UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

Commission file number: 1-31429

Valmont Industries, Inc.

(Exact name of registrant as specified in its charter)

 

(Registrant’s telephone number, including area code)

402-963-1000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ

 

Index is located on page 2.

Total number of pages 35

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

2

VALMONT INDUSTRIES, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

		Thirteen Weeks Ended						Twenty-Six Weeks Ended
		July 1, 2006			June 25, 2005			July 1, 2006			June 25, 2005
Net sales		$	338,791		$	265,134		$	642,416		$	530,875
Cost of sales.		253,729			197,541			481,661			401,621
Gross profit		85,062			67,593			160,755			129,254
Selling, general and administrative expenses		55,153			46,387			107,269			91,941
Operating income		29,909			21,206			53,486			37,313
Other income (deductions):
Interest expense		(4,338		)	(4,884		)	(8,486		)	(9,711		)
Interest income		395			592			948			829
Miscellaneous		286			33			1,183			(115		)
		(3,657		)	(4,259		)	(6,355		)	(8,997		)
Earnings before income taxes, minority interest and equity in earnings (losses) of nonconsolidated subsidiaries		26,252			16,947			47,131			28,316
Income tax expense (benefit):
Current		13,093			5,129			23,993			7,741
Deferred		(4,599		)	996			(7,828		)	2,528
		8,494			6,125			16,165			10,269
Earnings before minority interest and equity in earnings (losses) of nonconsolidated subsidiaries		17,758			10,822			30,966			18,047
Minority interest		(341		)	(313		)	(509		)	(662		)
Equity in earnings (losses) of nonconsolidated subsidiaries		(132		)	(66		)	(87		)	(132		)
Net earnings		$	17,285		$	10,443		$	30,370		$	17,253
Earnings per share—Basic Earnings per share—Basic		$	0.69		$	0.43		$	1.22		$	0.71
Earnings per share—Diluted Earnings per share—Diluted		$	0.67		$	0.42		$	1.18		$	0.69
Cash dividends per share		$	0.095		$	0.085		$	0.180		$	0.165
Weighted average number of shares of common stock outstanding (000 omitted)		25,091			24,292			24,880			24,201
Weighted average number of shares of common stock outstanding plus dilutive potential common shares (000 omitted)		25,859			25,035			25,654			25,042

 

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)

		July 1, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents		$	34,547			$	46,867
Receivables, net		223,068				180,969
Inventories		165,248				158,327
Prepaid expenses		10,818				7,643
Refundable and deferred income taxes		17,479				14,506
Total current assets		451,160				408,312
Property, plant and equipment, at cost		500,781				489,660
Less accumulated depreciation and amortization		310,375				294,984
Net property, plant and equipment		190,406				194,676
Goodwill		106,887				106,695
Other intangible assets, net		57,919				60,140
Other assets		34,381				32,219
Total assets		$	840,753			$	802,042
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt		$	15,587			$	13,583
Notes payable to banks		4,825				4,918
Accounts payable		93,452				90,674
Accrued expenses		70,102				67,869
Dividends payable		2,426				2,107
Total current liabilities		186,392				179,151
Deferred income taxes		37,955				43,199
Long-term debt, excluding current installments		212,030				218,757
Other noncurrent liabilities		27,105				24,889
Minority interest in consolidated subsidiaries		7,443				7,371
Shareholders’ equity:
Preferred stock		—				—
Common stock of $1 par value		27,900				27,900
Retained earnings		377,429				357,025
Accumulated other comprehensive income		1,510				(2,521		)
Treasury stock		(37,011		)		(50,067		)
Unearned restricted stock		—				(3,662		)
Total shareholders’ equity		369,828				328,675
Total liabilities and shareholders’ equity		$	840,753			$	802,042

 

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)

		Twenty-Six Weeks Ended
		July 1, 2006			June 25, 2005
Cash flows from operations:
Net earnings		$	30,370		$	17,253
Adjustments to reconcile net earnings to net cash flows from operations:
Depreciation and amortization		19,113			20,095
Stock option expense		713			—
Loss on sale of assets		511			376
Equity in (earnings)/losses in nonconsolidated subsidiaries		87			132
Minority interest		509			662
Deferred income taxes		(7,828		)	2,528
Other adjustments		(137		)	(117		)
Changes in assets and liabilities, net of business acquisitions:
Receivables		(38,823		)	9,210
Inventories		(5,550		)	10,050
Prepaid expenses		(3,628		)	(2,547		)
Accounts payable		5,803			(901		)
Accrued expenses		1,423			(6,945		)
Other noncurrent liabilities		537			644
Income taxes payable		(4,830		)	4,097
Net cash flows from operations		(1,730		)	54,537
Cash flows from investing activities:
Purchase of property, plant & equipment		(11,430		)	(25,346		)
Investment in nonconsolidated subsidiary		(1,274		)	—
Proceeds from sale of assets		1,058			1,422
Dividends to minority interests		(302		)	(247		)
Other, net		(502		)	185
Net cash flows from investing activities		(12,450		)	(23,986		)
Cash flows from financing activities:
Net borrowings (payments) under short-term agreements		(93		)	2,091
Proceeds from long-term borrowings		475			16,500
Principal payments on long-term obligations		(5,197		)	(39,908		)
Dividends paid		(4,232		)	(3,877		)
Proceeds from exercises under stock plans		25,229			5,809
Excess tax benefits from stock option exercises		15,428			—
Purchase of common treasury shares—stock plan exercises		(30,138		)	(552		)
Net cash flows from financing activities		1,472			(19,937		)
Effect of exchange rate changes on cash and cash equivalents		388			(997		)
Net change in cash and cash equivalents		(12,320		)	9,617
Cash and cash equivalents—beginning of period		46,867			30,210
Cash and cash equivalents—end of period		$	34,547		$	39,827

