<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 quarterly period ended August 31, 1999
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 October 8, 1999:
7,192,264 shares of Common Stock, $.50 Par Value
<PAGE>
PART I
Item 1. FINANCIAL STATEMENTS
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1999 1999
----------- -------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,356 $ 1,524
Investment securities, at cost which approximates market 2,300 3,000
Accounts receivable, net 42,916 50,878
Inventories 46,566 42,674
Prepaid expenses and other current assets 4,497 5,239
-------- --------
Total current assets 97,635 103,315
Property, plant and equipment, at cost 40,579 39,453
Less accumulated depreciation and amortization 26,007 25,234
-------- --------
Net property, plant and equipment 14,572 14,219
Notes receivable, non-current, affiliate 423 427
Investment in foreign affiliates, net 17,905 17,002
Intangibles, net of accumulated amortization 6,970 7,108
Other 3,341 909
-------- --------
$140,846 $142,980
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 2,968 $ 961
Accounts payable 11,872 15,057
Accrued liabilities 2,893 2,981
Income taxes payable 71 -
-------- --------
Total current liabilities 17,804 18,999
Long-term debt, excluding current maturities 13,804 15,829
Deferred income taxes 837 834
Other non-current liabilities 636 764
Minority interest (379) (333)
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 and 7,192,264 shares issued and
outstanding at August 31, 1999, respectively, and
9,758,075 and 7,182,264 issued and outstanding at
May 31, 1999, respectively 4,879 4,879
Additional paid-in capital 7,017 6,861
Accumulated other comprehensive loss (831) (837)
Retained earnings 102,434 101,360
Less cost of common shares held in treasury (2,565,811 and
2,575,811 shares at August 31, 1999 and
May 31, 1999, respectively) (5,355) (5,376)
-------- --------
Total shareholders' equity 108,144 106,887
-------- --------
$140,846 $142,980
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
Page 2 of 12
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Thousands of Dollars Except for Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
--------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Net sales $70,679 $72,936
Cost of sales 53,179 55,133
------- -------
Gross profit 17,500 17,803
Selling, general and administrative expenses 17,024 16,150
------- -------
Operating income 476 1,653
Earnings from foreign affiliates, net 902 940
Interest and dividend income 38 73
Interest expense (236) (195)
Other (expense), net (88) (4)
------- -------
Earnings before income taxes 1,092 2,467
Income taxes 64 630
Minority interests (46) (46)
------- -------
Net earnings $ 1,074 $ 1,883
======= =======
Net earnings per common share - basic $ 0.15 $ 0.26
======= =======
Net earnings per common share - diluted $ 0.15 $ 0.26
======= =======
Weighted average number of common shares outstanding - basic 7,191 7,225
Weighted average number of common shares outstanding - diluted 7,237 7,325
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
Page 3 of 12
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (UNAUDITED)
(Thousands of Dollars)
THREE MONTHS ENDED
-------------------
AUGUST 31,
-------------------
1999 1998
------ ----
Net earnings $1,074 $1,883
Other comprehensive earnings:
Foreign currency translation gains 6 17
------ ------
Total comprehensive earnings $1,080 $1,900
====== ======
See accompanying Notes to Consolidated Financial Statements (Unaudited).
Page 4 of 12
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three months ended August 31, 1999 1998
- ----------------------------- ---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 1,074 $ 1,883
Adjustments to reconcile net earnings to net cash
provided by operating activities:
(Gain) loss on disposition of property,
plant and equipment (1) 17
Depreciation and amortization 920 784
Change in deferred income taxes 3 7
Undistributed earnings from foreign affiliates, net (902) (940)
Undistributed loss from U.S. affiliate, net - 65
Undistributed earnings from U.S. partnership, net 1 (162)
Compensation expense related to restricted sock award 19 -
Change in minority interest of majority-owned
foreign affiliate (46) (46)
Decrease in investment securities 700 -
Decrease in accounts receivable, net 7,962 1,947
(Increase) decrease in inventory (3,892) 2,155
(Increase) in notes receivable, current - (650)
(Increase) decrease in prepaid expenses
and other current assets 742 (175)
(Increase) in other assets (267) (209)
Decrease in accounts payable
and other liabilities (3,330) (4,302)
------- -------
Net cash provided by operating activities 2,983 374
INVESTING ACTIVITIES:
Proceeds from disposition of assets - 17
Net additions to property, plant and equipment (1,136) (598)
Payments for acquisitions of businesses, net of cash acquired (2,165) -
Decrease in notes receivable 4 -
------- -------
Net cash used in investing activities (3,297) (581)
FINANCING ACTIVITIES:
Additions to long-term debt 63 1,500
Reduction of long-term debt (81) (196)
Treasury stock purchases - (925)
Stock transactions 158 88
------- -------
Net cash provided by financing activities 140 467
------- -------
Net (decrease) increase in cash and cash equivalents (174) 260
Effect of exchange rate on cash and cash equivalents 6 17
Cash and cash equivalents at beginning of period 1,524 1,041
------- -------
Cash and cash equivalents at end of period $ 1,356 $ 1,318
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments $ 242 $ 203
Income tax payments 15 626
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
Page 5 of 12
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Thousands of Dollars)
Note 1: Basis of Presentation and Significant Accounting Policies
The accompanying unaudited consolidated 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 and are of a normal and
recurring nature. The results of operations for the three months ended August
31, 1999 are not necessarily indicative of the results that will be realized for
the fiscal year ending May 31, 2000. These financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in Vallen Corporation's ("Vallen" or the "Company") Annual Report on Form 10-K
for the fiscal year ended May 31, 1999.
