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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 SEPTEMBER 30, 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 1-8009
ROHN INDUSTRIES, INC.
(Delaware)
6718 West Plank Road
Peoria, Illinois 61604
IRS Employer Identification Number 36-3060977
TELEPHONE NUMBER (309) 697-4400
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 /x/ No / /
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Shares Outstanding as of November 12, 1999 |
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Common Stock $.01 par value | 52,752,259 |
ROHN Industries, Inc and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except for per share data)
(unaudited)
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Three Months Ended |
Nine Months Ended |
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September 30, 1999 |
September 30, 1998 |
September 30, 1999 |
September 30, 1998 |
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Net sales | $ | 36,855 | $ | 47,541 | $ | 96,085 | $ | 128,537 | ||||
Cost of products sold | 27,214 | 37,473 | 74,365 | 95,651 | ||||||||
Gross profit | 9,641 | 10,068 | 21,720 | 32,886 | ||||||||
Operating expenses: | ||||||||||||
Selling expenses | 1,706 | 2,102 | 5,831 | 6,630 | ||||||||
General and administrative expenses | 2,617 | 1,860 | 8,191 | 7,214 | ||||||||
Operating income | 5,318 | 6,106 | 7,698 | 19,042 | ||||||||
Interest expense(income), net | (12 | ) | 87 | (29 | ) | 383 | ||||||
Other expense | | | 1,600 | | ||||||||
Income before income taxes | 5,330 | 6,019 | 6,127 | 18,659 | ||||||||
Income tax provision | 2,000 | 2,225 | 2,250 | 7,075 | ||||||||
Equity loss of corporate joint venture | 298 | 233 | 355 | 233 | ||||||||
Net income | $ | 3,032 | $ | 3,561 | $ | 3,522 | $ | 11,351 | ||||
Earnings per sharebasic and diluted |
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$ |
0.06 |
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$ |
0.07 |
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$ |
0.07 |
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$ |
0.22 |
Weighted average number of shares outstanding |
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Basic | 52,752 | 52,851 | 52,784 | 52,758 | ||||||||
Diluted | 52,964 | 52,852 | 52,869 | 52,765 | ||||||||
The accompanying notes to the financial statements are an integral part of these statements.
2
ROHN Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
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September 30, 1999 |
December 31, 1998 |
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(unaudited) |
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ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 27,552 | $ | 19,690 | |||
Accounts, notes and other receivables, less allowance for doubtful accounts of $977 in 1999 and $1,694 in 1998 | 25,256 | 28,588 | |||||
Inventories | 26,060 | 27,444 | |||||
Deferred income taxes | 2,600 | 2,600 | |||||
Prepaid expenses | 981 | 1,794 | |||||
TOTAL CURRENT ASSETS | 82,449 | 80,116 | |||||
Property, plant and equipment |
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51,555 |
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48,025 |
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Less: accumulated depreciation | (23,935 | ) | (21,395 | ) | |||
TOTAL PROPERTY, PLANT AND EQUIPMENT | 27,620 | 26,630 | |||||
Other assets |
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1,529 |
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5,277 |
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Long-term assets of discontinued operations | 1,680 | 2,169 | |||||
TOTAL ASSETS | $ | 113,278 | $ | 114,192 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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CURRENT LIABILITIES | |||||||
Current portion of long-term liabilities | $ | 1,048 | $ | 1,017 | |||
Accounts payable | 6,929 | 11,331 | |||||
Accrued liabilities & other | 15,244 | 14,846 | |||||
Customer deposits | 235 | 940 | |||||
Net liabilities of discontinued operations | 1,275 | 1,152 | |||||
TOTAL CURRENT LIABILITIES | 24,731 | 29,286 | |||||
Long-term debt | 9,423 | 10,253 | |||||
Nonpension post retirement benefits | 2,533 | 2,074 | |||||
TOTAL LIABILITIES | 36,687 | 41,613 | |||||
STOCKHOLDERS' EQUITY |
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Common stock | 534 | 535 | |||||
Capital surplus | 12,815 | 13,024 | |||||
Retained earnings | 68,025 | 64,503 | |||||
Treasury stock | (3,896 | ) | (3,896 | ) | |||
Unearned portion of restricted stock | (887 | ) | (1,587 | ) | |||
TOTAL STOCKHOLDERS' EQUITY | 76,591 | 72,579 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
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$ |
113,278 |
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$ |
114,192 |
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The accompanying notes to the financial statements are an integral part of these statements.
