termobligations
(21,257
(7
(652
Purchase of common treasury shares:
Stock plan exercises
(19,546
(3,497
8,357
(2,161
625
Cash and cash equivalents—beginning of year
Cash and cash equivalents—end of year
17
5,636
1,145
1,739
46
(26
(6,130
4,992
2,459
(8,510
(1,369
(6,091
(69
76
(199
1,099
6,874
(3,998
(1,517
(2,367
(799
(301
(46
(1,898
2,494
1,183
(2,917
2,170
248
(1,324
(2,050
(225
(1,153
(1,936
(514
158
(1,681
(1,796
1,935
1,324
(5,665
(2,021
(170
Net borrowings under short-term agreements
10,000
(4,554
(4,073
(608
4,548
(5,162
(4,034
132
(5,246
1,982
612
30,751
(2,052
744
25,505
18
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 discussions 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 25, 2004. We report our businesses as five reportable segments. See Note 7 to the Condensed Consolidated Financial Statements. In the fourth quarter of fiscal 2004, we reorganized our management reporting structure to better serve the electrical utility structure market. Our North American Utility business, formerly included within the Utility product line in the Engineered Support Structures segment, was combined with the Concrete Support Structures segment and is collectively referred to as the Utility Support Structures segment. Figures for 2004 have been reclassified to conform to the 2005 presentation.
Dollars in thousands, except per share amounts
March 26,
March 27,
2004
% Incr.(Decr)
Consolidated
23.1
%
20.2
as a percent of sales
23.2
23.8
SG&A expense
15.2
17.1
18.3
37.1
6.1
5.4
Net interest expense
4,590
2,122
116.3
Effective tax rate
36.4
36.6
22.7
Engineered Structures segment
28.6
24,720
20,984
17.8
17,322
10.2
53.6
19
167.9
11,139
1,854
500.8
6,751
4,075
65.7
Operating income (loss)
NM
–18.9
3,013
3,065
–1.7
2,247
2,599
–13.5
64.4
–12.5
16,770
21,240
–21.0
9,550
9,395
1.6
–39.0
30.3
4,894
3,487
40.3
1,635
1,402
16.6
56.3
9.8
1,127
1,153
–2.3
1,886
1,645
14.7
–54.3
Net Corporate expense
(2
(502
4,389
3,094
41.9
–22.1
NM = Not meaningful
Overview
In 2004, we completed the acquisition of Newmark International, Inc. (Newmark), a manufacturer of concrete and steel pole structures mainly for the utility industry, W.J. Whatley, Inc. (Whatley), a manufacturer of fiberglass poles principally for outdoor lighting applications and Sigma Industries, Inc. (Sigma), a manufacturer of overhead sign structures mainly serving the eastern United States. Newmark is reported as part of the Utility Support Structures segment and Whatley and Sigma are reported as part of the Engineered Support Structures (ESS) segment. The results of these operations were included in our consolidated results starting on the closing dates of the acquisitions, which were subsequent to the first quarter of 2004. Accordingly, the first quarter of 2004 does not include the sales or operating results of these acquired businesses.
Net sales increased for the fiscal first quarter of 2005 as compared with 2004, mainly due to the impact of acquisitions completed in 2004 (approximately $27 million) and higher selling prices due to increased steel costs. While improved sales volumes were realized in the Utility Support Structures segment and our
ESS segment operations in Europe, we experienced lower sales volumes in the Irrigation and Coatings segments. Throughout much of 2004, we responded to rapid escalation of steel prices by increasing our selling prices where feasible to recover as much of these cost increases as possible. In the first quarter of 2005, steel prices were relatively unchanged as compared with the 2004 fiscal year end. Gross profit as a percentage of sales was down slightly as compared with 2004, mainly due to lower gross profit margins in the Irrigation and ESS segments, offset somewhat by improved gross margins in our other segments. The increase in selling, general and administrative (SG&A) spending in 2005 as compared with 2004 principally related to the businesses acquired after the end of the first quarter of 2004 (approximately $3.9 million) and approximately $1.0 million of increased employee incentives, which resulted from improved operating performance this year. The increase in operating income in 2005 as compared with 2004 was due to improved profitability of the ESS, Utility Support Structures, Tubing and Coatings segments, offset somewhat by lower operating profits in the Irrigation segment.