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 for the fiscal year ended May 31, 1999. 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 current year presentation.
Investments in the common stock of foreign affiliated companies are accounted
for by the equity method. The excess 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.
Net earnings per share were computed per the requirements of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 requires a dual presentation of basic and diluted earnings per share
("EPS"). Basic EPS was computed by dividing net earnings by the weighted
average number of shares outstanding during the periods. Diluted EPS was
calculated by dividing net earnings by the combination of weighted average
number of shares outstanding and the impact of dilutive potential common shares
outstanding during the period. The net earnings for both basic and diluted EPS
were $1,074 and $1,883 for the three month periods ended August 31, 1999 and
1998, respectively. The weighted average shares outstanding for the periods
ended August 31, 1999 and 1998 are as follows:
1999 1998
---- ----
Basic 7,191,000 7,225,000
Restricted stock grant 20,000 -
Incremental shares from exercise of
outstanding stock options 26,000 100,000
--------- ---------
Diluted 7,237,000 7,325,000
========= =========
Page 6 of 12
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Thousands of Dollars)
Note 2: Inventory costs are summarized as follows:
August 31, 1999 May 31, 1999
--------------- ------------
Raw Materials $ 1,873 $ 1,878
Work-in-process 128 157
Finished goods 44,565 40,639
------- -------
Total inventories $46,566 $42,674
======= =======
Note 3: Long-term Debt
The Company has a $13.5 million working capital credit facility with a major
commercial bank and at August 31, 1999, the Company had drawn $13 million under
the facility. Of the $13 million borrowed, $6 million bore interest at 5.81%,
$4.8 million bore interest at 5.94%, $1.2 million bore interest at 5.85% and $1
million bore interest at 5.98%.
On October 1, 1999, the Company entered into a new $5 million revolving
promissory note with a major commercial bank, the proceeds of which were used to
partially finance the Company's recent acquisitions. This unsecured revolving
credit facility provides, at the Company's option, interest at the prime rate or
LIBOR plus a margin of 1% to 2% depending on certain financial ratios. Fees on
this facility range from .25% to .5% depending on the amounts borrowed and the
results of the same certain financial ratios. The Company is required, under
this agreement, to prepare a borrowing base report, maintain certain financial
ratios, maintain an adjusted minimum net worth of at least $100 million and to
limit capital expenditures to $4.5 million during the term of the note. The
maturity date of this note is April 3, 2000.
The Company's variable rate, tax exempt industrial development bonds of $2.75
million bore interest at 3.45% as of August 31, 1999.
Page 7 of 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THREE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1998:
RESULTS OF OPERATIONS
Net sales decreased 3.1% to $70.7 million and gross profit decreased by
1.7% to $17.5 million. The decrease in net sales was a result of a continuation
of the lower sales levels in the core distribution products group that began in
the third quarter of fiscal year 1999 and continued into early August. During
August, sales levels began to recover and exceeded the sales of August 1998 by
4.3%. Gross profit dollar levels for the distribution business decreased 2.2%
from last year because of the lower sales levels. Gross profit for the
manufacturing business increased 1.2% over 1998 as a result of reduced direct
manufacturing costs.
