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, 1997 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 7, 1997: 7,278,707 shares of Common Stock, $.50 Par Value Page 1 of 10 PART I Item 1. Financial Statements VALLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) MAY 31, 1996 ASSETS (DERIVED FROM FEBRUARY 28, 1997 AUDITED FINANCIAL Current assets: (UNAUDITED) STATEMENTS) ------------------ ------------------ Cash and cash equivalents $ 3,361 $ 831 Investment securities, at cost which approximates market 1,850 2,001 Accounts receivable, net 35,271 32,316 Notes receivable 82 147 Inventories 36,286 33,977 Prepaid expenses and other current assets 3,089 4,621 -------- -------- Total current assets 79,939 73,893 -------- -------- Property, plant and equipment, at cost 43,493 41,580 Less accumulated depreciation and amortization 23,255 21,191 -------- -------- Net property, plant and equipment 20,238 20,389 Notes receivable, non-current 557 1,599 Investment in foreign affiliates, net 9,274 8,243 Intangibles, net of accumulated amortization 5,166 5,107 Other 3,357 2,432 -------- -------- $118,531 $111,663 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 975 $ 464 Accounts payable 15,096 14,298 Other accrued liabilities 2,591 2,290 Income taxes payable 247 287 -------- -------- Total current liabilities 18,909 17,339 -------- -------- Long-term debt, excluding current maturities 9,952 10,705 Deferred income taxes 1,265 1,302 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, 9,741,604 shares issued and 7,278,707 outstanding at February 28, 1997 and 9,726,875 shares issued and 7,263,978 outstanding at May 31, 1996 4,872 4,864 Additional paid-in capital 6,075 5,825 Translation adjustment (772) (773) Retained earnings 80,844 75,015 -------- -------- 91,019 84,931 Less cost of common shares held in treasury (2,462,897 at February 28, 1997 and May 31, 1996, respectively) 2,614 (2,614) -------- -------- Total shareholders' equity 88,405 82,317 -------- -------- $118,531 $111,663 ======== ======== See accompanying Notes to Consolidated Financial Statements (Unaudited). Page 2 of 10 VALLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Thousands of Dollars Except for Per Share Amounts) THIRD QUARTER ENDED NINE MONTHS ENDED ---------------------------- --------------------------- FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, 1997 1996 1997 1996 ------------- ------------- ------------ ------------- Net sales $67,032 $61,516 $190,241 $174,345 Cost of sales 50,983 45,939 143,560 129,924 ------- ------- -------- -------- Gross profit 16,049 15,577 46,681 44,421 Selling, general and administrative expenses 13,153 12,754 38,282 36,092 ------- ------- -------- -------- Operating income 2,896 2,823 8,399 8,329 Earnings (loss) from foreign affiliates, net 406 311 1,030 743 Interest and dividend income 83 114 155 430 Interest expense 170 180 514 513 Other income (expense), net (58) (88) 17 (363) ------- ------- -------- -------- Earnings before income taxes 3,157 2,980 9,087 8,626 Income taxes 1,079 952 3,257 2,892 ------- ------- -------- -------- Net earnings $ 2,078 $ 2,028 $ 5,830 $ 5,734 ======= ======= ======== ======== Net earnings per common share $0.29 $0.28 $0.80 $0.79 ======= ======= ======== ======== Weighted average number of common shares outstanding 7,270 7,260 7,266 7,235 See accompanying Notes to Consolidated Financial Statements (Unaudited). Page 3 of 10 VALLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Thousands of Dollars) NINE MONTHS ENDED FEBRUARY 28 & 29, RESPECTIVELY 1997 1996 - ---------------------------------------- -------- --------- OPERATING ACTIVITIES: Net earnings $ 5,830 $ 5,734 Adjustments to reconcile net earnings to net cash provided by operating activities: (Gain) loss on disposition of property, plant and equipment 5 (42) Depreciation and amortization 2,953 2,648 Undistributed earnings from foreign affiliates, net (1,030) (743) Undistributed loss from U.S affiliate, net 206 122 Change in assets and liabilities, net of effects of acquisitions: Decrease in investment securities 151 5,255 (Increase) in accounts receivable, net (2,955) (8,008) (Increase) in inventory (2,308) (7,211) Decrease in notes receivable 65 265 Decrease (increase) in prepaid expenses and other current assets 1,531 (2,456) (Increase) in other assets (654) (42) Increase in accounts payable and accrued liabilities 1,020 9,730 ------- ------- Net cash provided by operating activities 4,814 5,252 INVESTING ACTIVITIES: Net additions to property, plant and equipment (2,428) (592) Payments for acquisitions (59) (8,844) Investments in affiliates (896) - Decrease in notes receivable 1,042 - ------- ------- Net cash used in investment activities (2,341) (9,436) FINANCING ACTIVITIES: Increase (decrease) in long-term debt (201) 5,531 Employee stock transactions 258 177 ------- ------- Net cash provided by financing activities 57 5,708 ------- ------- Net increase in cash and cash equivalents 2,530 1,524 Effect of exchange rate changes on cash and cash equivalents - (356) Cash and cash equivalents at beginning of period 831 3,006 ------- ------- Cash and cash equivalents at end of period $ 3,361 $ 4,174 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest payments $ 581 $ 502 Income tax payments $ 2,925 $ 2,846 See accompanying Notes to Consolidated Financial Statements (Unaudited). Page 4 of 10 VALLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (Thousands of Dollars) SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES - CONT'D. For the period ended February 29, 1996, the Company purchased assets or stock of Safety Centers, Inc., All Supplies, Inc., Century Sales and Service Limited, Shepco Manufacturing, Inc., and Griffin Fire Safety Company. In conjunction with the acquisitions, assets acquired, liabilities assumed, and cash paid are as follows: Fair value of assets acquired $14,939 Cost in excess of net assets of companies acquired 3,523 ------- Total assets recorded $18,462 Liabilities assumed $(7,792) Stock issued for common stock and assets (1,826) ------- Cash paid for common stock $ 8,844 ======= See accompanying Notes to Consolidated Financial Statements (Unaudited). Page 5 of 10 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, 1997 are not necessarily indicative of the results that will be realized for the fiscal year ending May 31, 1997. 