UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 25, 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 of
(I.R.S. Employer
incorporation or organization)
Identification No.)
One Valmont Plaza,
68154-5215
Omaha, Nebraska
(Zip Code)
(Address of principal executive offices)
(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. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o
24,413,509
Outstanding shares of common stock as of July 25, 2005
Index is located on page 2.
Total number of pages 33.
VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements:
Condensed Consolidated Statements of Operations for the thirteen and twenty-six weeks ended June 25, 2005 and June 26, 2004
3
Condensed Consolidated Balance Sheets as of June 25, 2005 andDecember 25, 2004
4
Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended June 25, 2005 and June 26, 2004
5
Notes to Condensed Consolidated Financial Statements
6-21
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22-28
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
29
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
30
Item 5.
Other Information
Item 6.
Exhibits
Signatures
31
2
VALMONT INDUSTRIES, INC. AND SUBSIDIARIESPART I. FINANCIAL INFORMATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Dollars in thousands, except per share amounts)(Unaudited)
Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 25,2005
June 26,2004
Product sales
$
244,222
243,057
492,014
439,705
Services sales
20,912
22,956
38,861
42,205
Net sales
265,134
266,013
530,875
481,910
Product cost of sales
182,739
183,213
372,749
332,667
Services cost of sales
14,802
16,720
28,872
31,883
Cost of sales
197,541
199,933
401,621
364,550
Gross profit
67,593
66,080
129,254
117,360
Selling, general and administrative expenses
46,387
47,071
91,941
86,602
Operating income
21,206
19,009
37,313
30,758
Other income (deductions):
Interest expense
(4,884
)
(4,067
(9,711
(6,465
Interest income
592
419
829
695
Debt prepayment expenses
—
(9,860
Miscellaneous
33
(274
(115
(260
(4,259
(13,782
(8,997
(15,890
Earnings before income taxes, minority interest and equity in earnings (losses) of nonconsolidated subsidiaries
16,947
5,227
28,316
14,868
Income tax expense (benefit):
Current
5,129
6,081
7,741
11,926
Deferred
996
(4,154
2,528
(6,470
6,125
1,927
10,269
5,456
Earnings before minority interest and equity in earnings (losses) of nonconsolidated subsidiaries
10,822
3,300
18,047
9,412
Minority interest
(313
(718
(662
(1,173
Equity in earnings (losses) of nonconsolidated subsidiaries
(66
230
(132
74
Net earnings
10,443
2,812
17,253
8,313
Earnings per share—Basic
0.43
0.12
0.71
0.35
Earnings per share—Diluted
0.42
0.69
0.34
Cash dividends per share
0.085
0.080
0.165
0.160
Weighted average number of shares of common stock outstanding (000 omitted)
24,292
23,866
24,201
23,856
Weighted average number of shares of common stock outstanding plus dilutive potential common shares (000 omitted)
25,035
24,413
25,042
24,466
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
December 25,2004
ASSETS
Current assets:
Cash and cash equivalents
39,827
30,210
Receivables, net
176,095
188,512
Inventories
172,914
186,988
Prepaid expenses
10,911
8,408
Refundable and deferred income taxes
12,377
14,387
Total current assets
412,124
428,505
Property, plant and equipment, at cost
510,807
493,997
Less accumulated depreciation and amortization
299,627
288,342
Net property, plant and equipment
211,180
205,655
Goodwill
105,435
106,022
Other intangible assets, net
61,534
63,337
Other assets
32,032
32,589
Total assets
822,305
836,108
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt
8,938
7,962
Notes payable to banks
6,364
4,682
Accounts payable
68,260
69,979
Accrued expenses
58,282
66,506
Dividends payable
2,077
1,932
Total current liabilities
143,921
151,061
Deferred income taxes
45,546
42,639
Long-term debt, excluding current installments
290,421
314,813
Minority interest in consolidated subsidiaries
10,262
10,107
Other noncurrent liabilities
23,476
22,833
Shareholders’ equity:
Preferred stock
Common stock of $1 par value
27,900
Retained earnings
339,329
324,748
Accumulated other comprehensive income
(1,311
3,499
Treasury stock
(55,155
(59,200
Unearned restricted stock
