Item 1. Business.
Available Information
The Company files annual, quarterly, current reports, and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov .
General
We believe we are the largest North American manufacturer and distributor of metal accessories and forms used in concrete construction and a leading manufacturer of metal accessories used in masonry construction in terms of revenues. In many of our product lines, we believe we are the market leader, in terms of revenues, competing primarily in two segments of the construction industry: infrastructure construction, such as highways, bridges, utilities, water and waste treatment facilities and airport runways, and non-residential building, such as schools, stadiums, prisons, retail sites, commercial offices, hotels and manufacturing facilities.
We derive our revenue from a mix of sales of consumable products and the sale and rental of engineered concrete forming systems. Through our network of 23 service/distribution centers, we serve over 4,000 customers, comprised of independent distributors and a broad array of pre-cast concrete manufacturers, general contractors, subcontractors and metal fabricators. We sell most of our 21,000 products under well established, industry-recognized brand names, and manufacture the vast majority of these products ‘‘in-house.’’ We believe that the breadth of our product offerings and national distribution network allow us to service the largest customer base in the industry by providing a ‘‘one-stop’’ alternative to our customers. We believe that none of our competitors can match our combination of product breadth and national reach. In addition, our nationwide customer base enables us to efficiently cross-sell our products and provides us with a platform from which we can broadly distribute newly developed and acquired product lines. Finally, our national customer base provides us with geographically dispersed sales that can mitigate the effects of regional economic downturns.
Products
Although almost all of our products are used in concrete or masonry construction, the function and nature of the products differ widely. Most of our products are consumable, providing us with a source of recurring revenue. In addition, while our products represent a relatively small portion of a construction project’s total cost, our products assist in ensuring the on-time, quality completion of those projects. We continually attempt to increase the number of products we offer by using engineers and product development teams to introduce new products and refine existing products.
We manufacture and sell products primarily under the Dayton/Richmond ® , Aztec ® , Symons ® , and BarLock ® brand names, chemical products under the Dayton Superior ® , Conspec ® , and Edoco ® , brand names, masonry products primarily under the Dur-O-Wal ® brand name and welded dowel assemblies and other paving products primarily under the American Highway Technology ® name.
Product Sales Consist Of:
• Wall-Forming Products. Wall-forming products include shaped metal ties and accessories that are used with modular forms to hold concrete in place when walls are poured at a construction site or are prefabricated off site. These products, which generally are not reusable, are made of wire or plastic or a combination of both materials.
• Bridge Deck Products. Bridge deck products are metal assemblies of varying designs used to support the formwork used by contractors in the construction and rehabilitation of bridges.
• Bar Supports. Bar supports are non-structural steel, plastic, or cementitious supports used to position rebar within a horizontal slab or form to be filled with concrete. Metal bar supports are often plastic or epoxy coated, galvanized or equipped with plastic tips to prevent creating a conduit for corrosion of the embedded rebar.
• Splicing Products. Splicing products are used to join two pieces of rebar together at a construction site without the need for extensive preparation of the rebar ends.
• Precast and Prestressed Concrete Construction Products. Precast and prestressed concrete construction products are metal assemblies of varying designs used in the manufacture of precast concrete panels and prestressed concrete beams and structural members. Precast concrete panels and prestressed concrete beams are fabricated away from a construction site in a manufacturing environment and transported to the site. Precast concrete panels are used in the construction of prisons, freeway sound barrier walls, external building facades and other similar applications. Prestressed concrete beams use multiple strands of steel cable under tension embedded in concrete beams to provide rigidity and bearing strength, and often are used in the construction of bridges, parking garages and other applications where long, unsupported spans are required.
• Formliner Products. Formliner products include plastic and elastomeric products that adhere to the inside face of forms to provide shape to the surface of the concrete.
• Chemical Products. Chemical products include a broad spectrum of chemicals for use in concrete construction, including form release agents, bond breakers, curing compounds, liquid hardeners, sealers, water repellents, bonding agents, grouts and epoxies, and other chemicals used in the pouring and placement of concrete and curing compounds used in concrete road construction.
• Masonry Products. Masonry products are wire products sold under the Dur-O-Wal ® name that improve the performance and longevity of masonry walls by providing crack control, greater elasticity and higher strength to withstand seismic shocks and better resistance to rain penetration.