3
ROHN Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(In thousands)
(unaudited)
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Nine Months Ended September 30, |
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1999 |
1998 |
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CASH FLOW FROM OPERATING ACTIVITIES | |||||||
Net income | $ | 3,522 | $ | 11,351 | |||
Adjustments for noncash items included in net income: | |||||||
Depreciation and amortization | 2,540 | 2,481 | |||||
Operating requirements: | |||||||
Accounts receivable decrease | 3,332 | 1,935 | |||||
Inventories decrease | 1,384 | 2,145 | |||||
Prepaid expenses decrease | 813 | 31 | |||||
Accounts payable & accrued expenses decrease | (4,709 | ) | (11,765 | ) | |||
Discontinued operations increase/(decrease) | 123 | (2,175 | ) | ||||
Net cash provided by operating activities | 7,005 | 4,003 | |||||
CASH FLOW FROM INVESTING ACTIVITIES |
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Purchase of plant and equipment, net of retirements | (3,530 | ) | (1,439 | ) | |||
Equity investment decrease/(increase) in joint venture | 3,129 | (3,340 | ) | ||||
Decrease in other assets | 1,108 | 165 | |||||
Net cash (used in)/provided by investing activities | 707 | (4,614 | ) | ||||
CASH FLOW FROM FINANCING ACTIVITIES |
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Repayment of borrowings | (799 | ) | (712 | ) | |||
Increase in long term liabilities | 459 | | |||||
Issuance of common stock | 490 | 371 | |||||
Net cash used in financing activities | 150 | (341 | ) | ||||
Net increase/(decrease) in cash and cash equivalents |
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7,862 |
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(952 |
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Cash & cash equivalents, beginning of period |
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19,690 |
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5,994 |
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Cash & cash equivalents, end of period | $ | 27,552 | $ | 5,042 | |||
Cash paid during the period for interest |
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206 |
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753 |
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Cash paid during the period for income taxes | | 5,816 |
The accompanying notes to the financial statements are an integral part of these statements.
4
ROHN Industries, Inc. and Subsidiaries
Notes to Unaudited Financial Statements
(1) Basis of Reporting for Interim Financial Statements
The Company, pursuant to the rules and regulations of the Securities and Exchange Commission, has prepared the unaudited financial statements included herein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
The financial statements presented herewith reflect all adjustments (consisting of only normal and recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the results of operations for the three-month and nine month periods ended September 30, 1999 and 1998. The results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.
(2) Revenue Recognition
The Company's products are manufactured according to stringent customer specifications and engineering design, and are available for immediate delivery according to the schedule requested by the customer. Revenue is generally recognized when the product is shipped. However, the Company recognizes revenue for its Tower Structures segment prior to the time a product is shipped if each of the following conditions are met:
The Enclosures segment differs from Tower Structures in that enclosures are generally ordered by the customer in multiple units on a project basis and are not necessarily site specific. Therefore, the revenue recognition policy for enclosures also requires that actual payment be received for enclosures on a bill and hold basis.
(3) Principles of Consolidation
The financial statements include the consolidated accounts of ROHN Industries, Inc. and its subsidiaries ("ROHN" or the "Company"). All significant inter-company transactions have been eliminated in consolidation. The Company accounted for its 49% interest in ROHN BrasilSat, a corporate joint venture in Brazil, under the equity method until its disposition in September 1999.
