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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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NO. 000-29226
VALLEY NATIONAL GASES INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2888240
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
67 43RD STREET
WHEELING, WEST VIRGINIA 26003
(Address of principal executive offices)
(304) 234-4460
(Registrant's telephone number, including area code)
Indicate by checkmark 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 14, 2002
----- --------------------------------
Common stock, $0.001 par value 9,347,584
VALLEY NATIONAL GASES INCORPORATED
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Balance Sheets as of June 30, 2002
and September 30, 2002 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2001 and 2002 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2001 and 2002 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 17
ITEM 4 CONTROLS AND PROCEDURES 17
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS 20
-2-
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
-----------
June 30, September 30,
2002 2002
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,216,668 $ 1,038,789
Accounts receivable, net of allowance for doubtful accounts of
$684,898 15,983,161 14,613,948
Inventory 15,660,118 14,672,998
Prepaids and other 2,042,407 2,317,598
------------- -------------
Total current assets 34,902,354 32,643,333
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land 90,000 88,000
Buildings and improvements 6,026,404 6,111,588
Equipment 82,274,545 84,727,059
Transportation equipment 13,843,310 14,091,518
Furniture and fixtures 6,771,212 6,945,955
------------- -------------
Total property, plant and equipment 109,005,471 111,964,120
Accumulated depreciation (41,160,064) (42,173,572)
------------- -------------
Net property, plant and equipment 67,845,407 69,790,548
------------- -------------
OTHER ASSETS:
Non-compete agreements and consulting
agreements, net of amortization of
$10,203,926 and $10,854,981, respectively 6,218,415 5,907,361
Goodwill 40,429,733 41,155,902
Deposits and other assets 1,622,305 1,173,603
------------- -------------
Total other assets 48,270,453 48,236,866
------------- -------------
TOTAL ASSETS $ 151,018,214 $ 150,670,747
============= =============
The accompanying notes are an integral part of these financial statements.
-3-
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, September 30,
------------------------------------ 2002 2002
------------- -------------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,319,077 $ 6,440,992
Bank overdraft -- 920,511
Accounts payable, trade 7,821,065 6,489,852
Accrued compensation and employee benefits 3,087,484 2,399,587
Other current liabilities 3,558,832 3,776,495
------------- -------------
Total current liabilities 20,786,458 20,027,437
LONG-TERM DEBT, less current maturities 74,659,090 75,572,312
DEFERRED TAX LIABILITY 14,673,541 14,405,322
OTHER LONG-TERM LIABILITIES 4,265,500 4,760,513
------------- -------------
Total liabilities 114,384,589 114,765,584
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, par value, $.001 per share-
Authorized, 30,000,000 shares
Issued, 9,620,084 shares, Outstanding, 9,347,584 shares
9,620 9,620
Paid-in-capital 19,269,338 19,269,338
Retained earnings 21,752,457 21,856,857
Accumulated other comprehensive loss (2,134,362) (2,967,224)
Treasury stock at cost, 272,500 shares (2,263,428) (2,263,428)
- ----------------------------------------------------------- ------------- -------------
Total stockholders' equity 36,633,625 35,905,163
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 151,018,214 $ 150,670,747
============= =============
The accompanying notes are an integral part of these financial statements.
-4-
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
------------------------------------
2001 2002
----------- -----------
NET SALES $33,695,773 $33,452,736
COST OF PRODUCTS SOLD, excluding depreciation and amortization
15,479,335 15,394,603
----------- -----------
Gross profit 18,216,438 18,058,133
----------- -----------
EXPENSES:
Operating and administrative 13,247,584 13,903,532
Depreciation 1,152,600 1,260,600
Amortization of intangibles 647,001 701,054
----------- -----------
Total expenses 15,047,185 15,865,186
----------- -----------
Income from operations 3,169,253 2,192,947
INTEREST EXPENSE 1,408,627 2,097,034
OTHER INCOME, NET 100,879 82,548
----------- -----------
EARNINGS BEFORE INCOME TAXES 1,861,505 178,461
PROVISION FOR INCOME TAXES 772,525 74,061
----------- -----------
NET EARNINGS $ 1,088,980 $ 104,400
=========== ===========
BASIC EARNINGS PER SHARE $ 0.12 $ 0.01
DILUTED EARNINGS PER SHARE $ 0.12 $ 0.01
WEIGHTED AVERAGE SHARES:
Basic 9,347,584 9,347,584
Diluted 9,391,096 9,403,829
The accompanying notes are an integral part of these financial statements.