• Welded Dowel Assemblies. Welded dowel assemblies are used to transfer dynamic loads between two adjacent slabs of concrete roadway. Metal dowels are part of a dowel basket design that is imbedded in two adjacent slabs to transfer the weight of vehicles as they move over a road.
• Corrosive-Preventing Epoxy Coatings. Corrosive-preventing epoxy coatings are used for infrastructure construction products and a wide range of industrial and construction uses.
• Architectural Paving Products. Architectural paving products are used to apply decorative texture and coloration to concrete surfaces while concrete is being poured.
We manufacture, sell and rent reusable concrete forming systems primarily under the Symons ® name and tilt-up construction products under the Dayton/Richmond ® name.
Rental Revenues and Sales of Used Rental Equipment Consist Of:
• Concrete Forming Systems. Concrete forming systems are reusable, engineered modular forms which hold liquid concrete in place on concrete construction jobs while it hardens. Standard forming systems are made of steel and plywood and are used in the creation of concrete walls and columns. Traditionally, forms have been attached to each other using nuts and bolts. In recent years, a growth in the use of clamping systems has occurred in the United States. Specialty forming systems consist primarily of steel forms that are designed to meet architects’ specific needs for concrete placements. Both standard and specialty forming systems are rented and sold.
• Shoring Systems. Shoring systems, including aluminum beams and joists, are reusable post shores and shoring frames which are used to support deck and other raised forms while concrete is being poured.
• Tilt-Up Construction Products. Tilt-up construction products include a complete line of inserts, reusable lifting hardware and adjustable beams used in the tilt-up method of construction, in which the concrete floor slab is used as part of a form for casting the walls of a building. After the cast walls have hardened on the floor slab, a crane is used to ‘‘tilt-up’’ the walls that then are braced in place until they are secured to the rest of the structure. Tilt-up construction generally is considered to be a faster method of constructing low-rise buildings than conventional poured-in-place concrete construction.
Manufacturing
We manufacture a majority of the products we sell and rent in 17 facilities throughout North America. These facilities incorporate semi-automated and automated production lines, heavy metal presses, forging equipment, stamping equipment, robotic welding machines, drills, punches and other heavy machinery typical for this type of manufacturing operation. Our production volumes enable us to design and build or custom modify much of the equipment we use to manufacture these products, using a team of experienced manufacturing engineers and tool and die makers.
By developing our own automatic high-speed manufacturing equipment, we believe we generally have achieved significantly greater productivity, lower capital equipment costs, lower scrap rates, higher product quality, faster changeover times, and lower inventory levels than most of our competitors. In addition, our ability to ‘‘hot-dip’’ galvanize masonry products provides us with an advantage over many competitors manufacturing masonry wall reinforcement products, as they lack this internal capability. We also have a flexible manufacturing setup and can make the same products at several locations using short and discrete manufacturing lines.
We outsource some of our production requirements to lower cost foreign producers that we believe generate significant additional savings.
Distribution
We distribute our products to customers through our network of 23 service/distribution centers located in the United States and Canada. We ship most of our products to our service/distribution centers from our manufacturing plants. We have an on-line inventory tracking system that enables us to identify, reserve and ship inventory quickly from our locations in response to customer orders.
Sales and Marketing
We employed approximately 300 sales and marketing personnel at December 31, 2005, of whom approximately two-thirds were in field sales and one-third were customer service representatives. Sales and marketing personnel are located in most of our service/distribution centers. We produce product catalogs and promotional materials that illustrate certain construction techniques in which our products can be used to solve typical construction problems. We promote our products through seminars and other customer education efforts and work directly with architects and engineers to secure the use of our products whenever possible.
We consider our engineers to be an integral part of the sales and marketing effort. Our engineers have developed proprietary software applications to conduct extensive pre-testing on both new products and construction projects.
Customers
We have over 4,000 customers, of which approximately 50% purchase our products for resale and 50% are end users. Our customer base is geographically diverse, with no customer accounting for more than 5% of our net sales in 2005. Our customers consist of distributors, rebar fabricators, precast and prestressed concrete manufacturers, brick and concrete block manufacturers, general contractors and sub-contractors.
