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, 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 October 10, 1997: 7,282,457 shares of Common Stock, $.50 Par Value Page 1 of 8 PART I Item 1. Financial Statements VALLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) AUGUST 31, ASSETS 1997 May 31, Current assets: (Unaudited) 1997 ----------- ----------- Cash and cash equivalents $ -- $ 801 Investment securities, at cost which approximates market 1,650 2,050 Accounts receivable, net 35,054 35,168 Notes receivable, affiliate 1,150 650 Inventories 40,210 36,301 Prepaid expenses and other current assets 2,390 2,580 --------- --------- Total current assets 80,454 77,550 --------- --------- Property, plant and equipment, at cost 45,290 43,916 Less accumulated depreciation and amortization 24,269 23,704 --------- --------- Net property, plant and equipment 21,021 20,212 Notes receivable, non-current, affiliate 557 557 Investment in foreign affiliates, net 10,370 9,712 Intangibles, net of accumulated amortization 5,579 5,678 Other 3,861 3,693 --------- --------- $ 121,842 $ 117,402 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 451 $ 543 Accounts payable 13,666 11,469 Accrued liabilities 2,117 2,075 Income taxes payable 860 454 --------- --------- Total current liabilities 17,094 14,541 --------- --------- Long-term debt, excluding current maturities 10,448 10,425 Deferred income taxes 1,071 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; 9,743,874 and 7,282,457 shares issued and outstanding at August 31, 1997 and 9,740,874 and 7,278,707 issued and outstanding at May 31, 1997, respectively 4,873 4,871 Additional paid-in capital 6,144 6,076 Translation adjustment (773) (773) Retained earnings 85,598 83,779 --------- --------- 95,842 93,953 Less cost of common shares held in treasury (2,461,417 and 2,462,167 shares at August 31, 1997 and May 31, 1997, respectively) 2,613 2,614 --------- --------- Total shareholders' equity 93,229 91,339 --------- --------- $ 121,842 $ 117,402 ========= ========= See accompanying Notes to Consolidated Financial Statements (Unaudited). Page 2 of 8 VALLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Thousands of Dollars Except for Per Share Amounts) FIRST QUARTER ENDED AUGUST 31, ---------------------- 1997 1996 ---------- ---------- Net sales $ 64,278 $ 59,412 Cost of sales 48,503 44,537 ---------- ---------- Gross profit 15,775 14,875 Selling, general and administrative expenses 13,785 12,444 ---------- ---------- Operating income 1,990 2,431 Earnings from foreign affiliates, net 659 286 Interest and dividend income 70 31 Interest expense (174) (175) Other income (expense), net 67 (44) ---------- ---------- Earnings before income taxes 2,612 2,529 Income taxes 793 925 ---------- ---------- Net earnings $ 1,819 $ 1,604 ========== ========== Net earnings per common share $ 0.25 $ 0.22 ========== ========== Weighted average number of common shares outstanding 7,279 7,264 See accompanying Notes to Consolidated Financial Statements (Unaudited). Page 3 of 8 VALLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Thousands of Dollars) THREE MONTHS ENDED AUGUST 31, 1997 1996 - ------------------------------- ---------- ---------- OPERATING ACTIVITIES: Net earnings $ 1,819 $ 1,604 Adjustments to reconcile net earnings to net cash provided by operating activities: (Gain) loss on disposition of property, plant and equipment (22) 4 Depreciation and amortization 805 793 Change in deferred income taxes (26) (22) Undistributed earnings from foreign affiliates, net (659) (291) Undistributed loss from U.S. affiliate, net 56 26 Undistributed earnings from U.S. partnership, net (201) (52) Decrease in trading securities 400 100 (Increase) decrease in accounts receivable, net 114 (156) (Increase) in inventory (3,909) (1,491) (Increase) in notes receivable, current (500) - (Increase) decrease in prepaid expenses and other current assets 190 (108) (Increase) in other assets (4) (115) Increase (decrease) in accounts payable and other current liabilities 2,646 (80) ---------- ---------- Net cash provided by operating activities 709 212 INVESTING ACTIVITIES: Net additions to property, plant and equipment (1,498) (517) Payments for purchase of, and investment in companies, net of cash acquired - (29) Investments in affiliates (14) - ---------- ---------- Cash used for investing activities (1,512) (546) FINANCING ACTIVITIES: Addition of long-term debt - 244 Reduction of long-term debt (70) (250) Stock transactions 72 - ---------- ---------- Net cash provided by or (used in) financing activities 2 (6) ---------- ---------- Net (decrease) increase in cash and cash equivalents (801) (340) Cash and cash equivalents at beginning of period 801 831 ---------- ---------- Cash and cash equivalents at end of period $ - $ 491 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest payments $ 172 $ 249 Income tax payments $ 546 $ 298 See accompanying Notes to Consolidated Financial Statements (Unaudited). Page 4 of 8 VALLEN CORPORATION AND SUBSIDIARIES NOTE TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (Thousands of Dollars) 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 three months ended August 31, 1997 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 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 by dividing net earnings by the weighted average number of shares outstanding during the periods. The weighted average number of shares outstanding for the three months ended August 31, 1997 and 1996 were computed based on the actual number of common shares outstanding. Note 2: Inventory costs are summarized as follows: AUGUST 31, 1997 MAY 31, 1997 --------------- ------------ Raw Materials $ 1,640 $ 1,329 Work-in-process 683 705 Finished goods 37,887 34,267 -------- -------- Total inventories $ 40,210 $ 36,301 ======== ======== Page 5 of 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Thousands of Dollars) FIRST QUARTER ENDED AUGUST 31, 1997 COMPARED TO FIRST QUARTER ENDED AUGUST 31, 1996 __________________________________________ RESULTS OF OPERATIONS Net sales increased 8.2% to $64,278 and gross profit increased by 6.1% to $15,775. Gross profit margins for the distribution business increased 10.2% over last year with help from its service based business including training, fire services and technical support. Gross profit margins were down 16.8% in the manufacturing segment when compared to the same period last year primarily due to a decrease in units shipped from the engineered shower and eyewash products group. Sales were impacted by an estimated $2.7 million in August, 1997 due to the UPS strike in that month. Selling, general and administrative expenses increased 10.8%, primarily due to operation of distribution locations acquired or opened in the past twelve months, in addition to expenses for new business lines initiated during the same period. Earnings from foreign affiliates of $659 for the quarter ending August 31, 1997, increased 130.4% over the previous year's quarter primarily due to increased earnings reported by the Company's 50% owned affiliate in Mexico. Interest expense was flat in the first quarter of fiscal 1998 compared to the prior year. No significant debt was added in the current period. Other income increased primarily due to equity earnings from non-consolidated affiliates of $201 for the quarter ending August 31, 1997 compared to $52 in the prior year quarter. Net earnings increased 13.4% in the quarter ended August 31, 1997 to $1,819 ($.25 per common share), compared to $1,604 ($.22 per common share) in the previous year's first quarter, due primarily to increased sales and earnings recognized from the distribution segment and equity earnings from the foreign affiliates. FINANCIAL CONDITION Cash flows provided by operations for the quarter ended August 31, 1997 totaled to $709 compared to $212 in the comparable period of the prior year. The reduction in the current quarter compared to the previous year's quarter is primarily related to significant increases in inventories related to customer requirements and new locations opened and an increase in current notes receivable to affiliate. The Company's financial position in the first quarter of 1998 remains strong with working capital of $63 and a current ratio of 4.7 to 1 compared to working capital of $63 and a current ratio of 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 6 of 8 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 7 of 8 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 10, 1997 ________________________________ _________________________________ Date James W. Thompson President October 10, 1997 ________________________________ _________________________________ Date Leighton J. Stephenson Vice President - Finance, Secretary and Treasurer Page 8 of 8