(2,084
(2,292
Total shareholders’ equity
308,679
294,655
Total liabilities and shareholders’ equity
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operations:
Adjustments to reconcile net earnings to net cash flows from operations:
Depreciation and amortization
20,095
18,713
(Gain)/loss on sale of assets
376
(58
Equity in (earnings)/losses in nonconsolidated subsidiaries
132
(74
662
1,173
Other adjustments
(117
184
Changes in assets and liabilities, net of business acquisitions:
Receivables
9,210
(12,668
10,050
(27,368
(2,547
681
(901
5,552
(6,945
4,075
644
(299
Income taxes payable
4,097
3,873
Net cash flows from operations
54,537
(4,373
Cash flows from investing activities:
Purchase of property, plant & equipment
(25,346
(6,188
Acquisitions, net of cash acquired
(119,562
Investment in nonconsolidated subsidiary
(2,450
Proceeds from sale of assets
1,422
872
Dividends to minority interests
(247
(720
Other, net
185
Net cash flows from investing activities
(23,986
(127,404
Cash flows from financing activities:
Net borrowings (payments) under short-term agreements
2,091
(12,021
Proceeds from long-term borrowings
16,500
239,000
Principal payments on long-term obligations
(39,908
(89,127
Dividends paid
(3,877
(3,830
Proceeds from exercises under stock plans
5,809
893
Debt issuance costs
(5,923
Purchase of common treasury shares—stock plan exercises
(552
(533
Net cash flows from financing activities
(19,937
128,459
Effect of exchange rate changes on cash and cash equivalents
(997
(328
Net change in cash and cash equivalents
9,617
(3,646
Cash and cash equivalents—beginning of period
33,345
Cash and cash equivalents—end of period
29,699
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 June 25, 2005 and the Condensed Consolidated Statements of Operations for the thirteen and twenty-six week periods ended June 25, 2005 and June 26, 2004 and the Condensed Consolidated Statements of Cash Flows for the twenty-six 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 June 25, 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 June 25, 2005 are not necessarily indicative of the operating results for the full year.
At June 25, 2005, approximately 51% 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 $28,200 and $30,700 at June 25, 2005 and December 25, 2004, respectively.
Inventories consisted of the following:
Raw materials and purchased parts
107,176
121,484
Work-in-process
18,506
20,696
Finished goods and manufactured goods
75,429
75,526
Subtotal
201,111
217,706
LIFO reserve
28,197
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, except per share amounts) (Unaudited)
stock. At June 25, 2005, 1,094,108 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.
Net earnings as reported
Add:
Stock-based employee compensation expense included in reported net income, net of related tax effects
122
38
231
103
Deduct:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
380
428
813
915
Pro forma net earnings
10,185
2,422
16,671
7,501
Earnings per share
As reported:
Basic
Diluted
Pro forma:
0.10
0.31
0.41
0.67
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 and twenty-six weeks ended June 26, 2004, assuming that these transactions occurred at the beginning of the periods presented are as follows:
Thirteen WeeksEnded
Twenty-Six WeeksEnded
272,297
515,333
Net income
3,068
8,746
Earnings per share—diluted
0.13
0.36
8
3. Goodwill and Intangible Assets
Amortized Intangible Assets
The components of amortized intangible assets at June 25, 2005 and December 25, 2004 were as follows:
As of June 25, 2005
GrossCarryingAmount
AccumulatedAmortization
WeightedAverageLife
Customer Relationships
47,691
6,349
18 years
Proprietary Software & Database
2,609
1,568
6 years
Patents & Proprietary Technology
2,839
219
14 years
Non-compete Agreements
331
66
5 years
53,470
8,202
As of December 25, 2004
4,911
1,335
120
6,399
Amortization expense for intangible assets for the thirteen weeks ended June 25, 2005 and June 26, 2004, was $901 and $771, respectively. Amortization expense for intangible assets for the twenty-six weeks ended June 25, 2005, and June 26, 2004 was $1,803 and $1,093, 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, as of June 25, 2005 and December 25, 2004.