Raw Materials
Our principal raw materials are steel wire rod, steel hot rolled bar, metal stampings and flat steel, aluminum sheets and extrusions, plywood, cement and cementitious ingredients, liquid chemicals, zinc, plastic resins and injection-molded plastic parts. We currently purchase materials from over 800 vendors and are not dependent on any single vendor or small group of vendors for any significant portion of our raw material purchases. Steel, in its various forms, constitutes approximately 20% of our cost of sales. In 2004, we faced rapidly rising steel prices and responded by increasing our sales prices.
Competition
Our industry is highly competitive in most product categories and geographic regions. We compete with a limited number of full-line national manufacturers of concrete accessories, concrete forming systems and paving products, and a much larger number of regional manufacturers and manufacturers with limited product lines. We believe competition in our industry is largely based on, among other things, price, quality, breadth of product lines, distribution capabilities (including quick delivery times), and customer service. Due primarily to factors such as freight rates, quick delivery times and customer preference for local suppliers, some local or regional manufacturers and suppliers may have a competitive advantage over us in a given region. We believe the size, breadth, and quality of our product lines provide us with advantages of scale in both distribution and production relative to our competitors.
Trademarks and Patents
Our products are sold under our registered trademarks that are well known throughout the concrete construction industry and are therefore important to our business. Among our better-known trademarks are Dayton Superior®, Dayton/Richmond®, Symons®, Aztec®, Dur-O-Wal®, American Highway Technology®, Conspec®, Edoco®, Jahn®, Swift Lift®, Bar Lock®, Steel-Ply®, the Hexagon Logo® and the S & Diamond® design. Many of our products are protected by our patents, which are considered an important asset of the Company. As of December 31, 2005, we had approximately 100 patents and 40 pending patent applications, domestic and foreign, and about 170 registered trademarks and pending applications for registration.
Employees
As of December 31, 2005, we employed approximately 700 salaried and 1,000 hourly personnel, of whom approximately 400 of the hourly personnel and 3 of the salaried personnel are represented by labor unions. Employees at our Miamisburg, Ohio; Parsons, Kansas; Des Plaines, Illinois; New Braunfels, Texas; Tremont, Pennsylvania; Santa Fe Springs, California; City of Industry, California, and Aurora, Illinois facilities are covered by collective bargaining agreements. Two collective bargaining agreements will expire in 2006. We believe we have good employee and labor relations.
Seasonality
Our operations are seasonal in nature, with approximately 55% of our sales historically occurring in the second and third quarters. Working capital and borrowings under the revolving credit facility fluctuate with sales volume such that our peak revolving credit facility borrowings are generally in the late second quarter or early third quarter.
Backlog
We typically ship most of our products, other than paving products and most specialty forming systems, within one week and often within 24 hours after we receive the order. Other product lines, including paving products and specialty forming systems, may be shipped up to six months after we receive the order, depending on our customers’ needs. Accordingly, we do not maintain significant backlog, and backlog as of any particular date has not been representative of our actual sales for any succeeding period.
Item 1A. Risk Factors
Cyclicality of construction industry—The construction industry is cyclical, and a continued significant downturn in the construction industry could further decrease our revenues and profits and adversely affect our financial condition. Because our products primarily are used in infrastructure construction and non-residential building construction, our sales and earnings are strongly influenced by construction activity, which historically has been cyclical. Construction activity can decline because of many factors we cannot control, such as:
• weakness in the general economy;
• a decrease in government spending at the federal and state levels;
• interest rate increases; and
• changes in banking and tax laws.
Substantial leverage—Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations. We have a significant amount of indebtedness and debt service requirements. The following shows certain important credit information as of December 31, 2005:
Total long-term indebtedness, including current maturities
|
$369.3 million | |
Shareholders’ deficit
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$171.3 million |
Our substantial indebtedness could have important consequences. For example, it could:
• make it more difficult for us to satisfy our obligations under outstanding indebtedness;
• increase our vulnerability to general adverse economic and industry conditions;
• require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes;
• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
• place us at a disadvantage to our competitors that have less debt; and
• limit, along with other restrictive covenants in our indebtedness agreements, among other things, our ability to borrow additional funds.