-5-
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
---------------------------------------
2001 2002
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,357,196 $ 3,036,700
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets 11,000 49,257
Purchases of property and equipment (1,493,191) (2,035,817)
Business acquisitions, net of cash acquired (2,153,834) (1,054,112)
------------ ------------
Net cash used by investing activities (3,636,025) (3,040,672)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 17,458,317 13,232,446
Principal payments on loans (14,777,005) (13,406,353)
------------ ------------
Net cash provided (used) by financing
activities 2,681,312 (173,907)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 402,483 (177,879)
CASH AND CASH EQUIVALENTS, beginning of period 542,720 1,216,668
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 945,203 $ 1,038,789
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 1,469,513 $ 1,382,486
============ ============
Cash payments for income taxes
$ 12,885 $ --
============ ============
The accompanying notes are an integral part of these financial statements.
-6-
VALLEY NATIONAL GASES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements of Valley National Gases Incorporated (the
"Company") presented herein are unaudited. Certain information and footnote
disclosures normally prepared in accordance with generally accepted accounting
principles have been either condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Although the Company
believes that all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation have been made, interim periods are not
necessarily indicative of the financial results of operations for a full year.
As such, these financial statements should be read in conjunction with the
financial statements and notes thereto included or incorporated by reference in
the Company's audited financial statements for the period ending June 30, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
The components of inventory are as follows:
June 30, September 30,
2002 2001
----------- -------------
(Unaudited)
Hardgoods $13,559,775 $12,780,385
Gases 2,100,343 1,892,613
----------- -----------
$15,660,118 $14,672,998
=========== ===========
PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation is computed using the
straight-line basis over the estimated useful lives of the related assets.
3. ACQUISITIONS:
The Company acquires businesses engaged in the distribution of industrial,
medical and specialty gases and related welding supplies and accessories.
Acquisitions have been recorded using the purchase method of accounting and,
accordingly, results of their operations have been included in the Company's
financial statements since the effective dates of the respective acquisitions.
During the three months ended September 30, 2002, the Company acquired
substantially all of the assets of Gerber's Propane, Inc., a propane distributor
having approximately $2.0 million in combined annualized sales. This transaction
was financed through the Company's credit facility.
In connection with this acquisition, the total purchase price, fair value
of assets acquired, cash paid and liabilities assumed were as follows:
-7-
Three Months Ended
September 30, 2002
------------------
(Unaudited)
Cash paid $1,054,112
Notes issued to sellers 855,000
Notes payable and capital leases assumed 54,045
Other liabilities assumed and acquisition
costs including non-competes 300,000
----------
Total purchase price allocated to assets acquired $2,263,157
==========
As part of this acquisition, the Company recorded $709,000 for goodwill
and $300,000 for non-compete agreements having an amortization period of 3
years.
4. LONG-TERM DEBT:
Long-term debt consists of the following:
June 30, September 30,
2002 2002
------------ ------------
(Unaudited)
Revolving note, interest at LIBOR plus 2.75% payable monthly through June 2005.
Secured by the assets of the Company. $ 57,952,885 $ 59,475,000
Termnote, interest at LIBOR plus 2.75% payable monthly through June 2005.
Secured by the assets of the Company. 15,000,000 14,250,000
Notepayable, interest at 6.6% payable annually through October 2003. Secured by
certain assets of the Company. 1,366,149 1,366,149
Individuals and corporations, mortgages and notes, interest at 3.75% to 10.00%,
payable at various dates through 2010. 6,752,665 7,010,929
------------ ------------
81,071,699 82,102,078
Original issue discount (93,532) (88,774)
Current maturities (6,319,077) (6,440,992)
------------ ------------
Total long-term debt $ 74,659,090 $ 75,572,312
============ ============
Prime rate was 4.75% and LIBOR was 1.81% at September 30, 2002.
