<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
[ x ] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter period ended February 28, 1998
OR
[ ] 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 0-10796
________________________________
VALLEN CORPORATION
(Exact name of registrant as specified in its charter)
Texas 74-1366847
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13333 Northwest Freeway
Houston, Texas 77040
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 462-8700
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, exclusive of treasury shares, at April 14, 1997:
7,252,658 shares of Common Stock, $.50 Par Value
Page 1 of 9
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PART I
Item 1. Financial Statements
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
MAY 31, 1997
ASSETS (DERIVED FROM
FEBRUARY 28, 1998 AUDITED FINANCIAL
(UNAUDITED) STATEMENTS)
------------------------ -----------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents - $ 801
Investment securities, at cost which approximates market $ 1,000 2,050
Accounts receivable, net 43,819 35,168
Notes receivable, affiliate 150 650
Inventories 43,936 36,301
Prepaid expenses and other current assets 3,699 2,580
-------- --------
Total current assets 92,604 77,550
-------- --------
Property, plant and equipment, at cost 47,528 43,916
Less accumulated depreciation and amortization 25,759 23,704
-------- --------
Net property, plant and equipment 21,769 20,212
Notes receivable, non-current, affiliate 557 557
Investment in foreign affiliates, net 12,157 9,712
Intangibles, net of accumulated amortization 7,440 5,678
Other 3,658 3,693
-------- --------
$138,185 $117,402
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 370 $ 543
Accounts payable 21,436 11,469
Other accrued liabilities 2,926 2,075
Income taxes payable (120) 454
-------- --------
Total current liabilities 24,612 14,541
Long-term debt, excluding current maturities 15,138 10,425
Deferred income taxes 920 1,097
Shareholders' equity:
Preferred stock $1.00 par value; 1,000,000 shares
authorized and unissued
Common stock $.50 par value; 20,000,000 shares authorized,
9,758,075 shares issued and 7,252,658 outstanding at
February 28, 1998 and 9,740,874 shares issued and 7,278,707
outstanding at May 31, 1997 4,880 4,871
Additional paid-in capital 6,444 6,076
Translation adjustment (773) (773)
Retained earnings 90,566 83,779
-------- --------
101,117 93,953
Less cost of common shares held in treasury (2,505,417 at
February 28, 1998 and 2,462,167 at May 31, 1997 3,602 2,614
-------- --------
Total shareholders' equity 97,515 91,339
-------- --------
$138,185 $117,402
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
Page 2 of 9
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VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Thousands of Dollars Except for Per Share Amounts)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
-------------------------------------- ----------------------------------------
FEBRUARY 28, February 28, February 28, February 28,
1998 1997 1998 1997
---------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net sales $75,638 $67,032 $215,055 $190,241
Cost of sales 57,329 50,983 162,645 143,560
------- ------- -------- --------
Gross profit 18,309 16,049 52,410 46,681
Selling, general and
Administrative expenses 15,784 13,153 44,799 38,282
------- ------- -------- --------
Operating income 2,525 2,896 7,611 8,399
Earnings (loss) from foreign
affiliates, net 1,017 406 2,393 1,030
Interest and dividend income 29 83 145 155
Interest expense 263 170 664 514
Other income (expense), net 76 (58) 252 17
------- ------- -------- --------
Earnings before income taxes 3,384 3,157 9,737 9,087
Income taxes 976 1,079 2,950 3,257
------- ------- -------- --------
Net earnings $ 2,408 $ 2,078 $ 6,787 $ 5,830
======= ======= ======== ========
Net earnings per common share-basic $0.33 $0.29 $0.93 $0.80
======= ======= ======== ========
Net earnings per common share-diluted $0.33 $0.28 $0.92 $0.80
======= ======= ======== ========
Weighted average number of common
shares outstanding-basic 7,273 7,270 7,278 7,266
Weighted average number of common
shares outstanding-diluted 7,380 7,344 7,371 7,334
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
Page 3 of 9
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Nine months ended February 28, 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 6,787 $ 5,830
Adjustments to reconcile net earnings to net cash
provided by operating activities:
(Gain) loss on disposition of property,
plant and equipment (19) 5
Depreciation and amortization 2,544 2,953
Change in deferred income taxes (177) -
Undistributed earnings from foreign affiliates, net (2,445) (1,030)
Undistributed loss from U.S affiliate, net 115 206
Decrease in trading securities 1,050 151
(Increase) in accounts receivable, net (8,652) (2,955)
(Increase) in inventories (7,635) (2,308)
Decrease in notes receivable 500 65
Decrease (increase) in prepaid expenses (1,141) 1,531
(Increase) decrease in other assets 56 (654)
Increase in accounts payable
and accrued liabilities 10,350 1,020
------- -------
Net cash provided by operating activities 1,333 4,814
INVESTING ACTIVITIES:
Net additions to property, plant and equipment (3,925) (2,428)
Payments for purchase of, and investment in
In companies, net of cash acquired (1,493) (59)
Decrease in notes receivable - 1,042
Investments in affiliates (541) (896)
------- -------
Net cash used in investment activities (5,959) (2,341)
FINANCING ACTIVITIES:
Repurchase Company's common stock (995) -
Capital stock issued 9 -
Employee stock transactions 376 258
Increase (decrease) in long-term debt 4,435 (201)
------- -------
Net cash provided by financing activities 3,825 57
------- -------
Net increase (decrease) in cash and cash equivalents (801) 2,530
Cash and cash equivalents at beginning of period 801 831
------- -------
Cash and cash equivalents at end of period $ - $ 3,361
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest payments $ 623 $ 581
Income tax payments $ 3,692 $ 2,925
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
Page 4 of 9
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VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with the Instructions to Quarterly Reports on Form 10-Q
required to be filed with the Securities and Exchange Commission and do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. However, the information
furnished reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods. The
results of operations for the nine months ended February 28, 1998 are not
necessarily indicative of the results that will be realized for the fiscal year
ending May 31, 1998.
