(Mark One)
Commission File No. 1 - 9102
|
DELAWARE (State or other jurisdiction of incorporation or organization) |
77-0100596 (I.R.S. Employer Identification No.) |
245
South Los Robles Avenue
Pasadena, California 91101-3638
(Address of principal executive offices)
(626) 683-4000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as indicated in Rule 12b-2 of the Exchange Act). Yes/x/ No / /
The number of shares outstanding of Common Stock, $2.50 par value, was 8,429,971 on August 29, 2004. No other class of Common Stock exists.
1
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12
Item 3. Quantitative and Qualitative Market Risk Disclosure 18
Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 INDEX OF EXHIBITS 21 SIGNATURE PAGE 22 CERTIFICATIONS 23 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Three Months Ended Nine Months Ended
------------------------- -------------------------
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Sales $ 155,413 $ 155,174 $ 435,597 $ 433,639
Cost of Sales (117,168) (112,730) (330,827) (318,213)
----------- ----------- ----------- -----------
Gross Profit 38,245 42,444 104,770 115,426
Selling, General and
Administrative Expenses (35,414) (32,078) (100,360) (92,636)
Pension Plan Curtailment/Settlement (12,817) - (12,817) -
Other Income, Net 740 2,715 2,794 8,680
----------- ----------- ----------- -----------
(Loss)/Income before Interest, Income Taxes
and Equity in Earnings of Joint Venture (9,246) 13,081 (5,613) 31,470
Interest Expense, Net (1,193) (1,821) (4,462) (5,124)
----------- ----------- ----------- -----------
(Loss)/Income before Income Taxes and Equity in
Earnings of Joint Venture (10,439) 11,260 (10,075) 26,346
Provision for Income Taxes (2,921) (3,779) (3,041) (8,717)
----------- ----------- ----------- -----------
(Loss)/Income before Equity in Earnings of Joint Venture (13,360) 7,481 (13,116) 17,629
Equity in Earnings of Joint Venture, Net of Taxes 4,585 230 8,461 82
----------- ----------- ----------- -----------
Net (Loss)/Income $ (8,775) $ 7,711 $ (4,655) $ 17,711
=========== =========== =========== ===========
Net (Loss)/Income per Share (Basic) $ (1.05) $ .97 $ (.56) $ 2.25
=========== =========== =========== ===========
Net (Loss)/Income per Share (Diluted) $ (1.05) $ .94 $ (.56) $ 2.19
=========== =========== =========== ===========
Weighted-Average Shares (Basic) 8,333,346 7,945,157 8,249,076 7,874,174
=========== =========== =========== ===========
Weighted-Average Shares (Diluted) 8,333,346 8,194,581 8,249,076 8,103,576
=========== =========== =========== ===========
Cash Dividends per Share $ .20 $ .20 $ .60 $ .56
=========== =========== =========== ===========
|
August 29, November 30,
2004 2003
( Unaudited )
----------- -----------
ASSETS
Current Assets
Cash and Cash Equivalents $ 25,908 $ 20,390
Receivables, Less Allowances of $7,463
in 2004 and $8,168 in 2003 141,431 155,629
Inventories 86,577 91,371
Deferred Income Taxes 19,241 19,241
Prepaid Expenses and Other Current Assets 10,632 8,882
--------- ---------
Total Current Assets 283,789 295,513
Investments in Joint Ventures
Equity Method 13,688 13,064
Cost Method 5,479 5,479
Property, Plant and Equipment
Land 37,916 37,787
Buildings 84,580 84,426
Machinery and Equipment 286,190 283,123
Construction in Progress 10,846 6,169
--------- ---------
Total Property, Plant and Equipment at Cost 419,532 411,505
Accumulated Depreciation (269,686) (260,919)
--------- ---------
Total Property, Plant and Equipment, Net 149,846 150,586
Deferred Income Taxes 6,770 6,744
Intangible Assets, Net of Accumulated Amortization
of $9,925 in 2004 and $9,738 in 2003 13,466 13,526
Other Assets 44,856 48,580
--------- ---------
Total Assets $ 517,894 $ 533,492
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt $ 8,333 $ 8,333
Trade Payables 49,777 47,512
Accrued Liabilities 55,331 53,091
Income Taxes Payable 6,129 9,568
--------- ---------
Total Current Liabilities 119,570 118,504
Long-Term Debt, Less Current Portion 86,679 86,044