On June 28, 2002 the Company entered into an amendment to the second
amended and restated credit facility with Bank One, as agent. The amendment
facility decreased the maximum revolving note borrowings from $100.0 million to
$75.0 million, including a letter of credit sublimit of $15.0 million. The term
note has a balance of $14.3 million. The scheduled maturity date of both the
term and revolving note is June 28, 2005. The Company pays a fee for the unused
portion of the revolving loan. The revolving loan is used primarily to fund
acquisitions. The Company is not required to make principal payments on
outstanding balances of the revolving loan as long as certain covenants are
satisfied. Interest is charged on both the term loan and the revolving loan at
either the lender's prime rate or various LIBOR rates, at the Company's
discretion, plus an applicable spread. The weighted average interest rate for
substantially all of the borrowings under the credit facility was 4.6% as of
September 30, 2002 excluding the impact of the Company's interest rate swap
agreements. See Note 7. As of September 30, 2002, availability under the
revolving loan was approximately $11.9 million, with outstanding borrowings of
approximately $59.5 million and outstanding letters of credit of approximately
$3.6 million. The credit facility is secured by all of the Company's assets.
-8-
The loan agreement for the credit facility contains various financial
covenants applicable to the Company, including covenants requiring minimum fixed
charge coverage, maximum funded debt to EBITDA, and minimum net worth. On
October 28, 2002 the Company amended its credit facility. Certain financial
covenants were amended in order for the Company to remain in compliance with
such financial covenants as of September 30, 2002.
5. EARNINGS PER SHARE
Basic earnings per share were computed based on the weighted average
number of common shares issued and outstanding during the relevant periods.
Diluted earnings per common share were computed based on the weighted average
number of common shares issued and outstanding plus additional shares assumed to
be outstanding to reflect the dilutive effect of common stock equivalents using
the treasury stock method.
Options to purchase 189,500 and 212,200 shares of common stock were
outstanding during the quarter ended September 30, 2002 and 2001 respectively,
but were not included in the computation of diluted earnings per common share as
the options' exercise price was greater than the average market price of the
common stock for the respective periods.
Three Months Ended
September 30,
----------------------------------
2001 2002
---------- ----------
Net earnings available for common stock $1,088,980 $ 104,400
========== ==========
Basic earnings per common share:
Weighted average common shares 9,347,584 9,347,584
========== ==========
Basic earnings per common share $ 0.12 $ 0.01
========== ==========
Diluted earnings per common share:
Weighted average common shares 9,347,584 9,347,584
Shares issuable from assumed conversion of
common stock equivalents 43,512 56,245
---------- ----------
Weighted average common and common
equivalent shares 9,391,096 9,403,829
========== ==========
Diluted earnings per common share $ 0.12 $ 0.01
========== ==========
6. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, were as follows:
Three Months Ended
September 30,
-------------------------------------
2001 2002
----------- -----------
Net earnings $ 1,088,980 $ 104,400
Unrealized losses on derivatives, net of tax (1,390,043) (832,862)
----------- -----------
Comprehensive income (loss) $ (301,063) $ (728,462)
----------- -----------
-9-
Accumulated other comprehensive loss presented in the accompanying
condensed consolidated balance sheets consists of the accumulated other net
unrealized loss on derivatives designated as cash flow hedges.
7. DERIVATIVES AND HEDGING ACTIVITIES
In accordance with the provisions of SFAS No. 133, as amended, the Company
recognizes all derivatives on the balance sheet at fair value. On the date the
derivative instrument is entered into, the Company generally designates the
derivative as a hedge of the variability of cash flows to be paid related to a
recognized liability (cash flow hedge). Changes in the fair value of a
derivative that is designated as and meets all the required criteria for a cash
flow hedge are recorded in accumulated other comprehensive income and
reclassified into earnings as the underlying hedged item affects earnings.