5
(4) Net Income Per Share
Basic earnings per share were computed by dividing net income by the weighted average number of shares outstanding during each period. Diluted earnings per share were calculated by including the effect of all dilutive securities. For the nine months ended September 30, 1999 and 1998, the effect of potentially dilutive stock options was 84,500 and 7,000, respectively. For the three months ended September 30, 1999 and 1998, the effect of potentially dilutive stock options was 211,000 and 1,000, respectively. The Company had additional outstanding stock options of 745,000 as of September 30, 1999, which were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares.
(5) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventory costs include material, labor and factory overhead.
Total Inventories
(In Thousands)
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September 30, 1999 |
December 31, 1998 |
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Finished goods | $ | 12,158 | $ | 14,514 | ||
Work-in-process | 6,230 | 4,650 | ||||
Raw materials | 7,672 | 8,280 | ||||
Total Inventories | $ | 26,060 | $ | 27,444 | ||
(6) Investment in Joint Venture
In December 1997, the Company formed a corporate joint venture, ROHN BrasilSat, S.A. ("ROHN BrasilSat"), with BrasilSat Harald, S.A., Brazil's largest tower manufacturer and installer, to serve the growing telecommunications infrastructure industry in Brazil and the rest of South America. In September 1999, after re-evaluating its investment, the Company sold its 49% interest in ROHN BrasilSat to its joint venture partner, BrasilSat Harald, S.A.
ROHN BrasilSat was in the process of constructing production facilities in Curitiba, Brazil for the manufacture of concrete and lightweight composite equipment enclosures, tapered steel poles, and self-supporting and guyed towers. ROHN BrasilSat was also to provide complete installation services. As part of the corporate joint venture agreement between the parties, ROHN BrasilSat was the exclusive distributor for ROHN's self-supporting and guyed towers in Brazil, while ROHN had exclusive rights to distribute BrasilSat brand towers worldwide except in Brazil.
The Company accounted for the corporate joint venture under the equity method. The Company recorded a loss of $298,000 in the third quarter of 1999 arising out of the corporate joint venture, of which $63,000 represented the Company's share of the operating losses of the entity and $235,000 of the loss was related to the sale of the Company's interest in the joint venture. The Company recorded a loss of $233,000 in the third quarter of 1998 arising out of the corporate joint venture, which represented the Company's share of the start-up losses.
6
(7) Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which requires companies to report all changes in equity during a period, except those resulting in investment by owners and distribution to owners, in a financial statement for the period in which they are recognized. The Company has not had any transactions that would cause any difference in the amount reported as net income and comprehensive income.
(8) New Accounting Standards
In 1999, the Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company does not currently engage in these types of transactions.
(9) Business Segment Information
The Company operates in two business segments: Tower Structures and Enclosures. The segments are managed as strategic business units due to their distinct manufacturing processes and potential end-user applications. The Tower Structures segment includes manufacturing plants in Peoria, Illinois and Frankfort, Indiana. The Enclosures segment includes a manufacturing plant in Bessemer, Alabama.
7
Accounting policies for measuring segment assets and earnings before interest and taxes are substantially consistent with those described in Note 1. The Company evaluates segment performance based on earnings before interest and taxes. Transfers between segments, which are not material in nature, are recorded at cost.