The accounting policies followed by the Company in preparing interim
consolidated condensed financial statements are similar to those described in
the "Notes to Consolidated Financial Statements" in the Company's Form 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, for the fiscal year ended May 31, 1997. For interim reporting purposes,
provisions for income taxes are recorded on the basis of the estimated annual
effective tax rate. Certain prior year amounts have been reclassified to
conform with present year presentation.
Investments in the common stock of the foreign affiliated companies are
accounted for by the equity method. The excess of cost of the stock of these
affiliates over the Company's share of their net assets at the acquisition date
is being amortized on a straight line basis over 40 years.
Basic net earnings per share were computed by dividing net earnings by the
weighted average number of shares outstanding during the periods. Diluted
earnings per share is calculated based upon the requirements as set forth in FAS
128, and includes the impact of dilutive potential common shares outstanding
during the period. During the nine months ended February 28, 1998, shares
purchased through the employee stock purchase plan increased the number of
shares outstanding by 14,201 shares. The weighted average number of shares
outstanding for the nine months ended February, 1998 and 1997 were computed
based on the actual number of common shares outstanding, with consideration for
common stock equivalents as noted above.
Note 2. Inventory costs are summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, May 31,
1998 1997
---------------- --------------
(Thousands of Dollars)
<S> <C> <C>
Raw materials $ 1,953 $ 1,329
Work in process 659 705
Finished goods 41,324 34,267
------- -------
Total inventories $43,936 $36,301
======= =======
</TABLE>
Page 5 of 9
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Thousands of Dollars)
RESULTS OF OPERATIONS
Third Quarter Ended February 28, 1998 Compared to
THIRD QUARTER ENDED FEBRUARY 28, 1997
__________________________________________
Net sales increased 12.8% to $75,638, and gross profit dollars increased 14.1%
to $18,309. The Company's distribution business resulted in record sales of
$73,272 for the quarter ended February 28, 1998, up 15% when compared to the
same period last year. The manufacturing operations sales showed an increase of
7% to $5,087, compared to the quarter ended February 28, 1997. The increase in
this segment is attributed to a stronger market for the Company's eyewear
product line.
Selling, general, and administrative expenses as a percent of net sales were
20.8% for the quarter ended February 28, 1998, compared to 19.6% for same
quarter last year. The primary reasons for the increase were for additional
personnel in the growing services segment of the distribution business and non-
capitalized expenses related to acquisitions. Earnings from foreign affiliates
totaled $1,017 for the quarter ending February 28, 1998, a 150% increase over
the same quarter last year. The increase was due to higher earnings from the
50% owned Mexican affiliate, Proveedora de Seguridad based on significant new
contracts in Mexico. Operations income of $2,525 for the quarter was 12.8%
lower than the comparable period in 1997 due to flat profit margins in the
distribution business and the increase in operating expenses as noted above.
Net earnings increased 15.9% to $2,408 in the quarter ended February 28, 1998 or
$.33 per diluted common share, compared to $2,078 or $.28 per diluted common
share for the same period last year. The increase is due primarily to the
record sales levels and higher levels of equity income recorded from foreign
affiliates in the Company's distribution businesses, and in part by an upturn in
operating results of the manufacturing segment.