Other Long-Term Liabilities 58,043 72,832
--------- ---------
Total Liabilities 264,292 277,380
--------- ---------
Stockholders' Equity
Common Stock, Par Value $2.50 a Share,
Authorized 12,000,000 Shares, Outstanding
8,429,971 Shares in 2004 and 8,214,563
in 2003, Net of Treasury Shares 27,742 27,186
Additional Paid-In Capital 21,437 16,443
Unearned Restricted Stock (2,632) (1,481)
Retained Earnings 284,585 294,255
Accumulated Other Comprehensive Loss (28,756) (31,768)
Treasury Stock (2,666,670 Shares
in 2004 and 2,659,810 in 2003) (48,774) (48,523)
--------- ---------
Total Stockholders' Equity 253,602 256,112
--------- ---------
Total Liabilities and Stockholders' Equity $ 517,894 $ 533,492
========= =========
|
Nine Months Ended
-----------------------
August 29, August 31,
2004 2003
-------- --------
Cash Flows from Operating Activities
Net (Loss)/Income $ (4,655) $ 17,711
Adjustments to Reconcile Net (Loss)/Income to Net Cash
Provided by Operating Activities:
Depreciation 13,772 13,667
Amortization 167 233
Provision/(Benefit) for Deferred Income Taxes 46 (46)
Net Earnings and Distributions from Joint Ventures 75 186
Gain from Sale of Assets (77) (2,541)
Stock Compensation Expense 1,179 584
Other - 371
Changes in Operating Assets and Liabilities:
Receivables 14,409 (11,200)
Inventories 5,510 5,248
Prepaid Expenses and Other Current Assets (1,604) (4,231)
Other Assets 4,020 (3,341)
Trade Payables 2,101 (5,617)
Accrued Liabilities and Income Taxes Payable (1,323) 10,407
Other Long-Term Liabilities (13,589) 8,085
-------- --------
Net Cash Provided by Operating Activities 20,031 29,516
-------- --------
Cash Flows from Investing Activities
Proceeds from Sale of Assets 284 3,292
Additions to Property, Plant and Equipment (13,086) (12,892)
-------- --------
Net Cash Used in Investing Activities (12,802) (9,600)
-------- --------
Cash Flows from Financing Activities
Net Change in Short-Term Borrowings - (1,497)
Issuance of Debt 743 64,203
Repayment of Debt (88) (70,123)
Debt Issuance Costs (473) (1,659)
Dividends on Common Stock (5,015) (4,464)
Issuance of Common Stock 3,220 3,737
Change in Treasury Stock (251) 136
-------- --------
Net Cash Used in Financing Activities (1,864) (9,667)
-------- --------
Effect of Exchange Rate Changes
on Cash and Cash Equivalents 153 445
-------- --------
Net Change in Cash and Cash Equivalents 5,518 10,694
Cash and Cash Equivalents at Beginning of Period 20,390 10,360
-------- --------
Cash and Cash Equivalents at End of Period $ 25,908 $ 21,054
======== ========
|
Ameron International Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars In Thousands Except Per Share Data)
(Unaudited)
Note 1. Basis Of Presentation
Consolidated financial statements for the interim periods included herein are unaudited; however, they contain all adjustments, including normal recurring accruals, which in the opinion of management, are necessary to present fairly the consolidated financial position of Ameron International Corporation and all wholly-owned subsidiaries (the "Company" or "Ameron" or the "Registrant") at August 29, 2004, and consolidated results of operations and cash flows for the three and nine months ended August 29, 2004 and August 31, 2003. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. Results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
For accounting consistency, the quarter ends on the Sunday closest to the end of the relevant calendar month. Ameron's fiscal year ends on November 30, regardless of the day of the week. Each quarter consists of approximately 13 weeks, but the number of days per quarter can change from period to period
The consolidated financial statements do not include certain footnote disclosures and financial information normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America and, therefore, should be read in conjunction with the consolidated financial statements and notes included in Ameron's Annual Report on Form 10-K for the year ended November 30, 2003 ("2003 Annual Report").