Changes in the fair value of a derivative that is not designated as a hedge are
recorded immediately in earnings. At September 30, 2002 and 2001 the Company had
interest rate swap agreements outstanding that effectively convert a notional
amount of $60.0 million from floating rates to fixed rates. The agreements
outstanding at September 30, 2002 mature at various times between September 2003
and January 2006. The Company would have paid $5,612,469 and $4,259,759 to
settle its interest rate swap agreements at September 30, 2002 and 2001,
respectively, which represents the fair value of these agreements. The carrying
value equals the fair value for these contracts at September 30, 2002 and 2001.
Fair value was estimated based on the mark-to market value of the contracts
which closely approximates the amount the Company could receive or pay to
terminate the agreements at quarter end.
Based upon interest rates at September 30, 2002, the Company expects to
recognize into earnings in the next 12 months net current liabilities of
$242,198 related to outstanding derivative instruments and net losses of
$185,852 recorded in accumulated other comprehensive loss, related to the
classification of unrealized losses on derivatives that were not designated as
cash flow hedges upon the adoption of SFAS No. 133.
8. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146") was issued. This Statement addresses financial
accounting an reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early adoption encouraged. The Company
is currently evaluating the effects of SAFS No. 146 and does not anticipate that
the adoption of SFAS 146 will have a material impact on the Company's financial
position and results of operations.
9. INTANGIBLE ASSETS
On July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," under which goodwill and other intangible assets with
indefinite lives are not amortized. Such intangibles were evaluated for
impairment as of July 1, 2001 and no impairment existed. In addition, each year,
the Company will evaluate the intangible assets for impairment with any
resulting impairment reflected as an operating expense. The Company's only
intangibles, other than goodwill, are its noncompete agreements and consulting
agreements, which the Company currently believes have finite lives. As of
September 30, 2002, the Company's noncompete agreements and consulting
agreements are summarized as follows:
-10-
Weighted
Balance at Average
Original Accumulated September 30, Amortization
Cost Amortization 2002 Period (years)
----------- ------------ ------------- --------------
Non-competition
agreements $15,698,570 $ 9,890,988 $ 5,807,582 4.8
Consulting
agreements 1,063,771 963,992 99,779 5.7
Amortization expense for the three months ended September 30, 2002 totaled
$701,054. Estimated amortization expense for the remainder of fiscal 2003 and
the next five fiscal years is summarized as follows:
Fiscal year Ending
June 30,
------------------
Remainder of 2003 $ 1,646,895
2004 $ 1,802,522
2005 $ 1,185,571
2006 $ 515,968
2007 $ 299,302
2008 $ 287,218
The changes in the carrying amount of goodwill for the three months ended
September 30, 2002, are as follows:
Balance as of June 30, 2002 $40,429,733
Goodwill related to acquisitions
during the current fiscal quarter $ 726,169
-----------
Balance as of September 30, 2002 $41,155,902
-----------
10. SUBSEQUENT EVENTS
On October 28, 2002 the Company amended its credit facility. Certain
financial covenants were amended in order for the Company to remain in
compliance with such financial covenants as of September 30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the Notes thereto
included in item 1 herein.
OVERVIEW
The Company is a leading packager and distributor of industrial, medical
and specialty gases, welding equipment and supplies, and propane in 11 states in
the eastern United States. The Company's net sales have grown, primarily as a
result of acquisitions, at a compound annual rate of approximately 16% per year
since the Company started business in 1958, increasing from $190,000 in that
year to $144.3 million for the last twelve months. In fiscal 2002, gases
accounted for approximately 43% of net sales, welding equipment and supplies
accounted for approximately 41% of net sales, and cylinder and tank rental
accounted for approximately 16% of net sales. The Company is a Pennsylvania
corporation.