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Tower Structures Segment |
Enclosures Segment |
Total |
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For the three months ended September 30, | |||||||||
1999 |
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Net sales | $ | 25,478 | $ | 11,377 | $ | 36,855 | |||
Operating income/(loss) | 3,445 | 1,873 | 5,318 | ||||||
Depreciation and amortization | 700 | 158 | 858 | ||||||
Segment assets | $ | 81,115 | $ | 32,163 | $ | 113,278 | |||
1998 |
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Net sales | $ | 30,872 | $ | 16,669 | $ | 47,541 | |||
Operating income | 2,311 | 3,795 | 6,106 | ||||||
Depreciation and amortization | 569 | 156 | 725 | ||||||
Segment assets | $ | 62,520 | (1) | $ | 44,541 | $ | 107,061 |
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Tower Structures Segment |
Enclosures Segment |
Total |
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For the nine months ended September 30, | |||||||||
1999 |
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Net sales | $ | 68,051 | $ | 28,034 | $ | 96,085 | |||
Operating income/(loss) | 3,036 | 4,662 | 7,698 | ||||||
Depreciation and amortization | 2,090 | 450 | 2,540 | ||||||
Segment assets | $ | 81,115 | $ | 32,163 | $ | 113,278 | |||
1998 |
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Net sales | $ | 81,093 | $ | 47,444 | $ | 128,537 | |||
Operating income | 8,735 | 10,307 | 19,042 | ||||||
Depreciation and amortization | 2,002 | 479 | 2,481 | ||||||
Segment assets | $ | 62,520 | (1) | $ | 44,541 | $ | 107,061 |
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
The following discussion summarizes the significant factors affecting the consolidated operating results and financial condition of ROHN for the three months and nine months ended September 30, 1999. This discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements contained in item 1 above and the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Results of Operations
ROHN is a leading manufacturer and installer of infrastructure equipment for the communications industry including cellular, PCS, radio and television broadcast markets. The Company's products include towers, enclosures/shelters, cabinets, poles and antenna mounts. The following table sets forth, for the fiscal periods indicated, the percentage of net sales represented by certain items reflected in the Company's consolidated statements of income.
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For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
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1999 |
1998 |
1999 |
1998 |
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Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |
Cost of sales | 73.8 | 78.8 | 77.4 | 74.4 | |||||
Gross profit | 26.2 | 21.2 | 22.6 | 25.6 | |||||
S,G&A expense | 11.7 | 8.3 | 14.6 | 10.8 | |||||
Operating income | 14.5 | 12.9 | 8.0 | 14.8 | |||||
Interest expense/(income), net | 0.0 | 0.2 | 0.0 | 0.3 | |||||
Other expense | 0.0 | 0.0 | 1.7 | 0.0 | |||||
Income before income taxes | 14.5 | 12.7 | 6.3 | 14.5 | |||||
Income tax provision | 5.4 | 4.7 | 2.3 | 5.5 | |||||
Equity loss of corporate joint venture | 0.8 | 0.5 | 0.4 | 0.2 | |||||
Net income from continuing operations | 8.3 | % | 7.5 | % | 3.6 | % | 8.8 | % | |
For the Three Months Ended June 30, 1999
Net sales for the third quarter ended September 30, 1999 were $36.9 million compared to $47.5 million in the third quarter of 1998, a decrease of 22.3%. The decreases in sales by business segment were as follows:
For the Three Months Ended September 30, |
1999 |
1998 |
Dollar Decrease |
Percentage Decrease |
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Tower Structures | $ | 25.5 | $ | 30.8 | (5.3 | ) | (17.2 | )% | ||||
Enclosures | 11.4 | 16.7 | (5.3 | ) | (31.7 | )% | ||||||
Total | $ | 36.9 | $ | 47.5 | $ | (10.6 | ) | (22.3 | )% | |||
9
The decrease in sales in the tower structures segment was primarily the result of a continued softness in the demand for installation and erection of towers within the Company's construction business. The decrease in sales in the enclosures segment was primarily due to a reduction in sales volume to a provider of a high-speed broadband fiber optic network whose buildout was completed in 1999.
The Company expects sales in the fourth quarter of the year to be slightly stronger than the third quarter due to normal seasonality in the business and increased domestic and international sales activity. Nonetheless, the Company expects sales for the 1999 fiscal year to be significantly below 1998 sales levels.
Gross profit for the third quarter of 1999 was $9.6 million versus $10.1 million in the third quarter of 1998, a decrease of 5.0%. As a percentage to sales, gross profit margin was 26.2% for the current 1999 quarter in comparison to 21.2% for the same period a year ago. The 5 percentage point increase was mainly attributable to more effective expense control, reduced raw material costs and some improvement in pricing.
Selling, general and administrative ("SG&A") expenses were $4.3 million in the third quarter of 1999 versus $4.0 million in the third quarter of 1998. SG&A expenses increased in the third quarter of 1999 as compared to 1998 due to additional expenses for post retirement health care benefits and fees paid to consultants primarily for MIS issues related to system performance. In addition, expenses for the third quarter of 1998 were lower due to a favorable "true up" of an employee bonus accrual established in 1998 which totaled $465,000.