Interest expense increased in the first quarter of 2005 as compared with 2004, mainly due to increased borrowing levels this year. Average borrowing levels were higher in the first quarter of 2005 mainly due to the 2004 acquisitions. The Newmark, Whatley and Sigma acquisitions were financed through $138.0 million of increased borrowings, which consisted of $125.4 million cash paid for these businesses and approximately $12.6 million in assumed debt. Our cash flow from operations of $33.8 million resulted from improved earnings and lower working capital levels and were used to reduce our interest-bearing debt by approximately $24.8 million. This reduction in interest-bearing debt lowered our long-term debt to invested capital ratio from 46.3% to 44.2% for the thirteen weeks ended March 26, 2005.
Engineered Support Structures (ESS) segment
In the ESS segment, sales in the first quarter of 2005 improved, as compared with 2004, in North America and Europe, offset somewhat by lower sales in China. The sales increases were due mainly to sales price increases in response to increased steel costs and the acquisitions of Whatley and Sigma (approximately $4.2 million).
In North America, lighting and traffic sales were supported by stability in government programs to fund road and highway improvements, despite the lack of new federal highway legislation. Some legislative progress appears to have been made recently and we believe that a new multi-year spending program will be enacted in 2005. Commercial lighting sales volumes were higher in 2005 as compared with 2004, mainly the result of the Whatley acquisition (approximately $2.8 million). In Europe, lighting sales were higher than 2004, due to a combination of higher selling prices to offset higher steel costs and some improvement in economic conditions in our main market areas.
Sales in Specialty Structures products increased as compared with 2004, as higher sales in North America were somewhat offset by a reduction of approximately $2.7 million of sales in China. In North America, market conditions for sales of structures and components for the wireless communication market were similar to 2004, as the sales increase was attributable to sales price increases. Sign structure sales increased principally due to the Sigma acquisition (approximately $1.4 million). Sales of wireless communication poles in China decreased in the first quarter of 2005 as compared with record first quarter sales in 2004, when sales doubled over 2003 levels. We believe China will continue to expand and improve its wireless networks to accommodate growing demand for wireless communication services.
The increase in the profitability of the ESS segment for the thirteen weeks ended March 26, 2005 as compared with the same period in 2004 was the result of stronger earnings in North America and Europe, offset to a degree to lower earnings in China. In North America, improved pricing in the Lighting and Traffic product line contributed to the increase in earnings for the segment, as sales price increases implemented throughout 2004 generally lagged steel cost increases. In Europe, earnings improved by $2.3 million as compared with the first quarter of 2004, which was the result of cost structure reductions
taken in 2004 and improved sales volumes. In China, earnings decreased $1.3 million as compared with 2004. The reasons for lower earnings are related to lower sales volumes and competitive pricing pressures that are not allowing us to fully recover our steel cost increases in the marketplace.
This segment includes the operations of Newmark since its acquisition on April 16, 2004 and the North American utility structure operations that were previously part of the ESS segment. The increase in sales in 2005 as compared with 2004 was due to a combination of Newmark (approximately $23 million), improved sales volumes due to overall increased spending by utility companies and independent power producers for structures for transmission, substation and distribution applications (approximately $8 million) and increased selling prices in light of higher steel costs. In the first quarter of 2004, we experienced low margins due to significant competitive pricing pressures that existed throughout most of 2003 and the beginning of 2004. The pricing environment improved thereafter, which resulted in improved gross margins for the segment in 2005. The improved earnings for this segment as compared with 2004 relate to the acquisition of Newmark (approximately $2.3 million), improved pricing (approximately $2.0 million) and sales volume increases. The increase in SG&A spending was related primarily to the acquisition of Newmark in April 2004 (approximately $3.5 million).
The decrease in sales in the first quarter of 2005 as compared with the same period in 2004 primarily resulted from lower anodizing volumes, principally from one customer. In the galvanizing operations, sales were level with 2004, as the industrial economies in our market areas were comparable to 2004. Spending reductions in our factories largely mitigated the impact of lower sales and higher natural gas and zinc prices on gross profit. The increase in operating income resulted from lower SG&A spending, most of which was attributable to reduced compensation costs.
Sales were down due to an approximate 25% reduction in sales volumes in global markets, offset to an extent by higher selling prices to offset higher steel costs. In North America, we believe lower farm commodity prices and higher farm input costs (especially energy and fertilizer) contributed to reduced demand for irrigation machines and related service parts. International sales in the first quarter of 2005 were flat as compared with the first quarter of 2004, as higher selling prices were essentially offset by lower sales demand in our major markets. The reasons for the lower international sales demand were similar to those that impacted sales volumes in North America.