-11-
The Company believes it has been successful in executing its strategy of
growth through acquisitions, having completed 53 acquisitions since 1990. Some
acquisitions have had, and the Company expects some future acquisitions will
have, a dilutive effect upon the Company's income from operations and income
before tax for a short period following consummation. This temporary dilution
occurs because some of the benefits of acquisitions, such as leveraging of
operating and administrative expenses, improved product gross margins and real
sales growth, occur over a period ranging from two to eight quarters, depending
upon the complexity of integrating each acquisition into the Company's existing
operations. The consideration for most acquisitions includes a combination of a
cash payment at closing, seller financing and payments under covenants not to
compete and consulting agreements. In most cases, operating cash flow of an
acquired business is positive in a relatively short period of time. For many
acquisitions, the Company believes that projections of future cash flows justify
payment of amounts in excess of the book or market value of the assets acquired,
resulting in goodwill being recorded.
The Company's results are subject to moderate seasonality, primarily due
to fluctuations in the demand for propane, which is highest during winter months
falling in the Company's second and third fiscal quarters. Seasonality of total
sales has increased as propane sales as a percentage of total sales have
increased.
Operating and administrative expenses are comprised primarily of salaries,
benefits, transportation equipment operating costs, facility lease expenses and
general office expenses. These expenses are generally fixed on a
quarter-to-quarter basis. The Company believes that changes in these expenses as
a percentage of sales should be evaluated over the long term rather than on a
quarter-to-quarter basis due to the moderate seasonality of sales mentioned
above and the generally fixed nature of these expenses.
Historically, the Company's gross profit margins as a percentage of sales
have been higher on the sale of gases than on the sale of welding equipment and
supplies ("hard goods"). As a result of recent acquisitions of some distributors
with a higher proportion of hard goods to gas sales, the Company's average gross
profit as a percentage of sales has decreased in comparison to prior years.
Future acquisitions may affect this pattern depending upon the product mix of
the acquired businesses.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 2002 and 2001
Net sales decreased 0.7%, or $0.2 million, to $33.5 million for the three
months ended September 30, 2002 from $33.7 million for the three months ended
September 30, 2001. Acquisitions made since the prior year quarter contributed
$1.0 million of increase in net sales for the three months ended September 30,
2002, while same store sales decreased $1.2 million or 3.6% for such three month
period. The decline in same store sales was due primarily to reduced demand
associated with unfavorable economic conditions. Gases and cylinder revenue
represented 57.0% of net sales for the three months ended September 30, 2002,
with hard goods representing 43.0%. In comparison, gases and cylinder revenue
represented 56.0% of net sales for the three months ended September 30, 2001,
with hard goods representing 44.0%.
Gross profit, which excludes depreciation and amortization, decreased
0.9%, or $0.2 million to $18.0 million, for the three months ended September 30,
2002 compared to $18.2 million for the three months ended September 30,
2001.Acquisitions made since the prior year quarter contributed $0.6 million of
increase in gross profit while same store gross profit decreased $0.8
-12-
million, consistent with the decline in same store sales. Gross profit as a
percentage of net sales was 54.0% for the three months ended September 30, 2002,
compared to 54.1% for the three months ended September 30, 2001.
Operating and administrative expenses increased 5.0%, or $0.7 million, to
$13.9 million for the three months ended September 30, 2002. Of this increase,
$0.7 million was related to acquired businesses while same store operating
expenses remained the same. Operating and administrative expenses as a
percentage of sales were 41.6% for the three months ended September 30, 2002, as
compared to 39.3% for the same quarter in 2001, reflecting primarily the effect
of the decline in same store sales, and the effect of acquisitions made since
the prior year quarter.
Depreciation and amortization expense increased $0.2 million for the three
months ended September 30, 2002, compared to the three months ended September
30, 2001, primarily as a result of acquisitions completed since the prior year
quarter.
Interest expense increased $0.7 million to $2.1 million for the three
months ended September 30, 2002 compared to $1.4 million for the three months
ended September 30, 2001. Reflected in interest expense was an increase of $0.4
million for the three months ended September 30, 2002 and a decrease of $0.2
million for the three months ended September 30, 2001 to record changes in the
fair market value of the Company's interest rate swap agreements under SFAS No.