Earnings per share (basic and diluted) in the third quarter of 1999 were $0.06 versus $0.07 in the third quarter of 1998.
For the Nine Months Ended September 30, 1999
Net sales for the nine months ended September 30, 1999 were $96.1 million compared to $128.5 million, a decrease of 25.2%, from the same period a year ago.
The decrease in sales was mainly the result of a continued softness in the demand for installation and erection of tower structures within the Company's construction business, and a decrease in sales in the enclosures segment primarily due to a reduction in sales volume to a provider of a high-speed broadband fiber optic network whose buildout was completed in 1999.
Gross profit for the first nine months of 1999 was $21.7 million versus $32.9 million for the same period a year ago. As a percentage of sales, gross profit margin was 22.6% for the first half in comparison to 25.6% for the same period a year ago. The 3% decrease in gross profit margins is primarily the result of non-recurring charges of $1 million relating to reductions in workforce ($250,000 of which affected gross profit margins), a $1.5 million charge for excess and obsolete inventory, and more intense price competition for the Company's products earlier in the year.
SG&A expenses were $14.0 million in the first nine months of 1999 compared to $13.8 million in the first nine months of 1998. SG&A expense for the first nine months of 1999 includes $750,000 of the $1 million charge for severance costs related to the reduction in workforce taken in the second quarter 1999. Without this non-recurring charge, SG&A expense for the first nine months of 1999 would have been $13.3 million. In addition, expenses for the first nine months of 1998 were lower due to a favorable "true up" of an employee bonus accrual established in 1998 which totaled $465,000.
Other expense of $1.6 million for the nine months ended September 30, 1999 relates to fees and expenses in connection with the proposed merger with PiRod Holdings, Inc., which was terminated on March 31, 1999.
10
Liquidity and Capital Resources
The following table sets forth selected information concerning the Company's financial condition:
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September 30, 1999 |
December 31, 1998 |
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(Dollars in thousands) |
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Cash | $ | 27,552 | $ | 19,690 | ||
Working capital | 57,718 | 50,830 | ||||
Total debt | 10,471 | 11,270 | ||||
Current ratio | 3.33:1 | 2.73:1 |
The Company's working capital was $57.7 million at June 30, 1999 compared to $50.8 million at December 31, 1998, an increase of $6.9 million.
At September 30, 1999, the Company had long-term indebtedness of $10.5 million including current maturities of long-term debt. The Company's long-term indebtedness was related to mortgage notes payable and capital leases.
The Company expects that it will meet its ongoing working capital and capital expenditure requirements from operating cash flows. In addition, the Company's strong balance sheet allows it substantial financial flexibility.
Investment in Joint Venture
In December 1997, the Company formed a corporate joint venture, ROHN BrasilSat, with BrasilSat Harald, S.A., Brazil's largest tower manufacturer and installer, to serve the growing telecommunications infrastructure industry in Brazil and the rest of South America. In September 1999, after re-evaluating its investment, the Company sold its 49% interest in ROHN BrasilSat to its joint venture partner, BrasilSat Harald, S.A.
ROHN BrasilSat was in the process of constructing production facilities in Curitiba, Brazil for the manufacture of concrete and lightweight composite equipment enclosures, tapered steel poles, and self-supporting and guyed towers. ROHN BrasilSat was also to provide complete installation services. As part of the corporate joint venture agreement between the parties, ROHN BrasilSat was the exclusive distributor for ROHN's self-supporting and guyed towers in Brazil, while ROHN had exclusive rights to distribute BrasilSat brand towers worldwide except in Brazil.
The Company accounted for the corporate joint venture under the equity method. The Company recorded losses for the first nine months of 1999 of $355,000 arising out of the corporate joint venture, of which $120,000 represented the Company's share of the operating losses of the entity and $235,000 of the loss was related to the sale of the Company's interest in the joint venture. The Company recorded a loss of $233,000 in the first nine months of 1998 arising out of the corporate joint venture, which represented the Company's share of the start-up losses.