9
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 June 25, 2005 was as follows:
EngineeredSupportStructuresSegment
UtilitySupportStructuresSegment
CoatingsSegment
IrrigationSegment
TubingSegment
Total
Balance December 25, 2004
19,959
42,628
42,192
981
262
Divestiture
(398
Foreign currency translation
(189
Balance June 25, 2005
19,770
583
In June 2005, the Company divested of its ownership in a retail operation located in Greeley, Colorado, resulting in a $398 reduction of goodwill in the Irrigation Segment.
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 twenty-six weeks ended were as follows:
Interest
9,793
5,417
Income Taxes
3,902
7,990
10
5. Earnings Per Share
The following table provides a reconciliation between Basic and Diluted earnings per share:
Basic EPS
Dilutive Effect ofStock Options
Diluted EPS
Thirteen weeks ended June 25, 2005:
Shares outstanding
743
Per share amount
(.01
Thirteen weeks ended June 26, 2004:
547
Twenty-six weeks ended June 25, 2005:
841
(.02
Twenty-six weeks ended June 26, 2004:
610
6. Comprehensive Income
Results of operations for foreign subsidiaries are translated using the average exchange rates during the period. Assets and liabilities are translated at the exchange rates in effect on the balance sheet dates. The Company’s other comprehensive income for the thirteen and twenty-six weeks ended June 25, 2005 and June 26, 2004, respectively, were as follows:
Net derivative adjustment
(35
Currency translation adjustment
(2,039
(317
(4,810
(1,259
Total comprehensive income
8,369
2,495
12,443
7,054
11
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 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.
12
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
86,954
77,829
174,801
146,088
Specialty
25,545
25,616
41,693
40,939
Utility
7,903
4,056
12,750
8,011
120,402
107,501
229,244
195,038
Utility Support Structures segment
Steel
29,534
26,295
73,105
49,234
Concrete
13,374
12,134
28,836
42,908
38,429
101,941
61,368
Coatings segment
21,202
23,568
40,196
46,224
Irrigation segment
65,425
87,582
135,371
167,681
Tubing segment
22,743
24,096
44,810
41,419
Other
4,631
4,503
9,449
8,863
277,311
285,679
561,011
520,593
Intersegment Sales:
Engineered Support Structures
3,002
7,456
12,075
17,403
Utility Support Structures
1,068
1,821
1,585
2,914
Coatings
3,540
3,880
7,151
7,562
Irrigation
163
Tubing
3,588
5,351
7,398
8,666
975
1,147
1,916
1,975
12,177
19,666
30,136
38,683
Net Sales
117,400
100,045
217,169
177,635
41,840
36,608
100,356
58,454
17,662
19,688
33,045
38,662
65,421
87,571
135,360
167,518
19,155
18,745
37,412
32,753
3,656
3,356
7,533
6,888
Consolidated Net Sales
Operating Income
10,708
6,370
16,332
10,032
3,583
1,352
7,971
(869
2,108
2,601
2,874
3,067
7,523
12,008
14,744
23,853
3,896
3,421
7,156
5,506
(655
(593
(1,416
(1,085
Net corporate expense
(5,957
(6,150
(10,348
(9,746
Total Operating Income
13