Certain prior period balances have been reclassified to conform with the current period presentation.
Note 2. New Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The revision to SFAS No. 132 requires additional disclosures relating to the description of the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans recognized during interim periods. These disclosure requirements are effective for the Company. Disclosures required under SFAS No. 132 are included in Note 14, herein.
In January 2004, the FASB issued a FASB Staff Position ("FSP") regarding SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." FSP 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" discusses the effect of the Medicare Prescription Drug, Improvement and Modernization Act ("the Act") enacted on December 8, 2003. FSP 106-1 considers the effect of the two new features introduced in the Act in determining accumulated postretirement benefit obligation ("APBO") and net periodic postretirement benefit cost, which may serve to reduce a company's post-retirement benefit costs. Companies may elect to defer accounting for this benefit or may attempt to reflect the best estimate of the impact of the Act on net periodic costs currently. The Company has chosen to defer accounting for the benefit until the FASB issues final accounting guidance due to various uncertainties related to this legislation and the appropriate accounting. The Company's measures of APBO and net periodic postretirement benefit costs as of and for the quarter ended August 29, 2004 do not reflect the effect of the Act.
On May 19, 2004, the FASB issued an FSP regarding SFAS No. 106. FSP 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" discusses the effect of the Act. FSP 106-2 considers the effect of the two new features introduced in the Act in determining APBO and net periodic postretirement benefit cost, which may serve to reduce a company's post-retirement benefit costs. The adoption of FSP 106-2 is required in the Company's fourth quarter of 2004 and is not expected to have a material impact on the Company's financial position or results of operations.
In December 2003, the FASB issued FASB Interpretation ("FIN") No. 46-R, "Consolidation of Variable Interest Entities," to replace FIN No. 46. FIN No. 46-R addresses the consolidation of business enterprises ("variable interest entities") to which the usual condition (ownership of a majority voting interest) of consolidation does not apply. FIN No. 46-R focuses on financial interests that indicate control. It concludes that in the absence of clear control through voting interests or sufficient equity, a company's exposure ("variable interest") to the economic risks and potential rewards from the variable interest entity's assets and activities are the best evidence of control. Variable interests are rights and obligations that convey economic gains or losses from changes in the values of the variable interest entity's assets and liabilities. Variable interests may arise from financial instruments, service contracts, nonvoting ownership interests and other arrangements. If an enterprise holds a
6
majority of the variable interests of an entity, it would be considered the primary beneficiary. The primary beneficiary is required to consolidate the assets, liabilities and the results of operations of the variable interest entity in its financial statements. The adoption of FIN No. 46-R did not have a material impact on the Company's consolidated financial statements.
Note 3. Inventories
Inventories are stated at the lower of cost or market. Inventories consisted of the following:
August 29, November 30,
2004 2003
--------- ---------
Finished Products $ 48,450 $ 52,821
Materials and Supplies 22,982 22,037
Products in Process 15,145 16,513
--------- ---------
$ 86,577 $ 91,371
========= =========
|
Note 4. Supplemental Disclosure of Cash Flow Information
Nine Months Ended
------------------------
August 29, August 31,
2004 2003
--------- ---------
Interest Paid $ 4,273 $ 3,497
Income Taxes Paid $ 6,130 $ 5,737
|
Note 5. Joint Ventures
Operating results of TAMCO, an investment which is accounted for under the equity
method, were as follows:
Three Months Ended Nine Months Ended
------------------------ ------------------------
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Net Sales $ 70,960 $ 45,830 $ 178,947 $ 119,912
Gross Profit $ 18,798 $ 2,475 $ 36,459 $ 5,087
Net Income $ 10,113 $ 501 $ 18,580 $ 179
|
Investments in Ameron Saudi Arabia, Ltd. ("ASAL"), Bondstrand, Ltd. ("BL") and Oasis-Ameron, Ltd. ("OAL") are accounted for under the cost method due to management's current assessment of the Company's influence over these joint ventures.