Inflation
Inflation has not had a material effect on the Company's business or results of operation.
11
Seasonality
The Company has periodically experienced and expects to continue to experience significant fluctuations in its quarterly results. The Company has seen disruptions in its customer's ability to accept shipments due to unusual and prolonged weather-related construction delays. Also, the Company believes that quarterly fluctuations are due to the capital budgeting cycle of many of its customers who often purchase a disproportionately higher share of the Company's products at the end of the calendar year. It is expected that fluctuations in quarterly results could become more pronounced in the future as customers move to a more centralized purchasing environment and as consolidation continues among wireless communication service providers and build-to-suit customers.
Recent Developments
On December 22, 1998, the Company and PiRod Holdings, Inc. ("PiRod"), a privately held company headquartered in Plymouth, Indiana, signed a merger agreement (the "Merger Agreement") that provided that PiRod would be merged with the Company and up to 52.5 percent of the outstanding shares of Company common stock would be converted into the right to receive $3.78 per share in cash. PiRod shares would be converted into a total of approximately 7.9 million shares of Company common stock.
On March 31, 1999, the Company announced that the continued slowdown in the buildout of wireless telephone systems affected the results of operations of both companies and the amount of financing available for the proposed transaction. As a result, the parties mutually agreed to terminate the Merger Agreement. The Company incurred approximately $1.1 million, net of taxes, in fees and expenses in connection with the proposed merger. These expenses were recognized by the Company in the first quarter of 1999, resulting in an adverse impact on earnings of approximately $0.02 per share.
In May 1999, the Board of Directors, in discussions with the UNR Asbestos-Disease Claims Trust, concluded not to pursue a sale of the Company or merger of the Company with a strategic partner at such time. The Board announcement also noted that it would continue to examine alternatives that are consistent with the objective of enhancing long-term value for shareholders.
Market Risk Sensitivity
The Company has very limited exposure to market rate sensitivity and adverse impacts would not be material to its financial results. The principal market risks to which the Company is currently exposed to or may be exposed to during 1999 or beyond are changes in interest rates and foreign currency exchange rates.
The Company currently manages its exposure to changes in interest rates by utilizing primarily all fixed rate debt. In the future, it is expected that if additional debt is incurred, the Company would manage its exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps. International operations, which accounted for less than 10% of 1998 net sales, are concentrated principally in Mexico and Central America. In the future, it is expected that if significant growth is incurred in international operations, the Company would manage its exposure to changes by borrowing in foreign currencies and by utilizing either cross-currency swaps or forward contracts. Such swaps or forward contracts would be entered into for periods consistent with related underlying exposures and would not constitute positions independent of those exposures. The Company would not enter into contracts for speculative purposes.
12
Year 2000 Compliance
Historically, certain computer programs were written using two digits rather than four to define the applicable year. Accordingly, the Company's software may recognize a date using "OO" as 1900 rather than the year 2000, which could result in computer system failures or miscalculations, commonly referred to as the Year 2000 ("Y2K") issue. The Y2K issue can arise at any point in the company's supply, manufacturing, processing, distribution and financial chains. Incomplete or untimely resolution of the Y2K issue by the Company, key suppliers, customers and other parties could have a material adverse effect on the Company's results of operations, financial condition and cash flows.
The Company's plan for addressing the Y2K issue is divided into three major phases: Business Systems Inventory and Assessment, Remediation and Replacement, and Testing.
Business Systems Inventory and AssessmentThe internal inventory portion of this phase, completed in 1997, was designed to identify internal business systems that were susceptible to system failure or processing errors as a result of the Y2K issue. In addition, the Company completed in the third quarter of 1999 the inventory and assessment of its non-information technology systems (Non-IT). The remediation and replacement of these systems, which include manufacturing production lines and equipment, heating, ventilation and air conditioning systems and water treatment systems, are included in the remediation and replacement plan discussed below. As part of this phase, significant service providers, vendors, suppliers, customers and governmental entities that are believed to be critical to business operations after January 1, 2000, have been identified and steps have been undertaken to ascertain their stage of Y2K readiness through questionnaires, interviews, and other available means.