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 Company (“Parent”), the Guarantor subsidiaries and the Non-Guarantor subsidiaries is as follows:
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSFor the Thirteen Weeks Ended June 25, 2005
Parent
Guarantors
Non-Guarantors
Eliminations
147,311
34,254
74,326
(11,669
Service sales
13,299
8,261
2,891
(3,539
160,610
42,515
77,217
(15,208
111,459
27,036
56,052
(11,808
Service cost of sales
10,264
6,460
1,617
121,723
33,496
57,669
(15,347
38,887
9,019
19,548
139
25,486
7,389
13,512
13,401
1,630
6,036
(4,700
(5
(198
19
574
(19
(128
153
(4,799
529
Earnings before income taxes, minority interest, and equity in earnings/(losses) of nonconsolidated subsidiaries
8,602
1,641
6,565
Income tax expense:
2,387
628
2,114
839
98
59
3,226
726
2,173
Earnings before minority interest, and equity in earnings/(losses) of nonconsolidated subsidiaries
5,376
4,392
Equity in earnings/(losses) of nonconsolidated subsidiaries
4,928
61
(5,055
10,304
4,140
(4,916
14
For the Twenty-Six Weeks Ended June 25, 2005
301,612
77,267
142,501
(29,366
25,078
15,704
5,230
(7,151
326,690
92,971
147,731
(36,517
231,754
63,052
107,875
(29,932
19,862
12,806
3,355
251,616
75,858
111,230
(37,083
75,074
17,113
36,501
566
50,294
15,339
26,308
24,780
1,774
10,193
(9,416
(16
(322
43
55
805
(43
(141
(9,502
495
15,278
1,784
10,688
3,264
757
3,720
2,727
(206
5,991
764
3,514
9,287
1,020
7,174
7,400
(21
(7,511
16,687
6,491
15
For the Thirteen Weeks Ended June 26, 2004
150,602
35,167
72,149
(14,861
13,367
8,918
4,552
(3,881
163,969
44,085
76,701
(18,742
117,001
27,386
53,672
(14,846
9,923
7,638
3,040
126,924
35,024
56,712
(18,727
37,045
9,061
19,989
(15
26,462
6,613
13,996
10,583
2,448
5,993
(3,827
(271
36
41
414
(36
(26
93
(341
(13,672
88
(3,089
2,536
5,795
3,156
804
2,121
(4,330
238
(62
(1,174
1,042
2,059
(1,915
1,494
3,736
4,742
(4,512
2,827
3,018
(4,527
16
For the Twenty-Six Weeks Ended June 26, 2004
284,522
47,948
132,613
(25,378
25,153
17,371
7,244
(7,563
309,675
65,319
139,857
(32,941
220,503
38,596
98,999
(25,431
19,528
14,933
4,985
240,031
53,529
103,984
(32,994
69,644
11,790
35,873
53
50,015
10,889
25,698
19,629
901
10,175
(6,030
(10
(504
79
84
1
689
(79
(18
(335
(15,824
(150
3,805
985
10,025
7,969
(143
4,100
(6,532
542
(480
1,437
399
3,620
2,368
586
6,405
Equity in (earnings)/losses of nonconsolidated subsidiaries
5,892
(5,818
8,260
5,232
(5,765
17
CONDENSED CONSOLIDATED BALANCE SHEETSJune 25, 2005
11,196
1,983
26,648
73,308
23,076
79,753
(42
72,190
43,097
57,627
4,329
821
5,761
7,039
3,199
2,139
168,062
72,176
171,928
341,610
74,246
94,951
210,767
28,023
60,837
130,843
46,223
34,114
20,370
73,377
11,688
Other intangible assets
58,133
2,596
Investment in subsidiaries and intercompany accounts
341,469
40,487
(7,994
(373,962
30,861
1,771
(600
692,410
290,396
214,103
(374,604
LIABILITIES ANDSHAREHOLDERS’ EQUITY
6,751
26
2,161
21,138
8,177
38,945
34,471
5,804
18,049
64,437
14,007
65,519
19,658
21,774
4,114
289,173
81
1,767
22,382