NINE MONTHS ENDED FEBRUARY 28, 1998 COMPARED TO
NINE MONTHS ENDED FEBRUARY 28, 1997
_____________________________________________
Sales increased 13.0% to $215,055 and gross profit dollars increased 12.3% to
$52,410. The reasons for the sales and gross profit increases between
comparable periods were consistent with those discussed above for the comparable
quarters. Selling, general, and administrative expenses were up 17.0% to
$44,799. The primary reason for higher operating expenses in 1998 are related to
more branches opened or acquired by acquisition, and front end loaded costs for
rollout of new service centers. As a percent of net sales, selling, general, and
administrative expenses were 20.8% for the period ended February 28, 1998 as
compared to 20.1% for the nine months ended February 28, 1997. Net earnings
increased 16.4% year to date to $6,787, or $.92 per diluted common share,
compared to $5,830, or $.80 per diluted common share, for the same nine month
period in the previous year. The increase is due primarily to the distribution
segment's higher sales during the current year and equity earnings from foreign
operations in Mexico and Canada which were up 132% from the period ended
February 28, 1997.
Page 6 of 9
<PAGE>
FINANCIAL CONDITION
FEBRUARY 28, 1998 COMPARED TO MAY 31, 1997
____________________________________
Cash flows provided by operations for the nine months ended February 28, 1998
totaled $1,333 compared to $4,814 for the period ended February 29, 1997. The
decrease in the current period compared to the same period of the prior year, is
primarily due to the increase in inventories for the distribution business and a
higher level of undistributed earnings from foreign affiliates in Mexico and
Canada.
Cash and cash equivalents decreased by $3,361 primarily due to the decrease in
cash provided by operations as discussed above. Accounts receivable increased
$8,652, and inventories increased $7,635, primarily as a result of increased
sales levels and acquisitions of companies. Net additions to property, plant
and equipment were $3,925, primarily for operating equipment and computer
hardware and software, and assets added through the acquisition of Sheridan
Safety in the second quarter of fiscal 1998. Employee stock transactions
increased for the nine months ended February 28, 1998, with the issuance of
14,201 shares in January, 1998.
The Company repurchased 50,000 shares of its common stock in open market
purchases during the period. The stated purpose for these transactions is to
provide shares which can be issued upon the exercise of stock options held by
employees.
The Company's total working capital as of the end of the third quarter of fiscal
1998 is $68 million compared to $63 million at May 31, 1997. The current ratio
of 3.8 to 1 at February 28, 1998 compares to 5.3 to 1 at May 31, 1997.
Management believes the Company's liquidity, working capital and borrowing
capacity are sufficient to meet capital expenditure and working capital needs in
the future.
Page 7 of 9
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PART II OTHER INFORMATION
Item 1. Legal proceedings - None
Item 2. Changes in securities - None
Item 3. Defaults upon senior securities - None
Item 4. Submission of matters to a vote of security holders - None
Item 5. Other information - None
Item 6. (a) Exhibits:
3i. Restated Articles of Incorporation as amended. Incorporated
by reference is Exhibit 3a to the Company's Form 10-K, as
filed with the Securities and Exchange Commission on August
17, 1990.
3ii. Bylaws of the Company, as amended, through June 23, 1994.
Incorporated by reference is Exhibit 3ii to the Company's
Form 10-Q, as filed with the Securities and Exchange
Commission on January 16, 1996.
27. Financial Data Schedule, attached hereto.
Page 8 of 9
<PAGE>
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 by the
undersigned thereto duly authorized.
VALLEN CORPORATION
--------------------------------------
Registrant
April 15, 1998 /s/ James W. Thompson
- ------------------------- --------------------------------------
Date James W. Thompson
President
April 15, 1998 /s/ Leighton J. Stephenson
- ------------------------- --------------------------------------
Date Leighton J. Stephenson
Vice President - Finance,
Secretary and Treasurer
Page 9 of 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAY-31-1998 MAY-31-1998
<PERIOD-START> DEC-01-1997 JUN-01-1997
<PERIOD-END> FEB-28-1998 FEB-28-1998
<CASH> 0 0
<SECURITIES> 0 1,000
<RECEIVABLES> 0 44,382
<ALLOWANCES> 0 (413)
<INVENTORY> 0 43,936
<CURRENT-ASSETS> 0 92,605
<PP&E> 0 47,528
<DEPRECIATION> 0 25,759
<TOTAL-ASSETS> 0 138,185
<CURRENT-LIABILITIES> 0 24,612
<BONDS> 0 0
0 0
0 0
<COMMON> 0 4,880
<OTHER-SE> 0 92,635
<TOTAL-LIABILITY-AND-EQUITY> 0 138,195
<SALES> 75,638 215,055
<TOTAL-REVENUES> 75,638 215,055
<CGS> 57,329 162,645
<TOTAL-COSTS> 57,329 162,645
<OTHER-EXPENSES> 15,784 44,799
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 263 664
<INCOME-PRETAX> 3,384 9,737
<INCOME-TAX> 976 2,950
<INCOME-CONTINUING> 2,408 6,787
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,408 6,787
<EPS-PRIMARY> 0.33 0.93
<EPS-DILUTED> 0.33 0.92
</TABLE>