Earnings and dividends from the Company's joint ventures were as follows:
Three Months Ended Nine Months Ended
------------------------ ------------------------
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Equity in Earnings of Joint Venture
TAMCO $ 5,057 $ 250 $ 9,330 $ 89
Dividends Received from Joint Ventures
TAMCO $ 5,335 $ - $ 9,405 $ 275
ASAL - - - 2,633
BL - 397 - 2,635
OAL - 1 97 98
Amercoat Mexicana N/A 312 N/A 312
|
Earnings from ASAL, BL, OAL, and Amercoat Mexicana are included in other income. The Company sold its interest in Amercoat Mexicana in August 2003 for a pretax gain of $2,477.
7
Note 6. Net Income Per Share
Basic net income per share is computed on the basis of the weighted-average number of common shares outstanding during the periods presented. Diluted net income per share is computed on the basis of the weighted-average number of common shares outstanding plus the effect of outstanding restricted stock and stock options, using the treasury stock method. For the three months ended August 29, 2004, options to purchase 45,000 common shares were anti-dilutive, while options to purchase 21,000 common shares were anti-dilutive for the nine months ended August 29, 2004. For the three and nine months ended August 31, 2003, options to purchase 21,000 commons shares were anti-dilutive. Following is a reconciliation of the weighted-average number of shares used in the computation of basic and diluted net income per share:
Three Months Ended Nine Months Ended
------------------------ ------------------------
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Basic Average Common
Shares Outstanding 8,333,346 7,945,157 8,249,076 7,874,174
Dilutive Effect of
Common Stock Equivalents - 249,424 - 229,402
--------- --------- --------- ---------
Diluted Average Common
Shares Outstanding 8,333,346 8,194,581 8,249,076 8,103,576
========= ========= ========= =========
|
The Company declared a two-for-one stock split in the form of a stock dividend, payable May 27, 2003. The share and per share information herein is reflected on a post-split basis.
Note 7. Comprehensive Income
Comprehensive income was as follows:
Three Months Ended Nine Months Ended
------------------------ ------------------------
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Net (Loss)/Income $ (8,775) $ 7,711 $ (4,655) $ 17,711
Foreign Currency Translation
Adjustment (870) (2,494) 1,043 7,045
Comprehensive (Loss)/Income from Joint Venture (96) (246) 700 931
Adjustment to Minimum Pension Liabilities 1,269 - 1,269 -
--------- --------- --------- ---------
Comprehensive (Loss)/Income $ (8,472) $ 4,971 $ (1,643) $ 25,687
========= ========= ========= =========
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Note 8. Debt
The Company's long-term debt consisted of the following:
August 29, November 30,
2004 2003
--------- ---------
Fixed-rate notes payable, bearing
interest at 7.92%, in annual principal
installments of $8,333 $ 25,000 $ 25,000
Fixed-rate notes payable, bearing
interest at 5.36%, in annual principal
installments of $10,000 beginning in 2005 50,000 50,000
Variable-rate industrial development bonds,
payable in 2016 (1.45% at August 29, 2004) 7,200 7,200
Variable-rate industrial development bonds,
payable in 2021 (1.45% at August 29, 2004) 8,500 8,500
Variable-rate bank revolving credit
facilities, payable in 2008 (4.06% at August 29, 2004) 4,312 3,677
--------- ---------
Total long-term debt 95,012 94,377
Less current portion (8,333) (8,333)
--------- ---------
Long-term debt, less current portion $ 86,679 $ 86,044
========= =========
|
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The Company maintains a $100,000 revolving credit facility with six banks (the "Revolver"). The Revolver was extended on consistent terms in June 2004. Under the Revolver, the Company may, at its option, borrow at floating interest rates based on specified margins over money market rates, at any time until June 2008, when all borrowings under the Revolver must be repaid. The lending agreements contain various restrictive covenants, including the requirement to maintain specified amounts of net worth and restrictions on cash dividends, borrowings, liens, investments and guarantees. The Revolver, the 5.36% term notes and the 7.92% term notes are collateralized by substantially all of the Company's assets. The industrial revenue bonds are supported by standby letters of credit that are issued under the Revolver. Certain note agreements contain provisions regarding the Company's ability to grant security interests or liens in association with other debt instruments.
If the Company grants such a security interest or lien, then such notes will be collateralized equally and ratably as long as such other debt shall be collateralized.