The decrease in operating income for the thirteen weeks ended March 26, 2005 as compared with the same period in 2004 was due to the lower sales volumes experienced in most major markets. The lower sales volumes also negatively affected factory utilization, the operating income impact of which was approximately $1.6 million for the first quarter of 2005, as compared with 2004.
The increase in Tubing sales for the first quarter of 2005 as compared with last year was due to sales price increases associated with increased steel costs, offset somewhat by slightly lower unit sales volumes. The increase in 2005 operating income as compared with 2004 was due to a more favorable pricing environment than in the first quarter of 2004 and some improvement in factory operations. SG&A spending increased in 2005 as compared with the same period in 2004, mainly due to increased employee incentives associated with increased profitability and higher sales commissions related to increased sales.
22
This includes our industrial fastener business, our machine tool accessories operation in France and the development costs associated with our wind energy structure initiative. The main reason for the decrease in profitability this year was higher spending related to wind energy.
The most significant item that resulted in increased net corporate expenses in 2005 as compared with 2004, related to increased employee incentives due to improved earnings this year (approximately $0.7 million).
Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows—Net working capital was $271.1 million at March 26, 2005, as compared with $277.4 million at December 25, 2004. The ratio of current assets to current liabilities was 2.95:1 at March 26, 2005, as compared with 2.84:1 at December 25, 2004. Operating cash flow was a net inflow of $33.8 million for the thirteen week period ended March 26, 2005, as compared with a net outflow of $1.8 million for the same period in 2004. The main reasons for the improvement in operating cash flows from 2004 to 2005 were increased net earnings this year, increased depreciation and amortization expenses in 2005 (due mainly to fixed assets and finite-lived intangible assets recognized as part of the acquisitions completed in 2004) and lower working capital levels. Inventories increased throughout most of 2004, which resulted from steel price increases and increased quantities of steel that were purchased due to shortages and extended lead times. Inventories peaked in the third quarter of 2004 and decreased somewhat in the fourth quarter of 2004. We further reduced inventory levels in the first quarter of 2005 and plan to continue reducing inventories over the remainder of 2005. The speed of any future inventory reductions will be a function of factors such as market conditions in our businesses and the operating conditions in the steel industry.
Investing Cash Flows—Capital spending during the thirteen weeks ended March 26, 2005 was $4.0 million, as compared with $3.4 million for the same period in 2004. Our capital spending for the 2005 fiscal year is expected to be between $30 million and $40 million.
Financing Cash Flows—Our total interest-bearing debt decreased from $327.5 million as of December 25, 2004 to $302.7 million as of March 26, 2005. The decrease in borrowings was related to the operating cash flows generated during the first quarter of 2005.
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 March 26, 2005, our long-term debt to invested capital ratio was 44.2%, as compared with 46.3% at December 25, 2004. 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. We believe these acquisitions were appropriate opportunities to expand our product offerings and market coverage and generate earnings growth. While our long-term debt to capital ratio exceeds our 40% objective at this time, this ratio was reduced during the first quarter of 2005 and we believe our cash flows will be able to enable us to reduce our debt level to 40% over the next 12 to 18 months. This estimate is dependent on our level of acquisition activity and steel industry operating conditions (which could affect the levels of inventory we need to fulfill customer commitments).
23
Our debt financing at March 26, 2005 consisted primarily of long-term debt. We also maintain certain short-term bank lines of credit totaling $22.8 million, $22.1 million which was unused at March 26, 2005. Our long-term debt principally consists of:
· $150 million of senior subordinated notes that bear interest at 6.875% per annum and are due in May 2014. We may repurchase the notes starting in May 2009 at specified prepayment premiums. These notes are guaranteed by certain of our U.S. subsidiaries.
· $150 million revolving credit agreement that accrues interest at our option at (a) the higher of the prime lending rate and the Federal Funds rate plus 50 basis points or (b) an interest rate spread over the LIBOR of 75 to 175 basis points, depending on our ratio of debt to earnings before taxes, interest, depreciation and amortization (EBITDA). At March 26, 2005, we had $50.0 million outstanding under the revolving credit agreement at an interest rate of 3.95% per annum. The revolving credit agreement contains certain financial covenants that limit our additional borrowing capability under the agreement. At March 26, 2005, we had the ability to borrow an additional $94.4 million under this facility.