1,094
14,248
10,344
(24,592
Additional paid-in capital
159,082
71,825
(230,907
326,099
81,204
50,489
(118,463
Accumulated other comprehensive loss
296,760
254,534
131,347
18
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
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
1,894
(1,900
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
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Twenty-Six Weeks Ended June 25, 2005
11,108
5,187
3,800
(Gain)/ Loss on sale of property, plant and equipment
(1
358
111
21
143
Changes in assets and liabilities:
5,973
5,233
(1,989
(7
23,732
(4,609
(9,073
(1,947
95
(695
(1,655
(2,135
2,889
(7,226
241
782
(138
3,839
258
54,293
4,830
2,359
Purchase of property, plant and equipment
(21,554
(1,458
(2,334
750
664
Proceeds from minority interests
(2,337
(5,078
1,955
5,645
(23,141
(6,528
Net borrowings (repayments) under short-term agreements
(38,803
(13
(2,392
1,300
(20,923
(301
10,229
(1,711
1,099
Cash and cash equivalents—beginning ofyear
Cash and cash equivalents—end of year
11,195
26,649
20
11,701
3,552
3,460
(40
282
(98
(7,847
4,251
(9,150
78
(12,517
(5,644
(9,727
520
273
235
173
3,735
(748
2,565
4,336
(1,685
1,501
(77
858
(1,157
(1,533
3,610
1,796
921
4,702
(4,752
(5,244
(3,612
(569
(2,007
Proceeds from sale of property, plant and equipment
64
808
(20,786
10,573
7,113
3,744
(146,346
10,004
5,194
Net repayments under short-term agreements
(8,675
(3,346
(84,593
(2,866
(3,168
1,500
145,014
(11,541
(6,514
(411
3,165
(6,400
Cash and cash equivalents—beginning of year
1,982
612
30,751
1,571
3,777
24,351
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.
22
Results of Operations
Dollars in thousands, except per share amounts
Twenty-six Weeks Ended
% Incr.(Decr.)
% Incr.(Decr)
Consolidated
$265,134
$266,013
-0.3
%
$530,875
$481,910
10.2
$66,080
2.3
10.1
as a percent of sales
25.5
24.8
24.3
24.4
SG&A expense
-1.5
6.2
17.5
17.7
17.3
18.0
11.6
21.3
8.0
7.1
7.0
6.4
Net interest expense
4,292
3,648
8,882
5,770
53.9
Effective tax rate
36.1
36.9
36.3
36.7
271.4
107.5
250.0
102.9
Engineered Support Structures Segment
22.3
30,709
26,181
55,429
47,166
20,001
19,811
1.0
39,097
37,134
5.3
68.1
62.8
14.3
71.7
9,939
7,015
41.7
21,079
8,869
137.7
6,356
5,663
12.2
13,108
9,738
34.6
Operating income (loss)
165.0
NM
-10.3
-14.5
4,478
5,004
-10.5
7,491
8,069
-7.2
2,370
2,403
-1.4
4,617
5,002
-7.7
-19.0
-6.3
-25.3
-19.2
15,944
22,008
-27.6
32,715
43,248
-24.4
8,421
10,000
-15.8
17,971
19,395
-7.3
-37.4
-38.2
2.2
14.2
5,564
5,605
-0.7
10,458
9,092
15.0
1,668
2,184
-23.6
3,302
3,586
-7.9
13.9
30.0
8.9
9.4
1,097
1,122
-2.2
2,224
2,275
1,753
1,715
3,639
3,360
8.3
-30.5
Net Corporate expense
(139
(855
(1,359
5,818
5,295
9.9
10,207
8,387
21.7
3.1
-6.2
NM = Not meaningful
23
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. The Newmark and Whatley acquisitions were completed in the second quarter of 2004 and the Sigma acquisition was completed in the third quarter of 2004.