Selling, general and administrative expenses increased 5.4%, due to a
combination of greater service business related expenses associated with the
Company's strategic plan to increase the supplementary service lines to provide
its customers with the Company's broader concept of safety distribution lines,
sales campaign start-up costs in the manufacturing business, and higher payroll
related costs as a result of tightening labor markets that was partially offset
by reduced employee workforce. Interest expense was higher in the first quarter
of fiscal 2000 compared to the prior year's first quarter as a result of higher
outstanding levels of borrowing partially offset by lower interest rates. Other
income decreased primarily due to the cessation of the existing Lion-Vallen
partnership contract with the Department of Defense that occurred in June, 1999.
The partnership has since entered into a new contract with the Department of
Defense to provide similar services in another location that is scheduled to
begin operations in the third quarter of fiscal year 2000.
Earnings from foreign affiliates decreased to $902 thousand in fiscal year
2000 compared to $940 thousand in the same period of fiscal year 1999 primarily
as a result of lower earnings recorded by Century Sales, the Company's 50% owned
Canadian affiliate. The Canadian affiliate's operations have been negatively
affected by the downturn in the energy business in Western Canada, which
includes many of its customers. The recovery of energy prices have resulted in
an increased level of capital spending in the energy sector and a corresponding
improvement in the operating results of Century. Earnings recorded by the
Company's 50% owned Mexican affiliate, Proveedora, continue to be positively
impacted by the continuation of its services contract with Pemex. One
significant contract expired at May 31, 1999 but was replaced by a comparable
contract in July.
Net earnings decreased 43% in the quarter ended August 31, 1999 to $1.08
million ($.15 per diluted share), compared to $1.88 million ($.26 per diluted
share) in the previous year's first quarter. The decrease in earnings was a
result of a combination of lower sales in Vallen Safety's domestic distribution
operations and higher selling, general and administrative costs related to
higher levels of services business in effect through August 31.
FINANCIAL CONDITION
Cash flows provided by operations for the three months ended August 31,
1999 totaled $3.0 million compared to $374 thousand for the three months ended
August 31, 1998. The increase in the current period compared to the same period
of the prior year is primarily related to lower levels accounts receivable due
to positive results from increased collection efforts with certain significant
Page 8 of 12
<PAGE>
customers, other current assets and marketable securities partially offset by
cash used to increase inventory levels due to higher seasonal demands.
The Company's financial position during fiscal quarter of 2000 remains
strong with working capital of $79.8 million and a current ratio of 5.5 to 1
compared to working capital of $84.3 million and a current ratio of 5.4 to 1 at
May 31, 1999. Management believes the Company's liquidity, working capital and
borrowing capacity due to relatively low current financial leverage levels are
sufficient to meet capital expenditure and working capital needs in the future.
Lion Vallen Partnership income was based upon a U.S. government let
contract to supply clothing to a Department of Defense base. That contract
expired in June 1999. The partnership, of which 50% is owned by a Vallen
subsidiary, recently was awarded a new contract with the Department of Defense
to manage a procurement, inventory logistics and distribution program for
military recruit clothing items for approximately two thousand ordering
locations throughout the Southeast United States. The new operation will be
based in Virginia and will provide logistics and supply chain management under
the contract with a base period of three years, with additional one year options
up to a maximum of ten years. The announced value of the fee-based contract is
approximately $110 million for the ten-year period and operations are expected
to commence in December 1999. During the three months ended August 31, 1999,
the Company recognized a loss of $1 thousand compared to equity earnings of $162
thousand from the partnership for the same period of fiscal year 1999.
During the three months ended August 31, 1999, the Company purchased the
businesses of Gulf Coast Respiratory Services (GCRS) of Houston, Texas and
Augusta Automatic Fire Systems and Equipment, Inc. of Augusta, Georgia. GCRS is
a leading provider of occupational respiratory protection testing and safety
consulting services, serving Gulf Coast markets. The Company plans to expand
GCRS operations to a national basis over the next year. Augusta Automatic Fire
installs and services fire protection systems and portable extinguisher units in
the Northeast Georgia and South Carolina markets.
On October 6, 1999, the Company purchased the business of Keller Fire &
Safety, Inc., (Keller) of Kansas City, Kansas. Keller is a privately owned
regional provider of industrial and commercial fire suppression and fire alarm
systems as well as portable fire safety equipment. Keller provides full service
installation and system maintenance capabilities for its customers, as well as
installation and maintenance of commercial sprinkler systems. Based in Kansas
City, Keller covers the greater Kansas City area, eastern Kansas and western
Missouri. Additionally, Keller's technicians oversee systems installation
project for larger customers in other geographical areas. They feature a
complete system design and logistic planning service for turnkey fire system
service.
YEAR 2000 ISSUE
The Company's business is heavily dependent on its information systems.