· $75 million term loan that accrues interest at our option at (a) the higher of the prime lending rate and the Federal Funds rate plus 50 basis points or (b) LIBOR plus a spread of 75 to 175 basis points, depending on our debt to EBITDA ratio. This loan requires quarterly principal payments beginning in 2005 through 2009. The annualized principal payments beginning in 2005 in millions are: $3.8, $11.2, $18.8, $26.2, and $15.0. The effective interest rate on this loan at March 26, 2005 was 4.25% per annum.
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 March 26, 2005 we were in compliance with all covenants related to these debt agreements.
On December 16, 2004, the FASB issued Statement No. 123 (revised 2004) (“SFAS No. 123R”), Share-Based Payment. SFAS No. 123R will require us to measure the cost of all employee stock-based compensation awards based on the grant date fair value of those awards and to record that cost as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award). Excess tax benefits, as defined by this Statement, will be recognized as an addition to paid-in capital. SFAS No. 123R is effective at the beginning of our first quarter of fiscal 2006. We are currently evaluating the expected impact that the adoption of SFAS No. 123R will have on our results of operations and cash flows.
In November 2004, the FASB issued Statement No. 151,Inventory Costs. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Under this pronouncement, abnormal amounts of these costs are required to be charged against earnings rather than included in the cost of inventory on the balance sheet. SFAS No. 151 will be effective at the beginning of the company’s 2006 fiscal year. We do not believe this pronouncement will have a significant effect on our financial statements.
In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets. SFAS No. 153 amends existing guidance regarding the accounting for nonmonetary exchanges of similar productive assets. Under this pronouncement, the accounting for exchanges of similar productive assets that are not expected to significantly change the future cash flows of an entity will be an exception to the general rule that exchanges are accounted for based on the relative fair values of the exchanged assets. This pronouncement is effective at the beginning of our third quarter of fiscal 2005. We do not believe this pronouncement will have a significant effect on our financial statements.
FINANCIAL OBLIGATIONS AND FINANCIAL COMMITMENTS
There have been no material changes to our financial obligations and financial commitments as described on page 31 in our Form 10-K for the year ended December 25, 2004.
Off Balance Sheet Arrangements
There have been no changes in our off balance sheet arrangements as described on pages 31-32 in our Form 10-K for the fiscal year ended December 25, 2004.
Critical Accounting Policies
There have been no changes in the Company’s critical accounting policies during the quarter ended March 26, 2005. These policies are described on pages 33-35 in our Form 10-K for fiscal year ended December 25, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There are no material changes in the company’s market risk during the quarter ended March 26, 2005. For additional information, refer to the section “Risk Management” on page 33 in our Form 10-K for the fiscal year ended December 25, 2004
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures provide reasonable assurance that such disclosure controls and procedures are effective in timely providing them with material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings. There have been no significant changes in the Company’s internal controls over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, such internal controls.
ITEM 2. UNREGISTRED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
(c) Total Number of
(d) Maximum Number
Shares Purchased as
of Shares that May
Part of Publicly
Yet Be Purchased
(a) Total Number of
(b) Average Price
Announced Plans or
Under the Plans or
Period
Shares Purchased
paid per share
Programs
December 26, 2004 to January 22, 2005
January 23, 2005 to February 26, 2005
3,990
25.66
February 27, 2005 to March 26, 2005
4,547
25.39
0
8,537
25.52
During the first 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Valmont’s annual meeting of stockholders was held on April 25, 2005. The stockholders elected three directors to serve three-year terms and ratified the appointment of Deloitte & Touche LLP to audit the Company’s financial statements for fiscal 2005. For the annual meeting there were 24,210,957 shares outstanding and eligible to vote of which 21,521,155 were present at the meeting in person or by proxy. The tabulation for each matter voted upon at the meeting was as follows:
Election of Directors:
For
Withheld
Mogens C. Bay
21,265,152
256,003
John E. Jones
21,263,550
257,605
Walter Scott, Jr.
21,192,132
329,023
Proposal to ratify the appointment of Deloitte & Touche LLP as independent accountants for fiscal 2005:
21,388,518
Against
130,884
Abstain
1,753
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit No.
Description
31.1
Section 302 Certificate of Chief Executive Officer
31.2
Section 302 Certificate of Chief Financial Officer
32.1
Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
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.
(Registrant)
/s/ TERRY J. McCLAIN
Terry J. McClain
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Dated this 2nd day of May, 2005.