Note 9. Segment Information
The Company provides certain information about operating segments in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." In accordance with SFAS No. 131, the Company has determined that it has four reportable segments: Performance Coatings & Finishes, Fiberglass-Composite Pipe, Water Transmission, and Infrastructure Products. Each of these segments has a dedicated management team and is managed separately, primarily because of differences in products. The Company allocates certain selling, general and administrative expenses to the segments utilizing assumptions believed to be appropriate in the circumstances. Following is information related to each reportable segment included in, and in a manner consistent with, internal management reports:
Three Months Ended Nine Months Ended
------------------------ ------------------------
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Sales
Performance Coatings & Finishes $ 51,956 $ 49,993 $ 149,578 $ 140,029
Fiberglass-Composite Pipe 30,017 30,588 88,893 85,519
Water Transmission 35,443 40,984 100,763 112,005
Infrastructure Products 38,140 33,821 96,839 96,948
Eliminations (143) (212) (476) (862)
--------- --------- --------- ---------
Total Sales $ 155,413 $ 155,174 $ 435,597 $ 433,639
========= ========= ========= =========
(Loss)/Income Before Interest
and Income Taxes
Performance Coatings & Finishes $ 1,918 $ 2,572 $ 2,027 $ 6,082
Fiberglass-Composite Pipe 5,400 5,124 15,573 16,217
Water Transmission 2,614 3,806 5,116 12,608
Infrastructure Products 4,865 4,280 8,977 10,857
Corporate & Unallocated (24,043) (2,701) (37,306) (14,294)
--------- --------- --------- ---------
Total (Loss)/Income Before Interest
and Income Taxes $ (9,246) $ 13,081 $ (5,613) $ 31,470
========= ========= ========= =========
|
August 29, November 30,
2004 2003
--------- ---------
Assets
Performance Coatings & Finishes $ 163,995 $ 164,399
Fiberglass-Composite Pipe 154,652 147,326
Water Transmission 102,176 125,501
Infrastructure Products 75,166 70,202
Corporate & Unallocated 194,016 184,839
Eliminations (172,111) (158,775)
--------- ---------
Total Assets $ 517,894 $ 533,492
========= =========
|
Note 10. Commitments & Contingencies
The Company is one of numerous defendants in various asbestos-related personal injury lawsuits. These cases generally seek unspecified damages for asbestos-related diseases based on alleged exposure to products previously manufactured by the Company and others, and at this time the Company is generally not aware of the extent of injuries allegedly suffered by the individuals or the facts supporting the claim that injuries were caused by the Company's products. Based upon the information available to it at this time, the Company is not in a position to evaluate its potential exposure, if any, as a result of such claims. Hence, no amounts have been accrued for loss contingencies related to these lawsuits in accordance with SFAS No. 5, "Accounting for Contingencies." The Company continues to vigorously defend all such lawsuits. As of August 29, 2004, the Company was a defendant in asbestos-related cases involving 18,963 claimants, compared to 18,998 claimants as of May 31, 2004. The Company is not in a position to estimate the number of additional claims that may be filed against it in the future. For the
9
quarter ended August 29, 2004, there were new claims involving two claimants, dismissals and/or settlements involving 37 claimants and no judgments. Net costs and expenses incurred by the Company for the quarter ended August 29, 2004 in connection with asbestos-related claims were approximately $164.
The Company is one of numerous defendants in various silica-related personal injury lawsuits. These cases generally seek unspecified damages for silica-related diseases based on alleged exposure to products previously manufactured by the Company and others, and at this time the Company is not aware of the extent of injuries allegedly suffered by the individuals or the facts supporting the claim that injuries were caused by the Company's products. Based upon the information available to it at this time, the Company is not in a position to evaluate its potential exposure, if any, as a result of such claims. Hence, no amounts have been accrued for loss contingencies related to these lawsuits in accordance with SFAS No. 5. The Company continues to vigorously defend all such lawsuits. As of August 29, 2004, the Company was a defendant in silica-related cases involving 7,760 claimants, compared to 7,776 claimants as of May 31, 2004. The Company is not in a position to estimate the number of additional claims that may be filed against it in the future. For the quarter ended August 29, 2004, there were new claims involving 203 claimants, dismissals and/or settlements involving 219 claimants and no judgments. Net costs and expenses incurred by the Company for the quarter ended August 29, 2004 in connection with silica-related claims were approximately $121.