133. Interest expense for the three months ended September 30, 2002 also
included a charge of $0.1 million related to an amendment to the Company's
credit facility.
The Company's effective tax rate for the three months ended September 30,
2002 was 41.5%, the same rate for the three months ended September 30, 2001.
Net earnings decreased 90.4% to $0.1 million for the three months ended
September 30, 2002 compared to $1.1 million for the prior year quarter. This
change in earnings reflects primarily the effect of the above-mentioned decline
in same store sales and gross profit and the change in fair market value of the
Company's interest rate swap agreements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations, capital
expenditures and debt service with funds provided from operating activities.
Acquisitions have been financed by a combination of seller financing, bank
borrowings and funds generated from operations.
At September 30, 2002, the Company had working capital of approximately
$12.6 million. Funds provided by operations for the three months ended September
30, 2002 were approximately $3.0 million. Funds used for investing activities
were approximately $3.0 million for the three months ended September 30, 2002,
consisting primarily of capital spending and financing for acquisitions. The
Company's cash balance decreased $0.2 million during the three months to $1.0
million.
On June 28, 2002, the Company entered into an amendment to the second
amended and restated credit agreement with Bank One, as agent. This agreement
decreased the maximum revolving note borrowings to $75.0 million, from the
previous maximum borrowings level of $100.0 million, and extended the maturity
of the revolving note to June 28, 2005. The agreement permits the Company, on an
annual basis, to request that the maturity be extended one year. No significant
changes were made to pricing and the covenant requirements when compared to the
original agreement. The weighted average interest rate for substantially all of
the borrowings under the credit facility was 4.6% as of
-13-
September 30, 2002 excluding the impact of the Company's interest rate swap
agreements. See Note 7. As of September 30, 2002, availability under the
revolving loan was approximately $11.9 million, with outstanding borrowings of
approximately $59.5 million and outstanding letters of credit of approximately
$3.6 million. The credit facility is secured by all of the Company's assets. The
revolving loan is used primarily to fund acquisitions. The Company is not
required to make principal payments on outstanding balances of the revolving
loan as long as certain covenants are satisfied. Interest is charged on both the
term loan and the revolving loan at either the lender's prime rate or various
LIBOR rates, at the Company's discretion, plus an applicable spread.
The loan agreement for the credit facility contains various financial
covenants applicable to the Company, including covenants requiring minimum fixed
charge coverage, maximum funded debt to EBITDA, and minimum net worth. On
October 28, 2002 the Company amended its credit facility. Certain financial
covenants were amended in order for the Company to remain in compliance with
such financial covenants as of September 30, 2002.
The Company is obligated under various promissory notes related to the
financing of acquisitions that have various rates of interest, ranging from
3.75% to 10.0% per annum, and maturities through 2010. The outstanding balance
of these notes as of September 30, 2002 was $8.4 million. Some of these notes
are secured by assets related to the applicable acquisition, some are unsecured,
and some are backed by bank letters of credit issued under the Company's credit
facility.
The Company enters into contractual agreements in the ordinary course of
business to hedge its exposure to interest rate risks. Counterparties to these
agreements are major financial institutions. Management believes the risk of
incurring losses related to credit risk is remote and any losses would be
immaterial.
Interest rate swap agreements are used to reduce interest rate risks and
costs inherent in the Company's debt portfolio. The Company enters into these
agreements to change the fixed/variable interest rate mix of the debt portfolio
in order to maintain the percentage of fixed and variable debt within certain
parameters set by management. Accordingly, the Company enters into agreements to
effectively convert variable-rate debt to fixed-rate debt.
As of September 30, 2002, the Company had $60.0 million in notional
amounts outstanding under interest rate swap agreements. These swaps have an
average pay rate of 5.9% versus a receive rate of 1.8%.
The Company has previously entered into a put/call option agreement with
an independent distributor for the purchase of its business. This option became
exercisable in May 2002 and ends in the year 2008. The Company believes that it
will have adequate capital resources available to fund this acquisition at such
time that the option is exercised.