 

See accompanying notes to condensed consolidated financial statements.

5

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

1. Summary of Significant Accounting Policies

Condensed Consolidated Financial Statements

The Condensed Consolidated Balance Sheet as of July 1, 2006, the Condensed Consolidated Statements of Operations for the thirteen and twenty-six week periods ended July 1, 2006 and June 25, 2005 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 July 1, 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 July 1, 2006 are not necessarily indicative of the operating results for the full year.

Cash overdrafts

Cash book overdrafts totaling $8,344 and $7,243 were classified as accounts payable at July 1, 2006 and December 31, 2005, respectively. The Company’s policy is to report changes in book overdrafts as an operating activity in the Condensed Consolidated Statement of Cash Flows.

Inventories

At July 1, 2006, approximately 51.2% of inventory is valued at the lower of cost, determined on the last-in, first-out (LIFO) method, or market. All other inventory is valued at the lower of cost, determined on the first-in, first-out (FIFO) method or market. Finished goods and manufactured goods inventories include the costs of acquired raw materials and related factory labor and overhead charges required to convert raw materials to manufactured finished goods. The excess of replacement cost of inventories over the LIFO value was approximately $34,300 and $29,100 at July 1, 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)

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 July 1, 2006, 1,283,295 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 twenty-six weeks ended July 1, 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 $384 and $713 of compensation expense (included in selling, general and administrative expenses) for the thirteen and twenty-six weeks ended July 1, 2006, respectively. The associated tax benefits recorded were $148 and $274, 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 weeks and twenty-six weeks ended June 25, 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. The Interpretation 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 the uncertainty in income taxes. 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 financial statements.

2. Goodwill and Intangible Assets

The Company’s annual impairment testing on its reporting units was performed during the third quarter of 2005. As a result of that testing, it was determined the goodwill and other intangible assets on the Company’s Consolidated Balance Sheet were not impaired.

Amortized Intangible Assets

The components of amortized intangible assets at July 1, 2006 and December 31, 2005 were as follows:

 

 

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

Amortization expense for intangible assets for the thirteen weeks ended July 1, 2006 and June 25, 2005 was $904 and $901, respectively. Amortization expense for intangible assets for the twenty-six weeks ended July 1, 2006, and June 25, 2005 was $1,816 and $1,803, 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 the recognition of the intangible asset and the Company’s expected use of the intangible asset.

Non-amortized intangible assets

Under the provisions of SFAS 142, intangible assets with indefinite lives are not amortized. The carrying value of the PiRod and Newmark trade names are $4,750 and $11,111, as of July 1, 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 2005. 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 24, 2005.

In its determination of these intangible assets as indefinite-lived, 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.

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

Goodwill

The carrying amount of goodwill as of July 1, 2006 was as follows:

 

Goodwill in the Company’s reporting units was tested in the third quarter of 2005. Based on the evaluation, the Company concluded that goodwill was not impaired as of September 24, 2005.

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 twenty-six weeks ended were as follows:

 

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

4. Earnings Per Share

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

 

At July 1, 2006 there were 36,000 outstanding options with exercise prices exceeding the market price of common stock that were therefore excluded from the computation of diluted earnings per share.

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 twenty-six weeks ended July 1, 2006 and June 25, 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

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

therefore has not restated prior periods. Under this transition method, compensation cost associated with employee stock options recognized in the thirteen and twenty-six weeks ended July 1, 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 July 1, 2006, the amount of unrecognized stock option compensation cost, to be recognized over a weighted average period of 1.60 years, was approximately $2,300.

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 $384 and $713 of share-based compensation expense, with associated tax benefit of $148 and $274 for the thirteen and twenty-six weeks ended July 1, 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 $15,428 was classified as financing cash flows for the twenty-six weeks ended July 1, 2006.

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 July 1, 2006, 1,283,295 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.

12

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

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 twenty-six weeks ended July 1, 2006:

 

Following is a summary of the status of stock options outstanding at July 1, 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 twenty-six weeks ended July 1, 2006.

At July 1, 2006, there was $4,858 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 $302 and $584 in the thirteen and twenty-six weeks ended July 1, 2006 (with associated tax benefits of $116 and $225, 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

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

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 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 OPERATIONS
For the Thirteen Weeks Ended July 1, 2006

 

16