Valmont Industries - 10-Q quarterly report FY

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)

1. Summary of Significant Accounting Policies

Condensed Consolidated Financial Statements

The Condensed Consolidated Balance Sheet as of  September 30, 2006 and the Condensed Consolidated Statements of Operations for the thirteen and thirty-nine week periods ended September 30, 2006 and September 24, 2005 and the Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods then ended have been prepared by the Company, without audit. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) have been made to present fairly the financial statements as of September 30, 2006 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 31, 2005. 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 31, 2005, except for the January 1, 2006 adoption of SFAS 123(R). The results of operations for the periods ended September 30, 2006 are not necessarily indicative of the operating results for the full year.

Cash overdrafts

Cash book overdrafts totaling $11,300 and $7,243 were classified as accounts payable at September 30, 2006 and December 31, 2005, respectively. The Company’s policy is to report the change in book overdrafts as an operating activity in the Condensed Consolidated Statement of Cash Flows.

Inventories

At September 30, 2006, approximately 53% 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 $37,700 and $29,100 at September 30, 2006 and December 31, 2005, respectively.

Inventories consisted of the following:

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

Income Tax Expense

In the third quarter of 2006, the Company realized approximately $1.2 million in income tax benefits related to activities from prior tax years but were recognized in 2006 when the additional credits were taken on its income tax returns. Management had previously determined it was not probable that these tax benefits would be realized and therefore had not recognized these benefits in prior years.

Equity in Earnings (Losses) Nonconsolidated Subsidiaries

The Company realized a loss in its nonconsolidated subsidiary in the third quarter of 2006, due principally to losses in its 49% owned structures operation in Mexico. This loss mainly related to adjustment of receivable and inventory valuations, which reduced its share of earnings from this nonconsolidated subsidiary by $2.1 million, after tax. These valuation adjustments resulted from the Company’s due diligence reviews related to its planned purchase of the remaining 51% ownership interest in this subsidiary.

Stock Plans

The Company maintains stock-based compensation plans approved by the shareholders, which provide that the Compensation Committee of the Board of Directors may grant incentive stock options, nonqualified stock options, stock appreciation rights, non-vested stock awards and bonuses of common stock. At September 30, 2006, 1,298,323 shares of common stock remained available for issuance under the plans. Shares and options issued and available for issuance are subject to changes in capitalization.

Under the plans, the exercise price of each option equals the market price at the time of the grant. Options vest beginning on the first anniversary of the grant in equal amounts over three to six years or on the fifth anniversary of the grant. Expiration of grants is from six to ten years from the date of grant. On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS 123(R)), Shared Based Payment. The Company chose to apply the modified prospective transition method as permitted by SFAS 123(R) and therefore has not restated prior periods. Under this transition method, compensation cost associated with employee stock options recognized in the thirteen and thirty-nine weeks ended September 30, 2006 includes amortization related to the remaining unvested portion of stock option awards granted prior to December 31, 2005, and amortization related to new awards granted after January 1, 2006. Accordingly, the Company recorded $444 and $1,157 of compensation expense (included in selling, general and administrative expenses) for the thirteen and thirty-nine weeks ended September 30, 2006, respectively. The associated tax benefits recorded were $171 and $445, respectively. Prior to the adoption of SFAS 123(R), the Company accounted for these plans under APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations. Under APB Opinion 25, no compensation cost associated with stock options was 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 for the thirteen and thirty-nine weeks ended September 24, 2005 if the company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

Recently Issued Accounting Pronouncements

On July 13, 2006, the FASB issued Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No 109. FIN 48 provides a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial statement purposes. The Interpretation also requires expanded disclosure with respect to uncertain income tax positions. FIN 48 will be effective at the beginning of the Company’s 2007 fiscal year. The Company is currently assessing the effect of this pronouncement on the consolidated financial statements.

In September 2006, the FASB issued Statement 157 (“SFAS 157”), Fair Value Measurements. This Statement establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. While SFAS 157 does not require any new fair value measurements, it may change the application of fair value measurements embodied in other accounting standards. SFAS 157 will be effective at the beginning of the Company’s 2008 fiscal year. The Company is currently assessing the effect of this pronouncement on the consolidated financial statements.