The Company believes that cash generated from operations, borrowing
availability under its credit facility and the ability to obtain financing with
sellers of businesses will be sufficient to satisfy the Company's requirements
for operating funds, capital expenditures and future acquisitions for at least
the next twelve months. The Company has no plans at this time to issue
additional shares of common stock.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect
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the amounts reported in the consolidated financial statements and accompanying
notes. Note 2 to the consolidated financial statements describes the significant
accounting policies and methods used in the preparation of the consolidated
financial statements. Estimates are used for, but not limited to, determining
the net carrying value of trade receivables, inventories, goodwill, other
intangible assets and employee health care benefit reserves. Actual results
could differ from these estimates. The following critical accounting policies
are impacted significantly by judgments, assumptions and estimates used in the
preparation of the consolidated financial statements.
Trade Receivables
The Company must make estimates of the collectability of its trade
receivables. Management has established an allowance for doubtful accounts to
adjust the carrying value of trade receivables to fair value based on an
estimate of the amount of trade receivables that are deemed uncollectible. The
allowance for doubtful accounts is determined based on historical experience,
economic trends and management's knowledge of significant accounts.
Inventories
The Company's inventories are stated at the lower of cost or market. The
Company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon its physical condition as well as assumptions
about future demand and market conditions. If actual demand or market conditions
in the future are less favorable than those estimated, additional inventory
write-downs may be required.
Goodwill and Other Intangible Assets
The Company adopted SFAS 142, Goodwill and Other Intangible Assets, as of
July 1, 2001. SFAS 142 requires goodwill and intangible assets with indefinite
useful lives not to be amortized, but instead be tested for impairment at least
annually. The Company has elected to perform its annual tests for indications of
goodwill impairment as of June 30th of each year. The annual impairment test
used by the Company includes a discounted cash flow analysis as well as other
tests of the market value of its business entity. The discounted cash flow
analysis requires the use of significant estimates, assumptions and judgments.
Examples include, (i) projections on Company operating performance, (ii)
assumptions as to the Company's cost of capital, and (iii) assumptions as to the
availability of capital in the future.
Employee Health Care Benefits Payable
The Company has self-funded health care benefit programs in place whereby
a third party administrator settles and pays incurred claims on an on-going
basis. The Company estimates the level of outstanding claims, at any point in
time, based upon historical payment patterns, knowledge of individual claims and
estimates of health care costs. The Company has stop-loss insurance coverage in
place to limit the extent of individual claims.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company generally has experienced higher sales activity during its
second and third quarters as a result of seasonal sales of propane, with
corresponding lower sales for the first and fourth quarters. As a result, income
from operations and net income typically are higher for the second and
third quarters than for the first and fourth quarters of the fiscal year. The
timing of acquisitions may also have an appreciable effect on quarter to quarter
earnings.
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INFLATION
The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally low rates of inflation in the
economy and the Company's historical ability to pass purchase price increases to
its customers in the form of sales price increases. While inflation has not had,
and the Company does not expect that it will have, a material impact upon
operating results, there is no assurance that the Company's business will not be
affected by inflation in the future.
SUBSEQUENT EVENTS
On October 28, 2002 the Company amended its credit facility. Certain
financial covenants were amended in order for the Company to remain in
compliance with such financial covenants as of September 30, 2002.
CAUTIONARY STATEMENTS
This report includes statements that are forward-looking as that term is
defined by the Private Securities Litigation and Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases,
including statements regarding our intent, belief or current expectations. These
forward-looking statements are not guarantees of future performance and involve
a number of risks and uncertainties that may cause actual results to differ
materially from the results discussed in these statements. The Company intends
that such forward-looking statements be afforded the protections provided by the
safe harbor created by the Private Securities Litigation and Reform Act of 1995.