In April 2003 the Company was served with a complaint in an action brought by J. Ray McDermott, Inc., J. Ray McDermott, S.A. and SparTEC, Inc. in the District Court of Harris County, Texas against the Company and two co-defendants, in connection with certain coatings supplied by defendants in 2002 for an offshore production facility known as a SPAR. Plaintiffs allege that the Company's co-defendants improperly supplied coatings which contained lead and/or lead chromate, and that as a result the Company and its co-defendants are liable to plaintiffs for all costs associated with removal and replacement of those coatings. Plaintiffs' petition alleged a claim for damages in an unspecified amount. The matter is in active discovery. Plaintiffs' economic expert estimates plaintiffs' damages at approximately $21,000. The Company believes that it has meritorious defenses to this action. Based upon the information available to it at this time, the Company is not in a position to evaluate the ultimate outcome of this matter.
In addition, certain other claims, suits and complaints that arise in the ordinary course of business, have been filed or are pending against the Company. Management believes that these matters are either adequately reserved, covered by insurance, or would not have a material effect on the Company's financial position or its results of operations if disposed of unfavorably.
The Company is subject to federal, state and local laws and regulations concerning the environment and is currently participating in administrative proceedings at several sites under these laws. While the Company finds it difficult to estimate with any certainty the total cost of remediation at the several sites, on the basis of currently available information and reserves provided, the Company believes that the outcome of such environmental regulatory proceedings will not have a material effect on the Company's financial position or its results of operations.
Note 11. Product Warranties and Guarantees
The Company's product warranty accrual reflects management's estimate of probable liability associated with product warranties. Management establishes product warranty accruals based on historical experience and other currently available information.
Changes in the product warranty accrual for the nine months ended August 29, 2004 were as follows:
Balance, Beginning of Period $ 3,770
Payments (2,068)
Change in Liability for Warranties Issued During the Period 2,538
---------
Balance, End of Period $ 4,240
=========
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Note 12. Goodwill and Other Intangible Assets
The annual goodwill and intangible asset impairment tests were completed during the quarter ended February 29, 2004. No impairment losses were identified as a result of these tests. Changes in the Company's carrying amount of goodwill by business segment were as follows:
Foreign Currency
Translation
Segment November 30, 2003 Adjustments August 29, 2004
------------------------------------- ------------------ -------------- ----------------
Performance Coatings & Finishes $ 11,473 $ 61 $ 11,534
Fiberglass-Composite Pipe 1,440 - 1,440
Infrastructure Products 201 - 201
--------- --------- ---------
Total $ 13,114 $ 61 $ 13,175
========= ========= ========= |
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August 29, 2004 November 30, 2003
---------------------------------- -----------------------------------
Gross Intangible Accumulated Gross Intangible Accumulated
Assets Amortization Assets Amortization
--------------- -------------- --------------- --------------
Trademarks $ 2,144 $ (2,035) $ 2,076 $ (1,975)
Non-Compete Agreements 2,105 (1,923) 2,105 (1,794)
Patents 212 (212) 212 (212)
Leasehold Interests 1,930 (1,930) 1,930 (1,930)
-------- --------- -------- ---------
Total $ 6,391 $ (6,100) $ 6,323 $ (5,911)
======== ========= ======== ========= |
All of the Company's intangible assets, other than goodwill, are subject to amortization. Amortization expense for the three and nine months ended August 29, 2004 was $52 and $167, respectively. Amortization expense for the three and nine months ended August 31, 2003 was $93 and $233, respectively. At August 29, 2004, estimated future amortization expense was as follows: $53 for the remaining three months of 2004, $183 for 2005, $43 for 2006, $12 for 2007.