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, 1996. 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. Net earnings per share were computed by dividing net earnings by the weighted average number of shares outstanding during the periods. During the nine months ended February 28, 1997, shares purchased through the employee stock purchase plan increased the number of shares outstanding by 13,999 shares. The weighted average number of shares outstanding for the nine months ended February, 1997 and 1996 were computed based on the actual number of common shares outstanding. Note 2. Inventory costs are summarized as follows: FEBRUARY 28, MAY 31, 1997 1996 ------------ -------- (Thousands of Dollars) Raw materials $ 1,632 $ 1,323 Work in process 595 740 Finished goods 34,059 31,914 ------- ------- Total inventories $36,286 $33,977 ======= ======= Page 6 of 10 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, 1997 COMPARED TO THIRD QUARTER ENDED FEBRUARY 29, 1996 __________________________________________ Net sales increased 9% to $67,032, and gross profit increased 3% to $16,049. Strong sales for the months of January and February in the Company's core distribution business resulted in record sales of $63,827 for the quarter ended February 28, 1997, up 10% when compared to the same period last year. The manufacturing operations sales decreased 11% to $4,758 compared to the quarter ended February 29, 1996. The decrease in this segment is attributed to a soft market for major product lines. Selling, general, and administrative expenses as a percent of net sales were 20% for the quarter ended February 28, 1997, remaining flat compared to the same quarter last year. These expenses increased 3% when compared to the same quarter in the prior year. Earnings from foreign affiliates totaled $406, for the quarter ending February 28, 1997, a 31% increase over the same quarter last year. The increase was due to higher earnings from the 50% owned Canadian affiliate, Century Sales and Service, Limited of $209 compared to $81 for the quarter ended February 29, 1996. Earnings from the Mexican affiliate, Proveedora de Seguridad were down 15% from the same period last year, partially due to changes in the peso to dollar exchange rate in the current year quarter. Net earnings increased 2% to $2,078 in the quarter ended February 28, 1997 or $.29 per common share, compared to $2,028 or $.28 per common share for the same period last year. The increase is due primarily to the record sales and higher levels of operating income in the Company's distribution businesses, offset in part by a decrease in sales by the manufacturing segment. Selling, general, and administrative expenses as a percentage of net sales remained flat. NINE MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO NINE MONTHS ENDED FEBRUARY 29, 1996 _____________________________________________ Sales increased 9% to $190,241 and gross profit increased 5% to $46,681. 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 6% to $38,282. As a percent of net sales, selling, general, and administrative expenses were 20% for the period ended February 28, 1997 remaining flat as compared to the nine months ended February 29, 1996. Net earnings increased 2% year to date to $5,830, or $.80 per common share, compared to $5,734, or $.79 per 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 39% from the period ended February 29, 1996. Page 7 of 10 FINANCIAL CONDITION FEBRUARY 28, 1997 COMPARED TO MAY 31, 1996 ____________________________________ Cash flows provided by operations for the nine months ended February 28, 1997 totaled $4,814 compared to $5,252 for the nine months ended February 29, 1996. The decrease in the current period compared to the same period of the prior year, is primarily due to the effect of the 1995 acquisitions on working capital items offset by higher earnings from foreign affiliates in the current period. Cash and cash equivalents decreased by $813 primarily due to the decrease in cash provided by operations discussed above. Accounts receivable increased $2,955, and inventories increased $2,308, primarily as a result of increased sales levels. Net additions to property, plant and equipment were $2,428, primarily for operating equipment and computer hardware and software, and assets added through the acquisition of Pagel Safety, Inc. in the second quarter of fiscal 1997. The increase in investments of affiliates of $896 is primarily due to the Lion-Vallen Partnership and the Company's 50% equity investment in Nuclear Utility Products, Inc. The decrease in notes receivable relates to repayment of a loan to an affiliate. Employee stock transactions increased for the nine months ended February 28, 1997, with the issuance of 13,999 shares in January, 1997. The Company's total working capital as of the end of the third quarter of fiscal 1997 is $61 million compared to $57 million at May 31, 1996. The current ratio of 4.2 to 1 at February 28, 1997 compares to 4.3 to 1 at May 31, 1996. Management believes the Company's liquidity, working capital and borrowing capacity are sufficient to meet capital expenditure and working capital needs in the future. During the first quarter ended August 31, 1996, the Company extended periods of amortization of principal amounts under its primary bank borrowing facility by one year. The impact of this modification of the credit agreement was to reclassify approximately $938 as of August 31, 1996 to the non-current debt category. Page 8 of 10 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 9 of 10 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 7, 1997 /s/ James W. Thompson - ------------------------ -------------------------------------- Date James W. Thompson President April 7, 1997 /s/ Leighton J. Stephenson - ------------------------ -------------------------------------- Date Leighton J. Stephenson Vice President - Finance, Secretary and Treasurer Page 10 of 10