Consolidated net sales for the second quarter of fiscal 2005 were virtually unchanged as compared with 2004, as higher selling prices associated with higher steel costs and the impact of 2004 acquisitions (approximately $9 million) were essentially offset by lower sales volumes, particularly in the Irrigation and ESS segments in 2005. For the twenty-six weeks ended June 25, 2005, the increase in net sales as compared with the same period in 2004 resulted from acquisitions completed in 2004 (approximately $36 million) and higher selling prices due to increased steel costs. In 2004, we experienced unprecedented increases in our cost of steel and steel-related products. In response to these conditions, we increased our selling prices where possible to recover as much of these cost increases as possible. In 2005, steel prices decreased somewhat, but not to the levels prior to the 2004 increases. Gross profit grew slightly, despite generally lower sales volumes. In 2004, sales price increases somewhat lagged the rapid rise in the cost of steel, which contributed to weaker gross profit margins in 2004, as compared with 2003. Steel prices have stabilized in 2005, which has allowed us to recover some gross profit in 2005. Gross profit as a percentage of sales in the second quarter of 2005 was slightly higher than 2004 and, on a year-to-date basis, was essentially unchanged between 2004 and 2005. Stronger gross profit margins in the Utility Support Structures segment were offset to an extent by weaker gross profit margins in the Irrigation segment. Selling, general and administrative (SG&A) spending in the second quarter of 2005 was slightly lower than 2004, primarily related to lower employee incentives. On a year-to-date basis, the increase in SG&A spending was principally due to the businesses acquired in 2004.
Interest expense in 2005 was higher than 2004, both on a quarterly and year-to-date basis. The increase in interest expense was mainly due to higher average borrowing levels in 2005, as compared with 2004. The higher average borrowing levels this year were primarily due to the impact of the 2004 acquisitions, all of which were funded through debt. 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. “Minority interest”expenses were lower in 2005 than 2004, both on a quarterly and a year-to-date basis. This reduction is related to lower earnings in our Irrigation segment operations in Brazil and South Africa, both of which are less than 100% owned. The increase in net earnings in 2005 is due in part to a $9.9 million pre-tax expense (approximately $6.1 million after taxes) associated with the restructuring of our long-term debt in the second quarter of 2004.
Engineered Support Structures (ESS) Segment
In the ESS segment, sales increased in 2005, as compared with 2004, on both a quarterly and year-to-date basis. The increases in sales for the second quarter and the year-to-date periods ended June 25, 2005 mainly were the result of the impact of 2004 acquisitions (approximately $6.0 and $10.2 million, respectively) and sales price increases in response to higher steel costs. On a regional basis, we realized sales increases in North America and Europe, offset somewhat by slightly lower sales in China.
In North America, lighting and traffic sales in the second quarter of 2005 increased as compared with 2004, due to price increases in response to steel prices, offset by an approximate 10% decrease in sales volume. Sales volumes for 2005 were similar to 2004 on a year-to-date basis. Orders and shipments relating
24
to lighting and traffic projects funded by government programs lagged behind 2004, due to continued delays in the enactment of new federal highway legislation. We believe that, without specific funding guidelines in place, projects are being delayed until such funding is legislated. We anticipate that such legislation will be enacted this year, which should result in improved market conditions. Commercial lighting sales in 2005 likewise lagged 2004 levels, as we believe that commercial construction spending is weaker due to higher costs of construction materials. In Europe, lighting sales were higher than 2004, on both a quarterly and year-to-date basis, 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 of Specialty Structures products increased as compared with 2004, as higher sales in North America were somewhat offset by lower sales in China. In North America, market conditions for sales of structures and components for the wireless communication market were similar to 2004. Sign structure sales for the thirteen and twenty-six weeks ended June 25, 2005 increased over the same periods in 2004, principally due to the Sigma acquisition (approximately $4.0 and $5.4 million, respectively). Sales of wireless communication poles in China were lower in 2005 as compared with 2004, both on a quarterly and year-to-date basis. The quarterly and year-to-date drop in sales was $2.9 million and $5.6 million, respectively. While sales were below record 2004 levels, demand has been steady and we believe China will continue to expand and improve its wireless networks to accommodate growing demand for wireless communication services. Stronger sales of utility structures in China partially offset the drop in wireless communication structure sales. We believe that, as China develops its electrical infrastructure, there will be a solid demand in the future for steel transmission, substation and distribution structures to help transport and distribute electrical power to users.