These systems are critical in providing users with information regarding product
pricing and availability; order status; warehouse operations; inventory
purchases and management; financial reporting; and other operational functions.
Year 2000 issues exist when year dates in computer programs are recorded
using two digits, instead of four, and are then used for arithmetic operations,
comparisons or sorting. A two-digit date recording may recognize a date using
"00" as 1900 rather than 2000, and that could cause the
Page 9 of 12
<PAGE>
Company's computer systems to perform inaccurate computations. The Company's
Year 2000 issues relate not only to its own systems, but also to those of its
customers and suppliers.
The Company conducted a comprehensive review of its internal computer
systems and applications to identify those that might be affected by the year
2000 issue and developed an implementation plan to resolve the year 2000 issue.
The Company corrected or replaced those systems and applications that were not
year 2000 compliant. Conversion of the Company's computer systems has been
completed and tested. All Company computer systems are now year 2000 compliant.
It is anticipated that all year 2000 compliance efforts are complete.
However, if such modifications and conversions were not completed accurately,
the year 2000 issue may have a material impact on the operations of the Company.
The Company is also working to ensure that products purchased by Vallen, as well
as services utilized by Vallen, will be year 2000 compliant. However, no
assurance can be given that such compliance will happen.
Vallen has established a year 2000 business resumption planning committee
to evaluate business disruption scenarios, coordinate the establishment of year
2000 contingency plans, and identify and implement preemptive strategies.
Detailed contingency plans for critical business processes have been developed.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
The information discussed herein includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (The "Exchange Act"). All statements other than statements of
historical facts included herein regarding planned capital expenditures, the
Company's financial position, business strategy and other plans and objectives
for future operations, are forward-looking statements (typically using words
such as "expert," "plan," "anticipate," "believe," and similar expressions).
Although the Company believes that such forward looking statements reasonably
reflect expected outcomes, certain risks and assumptions are involved, and there
is no conclusive evidence that such expectations will ultimately prove correct.
Factors which may come into play which could cause actual results to vary from
anticipated results include acquisition programs involved in expansion
strategies, market competition affecting operating margins, depressed business
environments for the Company's customers, the Company's ability to compete
successfully with other competitors for the same markets (some of whom may be
larger and have greater resources than the Company), ability to obtain products
needed to remain competitive over long periods of time, ability to continue to
produce technically competitive products in its manufacturing segment, possible
exchange rate fluctuations related to affiliates in other countries, and changes
in regulatory requirements in its geographic markets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Total debt at August 31, 1999 included $16.7 million of floating rate debt
to banks and for industrial development bonds. As a result, the Company's
annual interest cost in fiscal year 2000 will fluctuate based on short-term
interest rates. The impact on annual cash flow of a 100 basis point change in
the floating rate would be approximately $105,000.
Page 10 of 12
<PAGE>
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company conducts a portion of its business in the Canadian dollar and
is therefore subject to foreign currency exchange rate risk on cash flows
related to sales, expenses, financing and investing transactions. Exposure from
market rate fluctuations related to activities in Canada, where the Company's
functional currency is the Canadian dollar, is not material at this time.
PART II OTHER INFORMATION
Item 1. Legal proceedings - None
Item 2. Changes in securities and use of proceeds - 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.
(b) Reports on Form 8-K:
None
Page 11 of 12
<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
October 15, 1999 /s/ James W. Thompson
- ------------------------------- -----------------------------------
Date James W. Thompson
President
October 15, 1999 /s/ Leighton J. Stephenson
- -------------------------------- -----------------------------------
Date Leighton J. Stephenson
Vice President - Finance,
Secretary and Treasurer
Page 12 of 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 1,356
<SECURITIES> 2,300
<RECEIVABLES> 43,427
<ALLOWANCES> 511
<INVENTORY> 46,566
<CURRENT-ASSETS> 97,635
<PP&E> 40,579
<DEPRECIATION> 26,007
<TOTAL-ASSETS> 140,846
<CURRENT-LIABILITIES> 17,804
<BONDS> 0
0
0
<COMMON> 4,879
<OTHER-SE> 103,265
<TOTAL-LIABILITY-AND-EQUITY> 140,846
<SALES> 70,679
<TOTAL-REVENUES> 70,679
<CGS> 53,179
<TOTAL-COSTS> 53,179
<OTHER-EXPENSES> 17,024
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 236
<INCOME-PRETAX> 1,092
<INCOME-TAX> 64
<INCOME-CONTINUING> 1,074
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,074
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
</TABLE>