In addition, failing to comply with those covenants could result in an event of default that, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. In addition, we may be able to incur additional indebtedness under the terms of our indebtedness agreements. If new debt is added to our current debt levels, the related risks that we and they now face could increase.
Net losses—Our business has experienced net losses over the past several years. We reported net losses of approximately $17.6 million in 2003, $48.7 million in 2004 and $114.7 million in 2005. Our results of operations will continue to be affected by events and conditions both within and beyond our control, including competition, economic, financial, business and other conditions. Therefore, we cannot offer assurances to you that we will not continue to incur net losses in the future.
Price increases and availability—We may not be able to pass on the cost of commodity price increases to our customers. Steel, in its various forms, is our principal raw material, constituting approximately 20% of our cost of sales in 2005. Historically, steel prices have fluctuated, and we faced rapidly rising steel prices in 2004. Any decrease in our volume of steel purchases could affect our ability to secure volume purchase discounts that we have obtained in the past. Additionally, the overall increase in energy costs, including natural gas and petroleum products, has adversely impacted our overall operating costs in the form of higher raw material, utilities, and freight costs. We cannot offer assurances that we will be able to pass these cost increases on to our customers.
Weather-related risks—Weather causes our operating results to fluctuate and could adversely affect the demand for our products and decrease our revenues. Our operating results tend to fluctuate from quarter to quarter because, due to weather, the construction industry is seasonal in most of North America, which is where almost all of our sales are made. Demand for our products generally is higher in the spring and summer than in the winter and late fall. As a result, our first quarter net sales typically are the lowest of the year. Our net sales and operating income in the fourth quarter also generally are less than in the second and third quarters. In addition, severe weather could adversely affect our business, financial condition and results of operation. Adverse weather, such as unusually prolonged periods of cold, rain, blizzards, hurricanes and other severe weather patterns, could delay or halt construction activity over wide regions of the country. For example, a severe winter, such as the 2002-2003 winter, could lead to reduced construction activity and thus magnify the seasonal decline in our revenues and earnings during the winter months. Sustained extreme adverse weather conditions could have a material adverse effect on our business, financial condition and results of operations.
Chemical products competition—We are significantly smaller than some of our construction chemical competitors. In the sale of some construction chemicals, we must compete with a number of national and international companies that are many times larger than we are in terms of total assets and annual revenues. Because our resources are more limited, we may not be able to compete effectively and profitably on a sustained basis in the markets in which those competitors are actively present.
Potential exposure to environmental liabilities—We may be liable for costs under certain environmental laws even if we did not cause any environmental problems. Changes in environmental laws or unexpected investigations could adversely affect our business. Our business and our facilities are subject to a number of federal, state and local environmental laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water as well as the handling,
storage and disposal of these materials. Pursuant to certain environmental laws, a current or previous owner or operator of land may be liable for the costs of investigation and remediation of hazardous materials at the property. These laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous materials. Persons who arrange (as defined under these statutes) for the disposal or treatment of hazardous materials also may be liable for the costs of investigation and remediation of these substances at the disposal or treatment site, regardless of whether the affected site is owned or operated by them. We believe we are in material compliance with applicable environmental laws. However, because we own and operate a number of facilities where industrial activities have been historically conducted and because we arrange for the disposal of hazardous materials at many disposal sites, we may incur costs for investigation and remediation, as well as capital costs associated with compliance with these laws. These environmental costs have not been material in the past and are not expected to be material in the future. Nevertheless, more stringent environmental laws as well as more vigorous enforcement policies or discovery of previously unknown conditions requiring remediation could impose material costs and liabilities on us which could have a material adverse effect on our business, financial condition and results of operations.
Consolidation of our customers—Increasing consolidation of our customers may negatively affect our earnings. We believe that there is an increasing trend among our distributors to consolidate into larger entities. As our customers increase in size and market power, they may be able to exert pressure on us to reduce prices or create price competition by dealing more readily with our competitors. If the consolidation of our customers does result in increased price competition, our sales and profit margins may be adversely affected.
Increased dependence on foreign operations—We operate a manufacturing facility in Reynosa Mexico and have increased our purchasing of raw materials and finished goods from foreign sources. Political and economic conditions in foreign countries could adversely affect us. The success of our operations in Mexico depend on numerous factors, many of which are beyond our control, including our inexperience with operating abroad, general economic conditions, currency fluctuations, restrictions on the repatriation of assets, compliance with foreign laws and standards and political risks.