The increase in the profitability of the ESS segment for the thirteen and twenty-six weeks ended June 25, 2005 as compared with the same periods in 2004 was the result of stronger earnings in North America and Europe, offset to a degree by lower earnings in China. In North America, improved pricing in all product lines in light of steel cost increases 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 $2.0 and $4.3 million as compared with the second quarter and year-to-date of 2004, respectively. This profitability improvement was the result of cost structure reductions implemented in 2004 and improved sales volumes. In China, year-to-date earnings decreased $1.4 million as compared with 2004, while second quarter 2005 operating income was similar to 2004. The main reason for lower earnings so far this year in China was related to competitive pricing pressures that are not allowing us to fully recover our steel cost increases in the marketplace.
This segment included 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 the second quarter of 2005, as compared with 2004, was due to a full year impact of Newmark (approximately $3 million) and increased selling prices in light of higher steel costs. While demand for electrical transmission, substation and distribution structures was improved over 2004, shipping volumes for the quarter ended June 25, 2005 was down approximately 6% as compared with 2004, due in part to timing issues as to when structures were requested to be shipped by our customers. Year-to-date sales volumes in this segment increased slightly in 2005 as compared with 2004. In the first half 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 for the second quarter, as compared with 2004, relate to improved pricing and factory performance. On a year-to-date basis, the improved operating income for this segment was due to the acquisition of Newmark (approximately $2.3 million), improved pricing and sales volume increases. The increase in year-to-date SG&A spending was related primarily to the acquisition of Newmark in April 2004 (approximately $3.5 million).
25
Coatings Segment
The decrease in sales in the thirteen and twenty-six weeks ended June 25, 2005, as compared with the same periods in 2004, resulted from lower anodizing volumes. In the galvanizing operations, sales dollars were level with 2004, on both a quarterly and year-to-date basis, as price increases offset an approximate 6.5% decrease in pounds galvanized. The decrease in pounds galvanized included lower internal volumes from the Irrigation segment, whose sales volumes are down significantly this year. The decrease in second quarter operating income as compared with 2004 related mainly to lower sales volumes and increased natural gas and zinc costs that were not recovered by sales price increases. Spending reductions in our factories largely mitigated the impact of lower sales and higher natural gas and zinc prices on gross profit. Year-to-date SG&A spending was down in 2005 as compared with 2004, which mostly related to reduced compensation costs.
Irrigation Segment
Sales in 2005 were down on a quarterly and year-to-date basis as compared with the same periods in 2004, due to lower sales volumes in domestic and international markets, offset to an extent by higher selling prices to offset higher steel costs. Fiscal 2005 second quarter and year-to-date global volumes were down approximately 38% and 32%, respectively, as compared with the relatively strong 2004 sales volume levels. 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 in most of our key markets around the world. In our international markets, we believe the increased relative strength of foreign currencies in relation to the U.S. dollar has also negatively impacted markets in our key international regions, such as Brazil and South Africa.
The decreases in operating income for the thirteen and twenty-six weeks ended June 25, 2005 as compared with the same periods in 2004 were due to lower sales volumes and reduced factory utilization. While we have reduced factory spending, we were not able to reduce spending to completely offset the impact of lower volumes. The operating income impact of reduced factory utilization was approximately $1.9 million and $3.5 million for the second quarter and year-to-date 2005, respectively, as compared with 2004. The lower SG&A spending for the second quarter and year-to-date periods ended June 25, 2005, as compared with the same periods in 2004, related to reduced employee incentives (approximately $0.4 million), lower legal expenses (approximately $0.5 million) and the reversal of a $0.8 million doubtful account receivable provision for a receivable that was recovered in the second quarter of 2005. In light of the lower sales volumes this year, we reduced employment levels in the factory and administrative areas in the second quarter of 2005. We believe these actions will mitigate the impact of lower sales levels on segment profitability for the remainder of 2005.
Tubing Segment
The increases in Tubing sales for the thirteen and twenty-six weeks ended June 25, 2005, as compared with the same periods in 2004, were due to sales price increases associated with increased steel costs, offset somewhat by slightly lower unit sales volumes. We believe some of the strong sales volumes experienced in the first half of 2004 resulted from increased customer purchases related to steel shortages that were present in the marketplace in 2004. Operating income improved in the thirteen and twenty-six week periods ended June 25, 2005, as compared with the same periods in 2004, due to a generally favorable pricing environment and lower SG&A spending resulting from reduced employee incentives.