2. Goodwill and Intangible Assets

The Company’s annual impairment testing on its reporting units was performed during the third quarter of 2006. As a result of that testing, it was determined the goodwill on the Company’s Consolidated Balance Sheet was not impaired.  Non-amortized intangible assets were also tested for impairment and determined not to be impaired.

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

Amortized Intangible Assets

The components of amortized intangible assets at September 30, 2006 and December 31, 2005 were as follows:

Amortization expense for intangible assets for the thirteen weeks ended September 30, 2006 and September 24, 2005, was $756 and $901, respectively. Amortization expense for intangible assets for the thirty-nine weeks ended September 30, 2006, and September 24, 2005 was $2,572 and $2,704, respectively. Estimated amortization expense related to finite-lived intangible assets is as follows:

The useful lives assigned to finite-lived intangible assets included consideration of factors such as the Company’s past and expected experience related to customer retention rates, the remaining legal or contractual life of the underlying arrangement that resulted in the recognition of the intangible asset and the Company’s expected use of the intangible asset.

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

Non-amortized intangible assets

Under the provisions of SFAS 142, intangible assets with indefinite lives are not amortized. The carrying value of the PiRod and Newmark trade names are $4,750 and $11,111, as of September 30, 2006 and December 31, 2005. The Newmark trade name arose from the 2004 acquisition and the PiRod amount arose from the 2001 acquisition. The indefinite-lived intangible assets were tested for impairment separately from goodwill in the third quarter of 2006. 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 30, 2006.

In its determination of these intangible assets as indefinite-lived, the Company considered such factors as its expected future use of the intangible asset, legal, regulatory, technological and competitive factors that may impact the useful life or value of the intangible asset and the expected costs to maintain the value of the intangible asset. The Company has determined that these intangible assets are expected to maintain their value indefinitely and, therefore, these assets are not amortized.

In addition, the Company acquired the Sigma trade name as part of the acquisition of Sigma’s assets in 2004 and recorded an associated indefinite-lived intangible asset of $405. In the second quarter of 2006, the Company determined it would no longer use the Sigma trade name and, accordingly, a complete impairment of the $405 value assigned to the Sigma trade name was recorded in the second quarter of 2006.

Goodwill

The carrying amount of goodwill as of September 30, 2006 was as follows:

Goodwill in the Company’s reporting units was tested in the third quarter of 2006 using a discounted cash flow methodology. Based on the evaluation, the Company concluded that goodwill was not impaired as of September 30, 2006.

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

3. Cash Flows

The Company considers all highly liquid temporary cash investments purchased with a maturity of three months or less to be cash equivalents. Cash payments for interest and income taxes (net of refunds) for the thirty-nine weeks ended were as follows:

4. Earnings Per Share

The following table provides a reconciliation between Basic and Diluted earnings per share:

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

5. Comprehensive Income

Results of operations for foreign subsidiaries are translated using the average exchange rates during the period. Assets and liabilities are translated at the exchange rates in effect on the balance sheet dates. The Company’s other comprehensive income for the thirteen and thirty-nine weeks ended September 30, 2006 and September 24, 2005, respectively, were as follows:

6.   Stock Plans

On January 1, 2006, the Company adopted SFAS No. 123R,Shared Based Payment (SFAS 123R). The Company chose to apply the modified prospective transition method as permitted by SFAS 123R and therefore has not restated prior periods. Under this transition method, compensation cost associated with employee stock options recognized in the thirteen and thirty-nine weeks ended September 30, 2006 includes amortization related to the remaining unvested portion of stock options granted prior to December 31, 2005, and amortization related to stock options granted after January 1, 2006. At September 30, 2006, the amount of unrecognized stock option compensation cost, to be recognized over a weighted average period of 1.30 years, was approximately $2,000.

Upon adoption of SFAS 123R, the Company changed its method of valuation for share-based awards granted beginning in 2006 to a binomial option pricing model from the Black-Scholes-Merton option pricing model which was previously used for the Company’s pro forma information required under SFAS 123. The fair value of each option grant made in 2006 was estimated using the following assumptions:

As a result of adopting SFAS 123R, earnings before income taxes included $444 and $1,157 of share-based compensation expense related to stock options, with associated tax benefit of $171 and $445 for the thirteen and thirty-nine weeks ended September 30, 2006, respectively. Prior to the adoption of SFAS 123R, the Company presented all benefits of tax deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123R requires the cash flows resulting from tax deductions in excess of the compensation cost recognized for share-based payments (“excess tax benefits”) to be classified as financing cash flows. The excess tax benefit of $16,102 was classified as a financing cash flow for the thirty-nine weeks ended September 30, 2006.