Product mix profit margins—A change in the mix of products we sell could negatively affect our earnings. Some of our products historically have had narrow profit margins. If the mix of products we sell shifts to include a larger percentage of products with narrow profit margins, our earnings may be negatively affected.
Risks associated with acquisitions—We may complete acquisitions that disrupt our business. If we make acquisitions, we could do any of the following, which could adversely affect our business, financial condition and results of operations:
• incur substantial additional debt, which may reduce funds available for operations and future opportunities and increase our vulnerability to adverse general economic and industry conditions and competition;
• assume contingent liabilities; or
• take substantial charges to write off goodwill and other intangible assets. In addition, acquisitions can involve other risks, such as:
• difficulty in integrating the acquired operations, products and personnel into our existing business;
• costs that are greater than anticipated or cost savings that are less than anticipated;
• diversion of management time and attention; and
• adverse effects on existing business relationships with our suppliers and customers and the suppliers and customers of the acquired business.
Competition—The markets in which we sell our products are highly competitive. We compete against some national and many regional rivals. The uniformity of products among competitors results in substantial pressure on pricing and profit margins. As a result of these pricing pressures, we may in the future experience reductions in the profit margins on our sales, or we may be unable to pass any cost increases on to our customers. We cannot assure you that we will be able to maintain or increase our current market share of our products or compete successfully in the future.
Control by Odyssey—We are controlled by Odyssey Investment Partners, LLC. Odyssey and its co-investors directly or indirectly own 92% of our outstanding common shares and, therefore, have the power, subject to certain exceptions, to control our affairs and policies. They also control the election of directors, the appointment of management, the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions. The directors have authority, subject to the terms of our debt, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions about our capital stock. The interests of Odyssey and its affiliates could conflict with the interests of our note holders. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of the Odyssey investors, as holders of our equity, might conflict with the interests of our note holder. Affiliates of Odyssey may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though these transactions might involve risks to the holders of our notes.
Risks associated with our workforce—We depend on our highly trained employees, and any work stoppage or difficulty hiring similar employees would adversely affect our business. We could be adversely affected by a shortage of skilled employees. As of December 31, 2005, approximately 25% of our employees were unionized. We are subject to several collective bargaining agreements with employees at our Miamisburg, Ohio; Parsons, Kansas; Des Plaines, Illinois; New Braunfels, Texas; Tremont, Pennsylvania; Santa Fe Springs, California; City of Industry, California, and Aurora, Illinois facilities. Although we believe that our relations with our employees are good, we cannot offer assurances that we will be able to negotiate a satisfactory renewal of these collective bargaining agreements or that our employee relations will remain stable. Any shortage of labor could have a material adverse effect on our business, financial condition and results of operations.
Dependence on key personnel—If we lose our senior management, our business may be adversely affected. The success of our business is largely dependent on our senior managers, as well as on our ability to attract and retain other qualified personnel. We cannot assure you that we will be able to attract and retain the personnel necessary for the development of our business. The loss of the services of key personnel or the failure to attract additional personnel as required could have a material adverse effect on our business, financial condition and results of operations. We do not currently maintain ‘‘key person’’ life insurance on any of our key employees.
Restrictive covenants—Our revolving credit facility and our note indentures contain various covenants that limit the discretion of our management in the operation of our business including, among other things, our ability to:
• incur additional debt;
• pay dividends or distributions on our capital stock or repurchase our capital stock;
• enter into guarantees;
• issue preferred stock of our subsidiary;
• restrict the rights of our subsidiary to make distributions to us;
• make certain investments;
• create liens to secure debt;
• enter into transactions with affiliates;
• merge or consolidate with another company;
• transfer and sell assets;
• change the terms of certain of our debt; and
• create new subsidiaries.
In addition, if we fail to comply with our revolving credit facility, our note indentures, or any other subsequent financing agreements, a default could occur. Such a default could allow the lenders, if the
agreements so provide, to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies. In addition, the lenders could terminate any commitments they had made to supply us with further funds.
Item 1B. Unresolved Staff Comments.
Not applicable.