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 increase in net corporate SG&A expense for the thirteen and twenty-six weeks ended June 25, 2005 as compared with the same period in 2004 related mainly to increased expenses related to the acquisition of a new corporate aircraft (approximately $0.5 million) and a reduction in certain tax incentives (approximately $0.5 million) this year.
Liquidity and Capital Resources
Cash Flows
Working Capital and Operating Cash Flows—Net working capital was $268.2 million at June 25, 2005, as compared with $277.4 million at December 25, 2004. The ratio of current assets to current liabilities was 2.86:1 at June 25, 2005, as compared with 2.84:1 at December 25, 2004. Operating cash flow was a net inflow of $54.5 million for the twenty-six week period ended June 25, 2005, as compared with a net outflow of $4.4 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. Our 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 two quarters 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 twenty-six weeks ended June 25, 2005 was $25.3 million, as compared with $6.2 million for the same period in 2004. The main reason for the increase in capital spending was the purchase of a corporate aircraft for approximately $16.5 million. Our existing aircraft is currently for sale and we believe the sale will be completed during the 2005 fiscal year. Our capital spending for the 2005 fiscal year is expected to be between $35 million and $40 million. In 2004, we spent $119.6 million related to the Newmark and Whatley acquisitions.
Financing Cash Flows—Our total interest-bearing debt decreased from $327.5 million as of December 25, 2004 to $305.7 million as of June 25, 2005. The decrease in borrowings was related to the operating cash flows generated during 2005, less capital expenditures.
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 June 25, 2005, our long-term debt to invested capital ratio was 43.2%, 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
27
was reduced during the first half of 2005 and we believe our cash flows will enable us to reduce our debt level to 40% over the next 6 to 12 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).
Our debt financing at June 25, 2005 consisted primarily of long-term debt. We also maintain certain short-term bank lines of credit totaling $22.7 million, $19.3 million which was unused at June 25, 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 with a group of banks 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 62.5 to 137.5 basis points (inclusive of facility fees), depending on our ratio of debt to earnings before taxes, interest, depreciation and amortization (EBITDA). In addition, this agreement provides that another $50 million may be added to the total credit agreement at our request at any time prior to May 31, 2007, subject to the group of banks increasing their current commitment. At June 25, 2005, we had $49.5 million outstanding under the revolving credit agreement at an interest rate of 4.0625% per annum. The revolving credit agreement contains certain financial covenants that limit our additional borrowing capability under the agreement. At June 25, 2005, we had the ability to borrow an additional $95 million under this facility.
· $75 million term loan with a group of banks 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 62.5 to 137.5 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 June 25, 2005 was 4.3125% 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 June 25, 2005 we were in compliance with all covenants related to these debt agreements.
FINANCIAL OBLIGATIONS AND FINANCIAL COMMITMENTS
There have been no material changes to our financial obligations and financial commitments as described on page 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 June 25, 2005. These policies are described on pages 33-35 in our Form 10-K for the fiscal year ended December 25, 2004.
28
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There are no material changes in the Company’s market risk during the second quarter ended June 25, 2005. For additional information, refer to the section “Risk Management” on page 33 of 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. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
(c)
(d)
Total Number of
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
March 27, 2005 to April 23, 2005
April 24, 2005 to May 28, 2005
13,559
23.70
May 29, 2005 to June 25, 2005
526
23.97
14,085
23.71
During the second 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 April 26, 2005, the Company’s Board of Directors declared a quarterly cash dividend on common stock of 8.5 cents per share, payable July 15, 2005, to stockholders of record June 24, 2005. The indicated annual dividend rate is 34 cents per share.
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
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.
VALMONT INDUSTRIES, INC.(Registrant)
/s/ Terry J. McClain
Terry J. McClainSenior Vice President and Chief Financial Officer(Principal Financial Officer)
Dated this 1st day of August, 2005.