All forward-looking statements are based upon current expectations
regarding important factors. Accordingly, actual results may differ materially
from those expressed in the forward-looking statements and the making of such
statements should not be regarded as a representation by the Company or any
other person that the results expressed will be achieved. Important risk factors
that may affect the Company's ability to achieve the results expressed in the
forward-looking statements include, but are not limited to, the Company's
ability to (i)accurately identify attractive acquisition targets and make
accurate predictions regarding the performance of those businesses if integrated
into the Company's operations, (ii) successfully negotiate agreements for the
acquisition of those businesses, (iii) integrate the operations of the acquired
businesses as anticipated, (iv) secure financing necessary to make acquisitions,
including maintaining and/or expanding its line of credit, negotiating seller
financing, or securing other financing methods, (v) manage rapid growth, (vi)
effectively compete, (vii) attract and retain key personnel and (viii) maintain
good relationships with suppliers and locate alternative suppliers if needed. In
addition, the Company's ability to achieve the results expressed by the
forward-looking statements may be affected by litigation or other claims arising
out of accidents involving the Company's products, changes in the economy,
monetary or fiscal policies, changes in laws and regulations affecting the
Company's business, inflation and fluctuations in interest rates. Other risks
and uncertainties are detailed from time to time in our filings with the
Securities and Exchange Commission. We do not intend to update any of the
forward-looking statements after the date of this Form 10-Q to conform them to
actual results.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps and debt obligations.
For debt obligations, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. For interest rate
swaps, the table presents notional amounts and weighted average interest rates
by expected (contractual) maturity dates. Notional amounts are used to calculate
the contractual payments to be exchanged under the contract. Weighted average
variable rates are based on the one month LIBOR rate in effect at the reporting
date. No assumptions have been made for future changes in the one month LIBOR
rate.
EXPECTED MATURITY DATE
FOR PERIODS ENDING JUNE 30,
----------------------------------------------------------------- ----------------------------------
THERE FAIR
2003 2004 2005 2006 2007 AFTER TOTAL VALUE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Liabilities
Long term debt
Fixed rate $ 3,319 $ 2,190 $ 801 $ 751 $ 547 $ 417 $ 8,025 $ 7,249
Average interest
rate 3.78% 4.47% 5.78% 6.38% 6.28% 4.86%
Variable rate $ 3,000 $ 3,000 $ 66,953 -- -- -- $ 72,953 $ 72,953
Average interest
rate 4.59% 4.59% 4.59% -- -- --
Interest rate swaps fixed
to variable $ 60,000 $ 55,000 $ 20,000 -- -- -- $ (3,874)
Average pay rate 5.45% 5.45% 5.25% -- -- --
Average receive
rate 1.84% 1.84% 1.84% -- -- --
No material change to the information set forth in the above table has
occurred since June 30, 2002. There was no change to the composition of the
Company's fixed and variable rate long-term debt or interest rate swaps during
the three months ended September 30, 2002. As of September 30, 2002 the
Company's average pay rate for these swaps was 5.9% compared to its average
receive rate of 1.8%.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer, Michael L. Tyler and our Chief Financial
Officer, Robert D. Scherich, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-14(c) under the Exchange Act) as of a date (the "Evaluation Date") within 90
days prior to the filing date of this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to the material information relating to us required to be included
in our periodic SEC filings.
(b) Changes in Internal Controls
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Second Amendment to Second Amended and Restated Credit
Agreement dated October 28, 2002
10.2 Employment Agreement dated October 15, 2002 between the
Company and Michael L. Tyler
99.1 Certification of Michael L. Tyler pursuant to 18 U.S.C. (s)
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification of Robert D. Scherich pursuant to U.S.C. (s)
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September
30, 2002.
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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 thereunto duly authorized.
VALLEY NATIONAL GASES INCORPORATED
November 14, 2002 /s/ Robert D. Scherich
----------------------------------
Robert D. Scherich
Chief Financial Officer
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CERTIFICATIONS
I, Michael L. Tyler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Valley
National Gases Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Michael L. Tyler
-------------------------------------
President and Chief Executive Officer
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I, Robert D. Scherich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Valley National
Gases Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Robert D. Scherich
-------------------------------------
Chief Financial Officer
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