Remediation and ReplacementThe Company has developed and has implemented a remediation and replacement plan for all affected systems including IT and Non-IT systems. The Company's plan established priorities for remediation or replacement. The business systems considered most critical to ongoing operations were given the highest priority. The Company prioritized its business systems into "Mission Critical" and "All Other." "Mission Critical" systems were defined as business systems such as Business Planning and Control Process manufacturing, Sales Order Billing and Inventory Control systems, that, if shut down or interrupted, could have a material adverse effect on the Company's results of operations, financial condition and cash flows. "All Other" systems were defined as business systems such as Job Bidding systems that, if shut down or interrupted, may have an adverse impact on the Company. The Company utilized internal and external resources to execute the plan and completed all remediation and replacement of "Mission Critical" and "All Other" systems during 1999.
TestingThe Company's efforts in this phase included testing by users and determination by appropriate local and Y2K project management that the remediated or replaced systems are Y2K compliant. The Company completed testing of "Mission Critical" systems and "All Other" systems during 1999.
The Company surveyed its primary and critical raw material, utility and transportation suppliers for Y2K compliance. The Company completed this process in July 1999. The Company has establish contingency plans to obtain the goods and services provided by any vendors determined to be non-compliant. Since substantially all of these goods and services are generally viewed as commodities, and are available from many different sources at comparable prices, the Company has elected not to use independent verification and validation of vendors' Y2K compliance through a third party. The cost of the internally conducted surveying process was approximately $0.1 million in 1999.
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Because the Company's Y2K compliance is dependent upon key third parties also being Y2K compliant on a timely basis, there can be no guarantee that the Company's efforts will prevent a material adverse impact on its results of operations, financial condition and cash flows. The possible consequences to the Company or its business partners not being fully Y2K compliant include temporary plant closings, delays in the delivery of finished products, delays in the receipt of key raw materials and supplies, invoice and collection errors, and inventory and supply obsolescence. These consequences could have a material adverse impact on the Company's results of operations, financial condition and cash flows if the Company is unable to conduct its business in the ordinary course. The Company believes that its readiness program, including the contingency plans discussed below, should significantly reduce the adverse effect any such disruptions may have.
The Company is continuing to develop contingency plans to mitigate the potential disruptions that may result from the Y2K issue. These plans include identifying and securing alternate suppliers of key raw materials, stockpiling of finished component inventories and other measures considered appropriate by management. These contingency plans are being continually developed and refined, as additional information becomes available. All contingency plans are expected to be completed by the end of the fourth quarter in 1999.
The Company currently estimates that the aggregate cost of its Y2K efforts will be approximately $4.7 million, of which $4.7 million has been incurred to date. These costs, except for capital costs of approximately $4.5 million, are being funded through operating cash flows. The Company incurred Y2K costs of approximately $0.1 million in 1999.
FORWARD-LOOKING INFORMATION
Matters discussed in this report contain forward-looking statements which reflect management's current judgment. Statements containing words such as "believes," "expects," "anticipates," or similar expressions are forward-looking statements. Many factors, some of which are discussed elsewhere in this document, could affect the future financial results of the Company and could cause those results to differ materially from those expressed in the forward-looking statements contained in this document. These factors include operating, legal and regulatory risks, economic, political and competitive forces affecting the telecommunications and equipment business, and the risk that the Company's analyses of these risks and forces could be incorrect or that the strategies developed to address them could be unsuccessful.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See "Market Risk Sensitivity" under Item 2.
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None.
ITEM 2. CHANGES IN SECURIITES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
None.
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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 thereunto duly authorized.
ROHN INDUSTRIES, INC. | ||
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/s/ LESTER H. NELSON, III |
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Lester H. Nelson, III Corporate Controller (and Principal Accounting Officer) |
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Dated: November 12, 1999 |
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PART IFINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURIITES AND USE OF PROCEEDS
ITEM 3. DEFAULTS ON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
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