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

The Company maintains stock-based compensation plans approved by the shareholders, which provide that the Compensation Committee of the Board of Directors may grant incentive stock options, nonqualified stock options, stock appreciation rights, non-vested stock awards and bonuses of common stock. At September 30, 2006, 1,298,323 shares of common stock remained available for issuance under the plans. Shares and options issued and available are subject to changes in capitalization. The Company’s policy is to issue shares upon exercise of stock options from treasury shares held by the Company.

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.

Following is a summary of the activity of the stock plans during the thirty-nine weeks ended September 30, 2006:

Following is a summary of the status of stock options outstanding at September 30, 2006:

In accordance with shareholder-approved plans, the Company grants stock under various stock-based compensation arrangements, including non-vested share awards and stock issued in lieu of cash bonuses. Under such arrangements, stock is issued without direct cost to the employee. In addition, the Company grants non-vested share units. The non-vested share units are settled in Company stock when the vesting period ends. Non-vested awards of 18,000 shares of Company common stock were issued to non-employee directors of the Company during the second quarter of 2006. There were no non-vested share units issued during the thirteen weeks ended September 30, 2006.

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

At September 30, 2006, there was $4,425 of unrecognized compensation expense related to these non-vested share awards, which is expected to be recognized over a weighted average period of approximately 4 years. The Company recorded expense of $331 and $915 in the thirteen and thirty-nine weeks ended September 30, 2006 (with associated tax benefits of $127 and $352, respectively), related to the amortization of non-vested shares and share units. Beginning January 1, 2006, the unamortized balance of the non-vested share awards is a component of retained earnings. Prior to January 1, 2006, this unamortized balance was shown as a separate component of shareholders’ equity.

7. Business Segments

The Company aggregates its operating segments into five reportable segments. Aggregation is based on similarity of operating segments as to economic characteristics, products, production processes, types or classes of customer and the methods of distribution. Net corporate expense is net of certain service-related expenses that are allocated to business units generally on the basis of employee headcounts and sales dollars.

Reportable segments are as follows:

ENGINEERED SUPPORT STRUCTURES:   This segment consists of the manufacture of engineered metal structures and components for the lighting and traffic and wireless communication industries, certain international utility industries and for other specialty applications;

UTILITY SUPPORT STRUCTURES:   This segment consists of the manufacture of engineered steel and concrete structures primarily for the North American utility industry;

COATINGS:   This segment consists of galvanizing, anodizing and powder coating services;

IRRIGATION:   This segment consists of the manufacture of agricultural irrigation equipment and related parts and services; and

TUBING:   This segment consists of the manufacture of tubular products for industrial customers.

In addition to these five reportable segments, the Company has other businesses that individually are not more than 10% of consolidated sales. These businesses, which include wind energy development, machine tool accessories and industrial fasteners, are reported in the “Other” category.

The accounting policies of the reportable segments are the same as those described in Note 1. The Company evaluates the performance of its business segments based upon operating income and invested capital. The Company does not allocate interest expense, non-operating income and deductions, or income taxes to its business segments.

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

8. Guarantor/ Non-Guarantor Financial Information

On May 4, 2004, the Company completed a $150,000,000 offering of 67¤8% Senior Subordinated Notes. The Notes are guaranteed, jointly, severally, fully and unconditionally, on a senior subordinated basis by certain of the Company’s current and future direct and indirect domestic subsidiaries (collectively the “Guarantors”), excluding its other current domestic and foreign subsidiaries which do not guarantee the debt (collectively referred to as the “Non-Guarantors”). All Guarantors are 100% owned by the parent company.

Condensed consolidated financial information for the Company (“Parent”), the Guarantor subsidiaries and the Non-Guarantor subsidiaries is as follows:

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Thirteen Weeks Ended September 30, 2006

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

For the Thirty-nine Weeks Ended September 30, 2006

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VALMONT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)

For the Thirteen Weeks Ended September 24, 2005