Note 13. Incentive Stock Compensation Plans
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its various stock option plans. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which was released in December 2002 as an amendment to SFAS No. 123. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123:
Three Months Ended Nine Months Ended
------------------------ ------------------------
August 29, August 31, August 29, August 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Reported Net (Loss)/Income $ (8,775) $ 7,711 $ (4,655) $ 17,711
(Deduct)/Add: Stock-based employee compensation (benefit)/
expense included in reported net income, net of tax 539 (62) 787 391
Deduct: Stock-based employee compensation
expense determined under SFAS No. 123,
net of tax (244) (210) (657) (613)
--------- --------- --------- ---------
Pro Forma Net Income $ (8,480) $ 7,439 $ (4,525) $ 17,489
========= ========= ========= =========
Basic Net (Loss)/Income Per Share:
As Reported $ (1.05) $ .97 $ (.56) $ 2.25
Pro Forma $ (1.02) $ .94 $ (.55) $ 2.22
Diluted Net (Loss)/Income Per Share:
As Reported $ (1.05) $ .94 $ (.56) $ 2.19
Pro Forma $ (1.02) $ .91 $ (.55) $ 2.16
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Note 14. Employee Benefit Plans
In June 2004, the Company terminated two executive benefit plans in consideration of ongoing costs, anticipated legislative restrictions on such programs, and a preference for executive benefit plans having more predictable costs. During the quarter ended August 29, 2004, the Company incurred a pretax expense of $12,817 due to the termination of the plans and distributions to plan participants. The Company recorded this expense in accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." SFAS No. 88 requires settlement accounting if the cost of all settlements, including lump-sum retirement benefits paid, in a year exceeds, or is expected to exceed, the total of the service and interest cost components of pension expense for the same period.
Ameron previously purchased life insurance policies to cover benefits under the plans. The cash surrender values of these policies (totaling approximately $26,900 as of August 29, 2004) exceed the amount of lump-sum payments (totaling approximately $25,600) required to settle all plan obligations. Ameron charged approximately $2,100 under the plans in fiscal 2003. For the three and nine months ended August 29, 2004 and August 31, 2003, net pension and postretirement costs consisted of the following:
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U.S. Postretirement Pension Benefits Health Care
------------------------------------------- --------------------
U.S. Plans Non U.S. Plans
-------------------- -------------------
Three Months Ended
-------------------------------------------------------------------- August 29, August 31, August 29, August 31, August 29, August 31, 2004 2003 2004 2003 2004 2003 -------- -------- -------- -------- -------- -------- Service cost $ 726 $ 713 $ 202 $ 193 $ 28 $ 26 Interest cost 2,553 2,662 297 313 50 48 Expected return on plan assets (2,629) (2,380) (224) (292) (8) (8) Amortization of unrecognized prior service cost 90 231 106 145 (4) (4) Amortization of unrecognized net transition obligation - - - - 18 18 Amortization of accumulated loss 1,057 1,345 - - 12 5 Settlement Charge 10,901 - - - - - Curtailment Loss 1,916 - - - - - -------- -------- -------- -------- -------- --------
Net periodic cost $ 14,614 $ 2,571 $ 381 $ 359 $ 96 $ 85
======== ======== ======== ======== ======== ========
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Nine Months Ended -------------------------------------------------------------------- August 29, August 31, August 29, August 31, August 29, August 31, 2004 2003 2004 2003 2004 2003 -------- -------- -------- -------- -------- -------- Service cost $ 2,450 $ 2,139 $ 606 $ 579 $ 84 $ 79 Interest cost 7,999 7,986 891 939 150 143 Expected return on plan assets (7,887) (7,141) (672) (876) (24) (25) Amortization of unrecognized prior service cost 524 694 318 435 (12) (11) Amortization of unrecognized net transition obligation - - - - 53 53 Amortization of accumulated loss 4,133 4,035 - - 37 16 Settlement Charge 10,901 - - - - - Curtailment Loss 1,916 - - - - - -------- -------- -------- -------- -------- --------
Net periodic cost $ 20,036 $ 7,713 $ 1,143 $ 1,077 $ 288 $ 255
======== ======== ======== ======== ======== ========
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The Company's policy is to make pension plan contributions to the extent such contributions are mandatory, actuarially determined and tax deductible. The Company contributed $5,758 to the U.S. qualified pension plans in the first three quarters of 2004.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Ameron
International Corporation and Subsidiaries
August 29, 2004
INTRODUCTION
Ameron International Corporation ("Ameron" or the "Company") is a multinational manufacturer of highly-engineered products and materials for the chemical, industrial, energy, transportation and infrastructure markets. Ameron is a leading producer of water transmission lines; high-performance coatings and finishes for the protection of metals and structures; fiberglass-composite pipe for transporting oil, chemicals and corrosive fluids; and specialized materials and products used in infrastructure projects. The Company operates businesses in North America, South America, Europe, Australasia and Asia. The Company has four reportable segments. The Performance Coatings & Finishes Group manufactures and markets high-performance industrial and marine coatings. The Fiberglass-Composite Pipe Group manufactures and markets filament-wound and molded composite fiberglass pipe, tubing, fittings and well screens. The Water Transmission Group manufactures and supplies concrete and steel pressure pipe, concrete non-pressure pipe, protective linings for pipe, and fabricated steel products. The Infrastructure Products Group manufactures and sells ready-mix concrete, sand and aggregates, concrete pipe and culverts, and concrete and
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steel lighting and traffic poles. The markets served by the Performance Coatings & Finishes Group and the Fiberglass-Composite Pipe Group are worldwide in scope. The Water Transmission Group serves primarily the western U.S. The Infrastructure Products Group's quarry and ready-mix business operates exclusively in Hawaii, and poles are sold throughout the U.S. Ameron also participates in several joint-venture companies, directly in the U.S. and Saudi Arabia, and indirectly in Kuwait and Egypt.
Management's Discussion and Analysis should be read in conjunction with the same discussion included in the Company's 2003 Annual Report. Reference should also be made to the financial statements included in this Form 10-Q for comparative consolidated balance sheets and statements of income and cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Liquidity and Capital Resources and Results of Operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
The Company's significant accounting policies are disclosed in Note 1 of Notes to Consolidated Financial Statements in the Company's 2003 Annual Report. Management believes the following accounting policies affect the more significant estimates used in preparing the consolidated financial statements.
The consolidated financial statements include the accounts of Ameron International Corporation and all wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The functional currencies for the Company's foreign operations are the applicable local currencies. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the period. The resulting translation adjustments are recorded in accumulated other comprehensive loss. The Company advances funds to certain foreign subsidiaries that are not expected to be repaid in the foreseeable future. Translation adjustments arising from these advances are also included in accumulated other comprehensive loss. The timing of repayments of intercompany advances could materially impact the Company's consolidated financial statements. Additionally, earnings of foreign subsidiaries are often reinvested outside the U.S. Unforeseen repatriation of such earnings could result in significant unrecognized U.S. tax liability. Gains or losses resulting from foreign currency transactions are included in other income.
Revenue for the Performance Coatings & Finishes, Fiberglass-Composite Pipe and Infrastructure Products segments is recognized when risk of ownership and title pass, primarily at the time goods are shipped, provided that an agreement exists between the customer and the Company, the price is fixed or determinable and collection is reasonably assured. In limited circumstances within the Performance Coatings & Finishes Group, revenue recognition associated with shipment of coatings for marine dry dockings is delayed until product returns are processed. Revenue is recognized for the Water Transmission Group primarily under the percentage-of-completion method, typically based on completed units of production, since products manufactured under enforceable and binding construction contracts typically are designed for specific applications, are not interchangeable between projects, and are not manufactured for stock. In some cases, if products are manufactured for stock or are not related to specific construction contracts, revenue is recognized under the same criteria used by the other three segments. Revenue under the percentage-of-completion method is subject to a greater level of estimation, which affects the timing of revenue recognition, costs and profits. Estimates are reviewed on a consistent basis and are adjusted periodically to reflect current expectations.
The Company expenses environmental clean-up costs related to existing conditions resulting from past or current operations on a site-by-site basis. Liabilities and costs associated with these matters, as well as other pending litigation and asserted claims arising in the ordinary course of business, require estimates of future costs and judgments based on the knowledge and experience of management and its legal counsel. When estimates of the Company's exposure can be reasonably estimated and probable, liabilities and expenses are recorded. The ultimate resolution of any such exposure to the Company may differ due to subsequent developments.
Inventories are stated at the lower of cost or market with cost determined principally on the first-in, first-out (FIFO) method. Certain steel inventories used by the Water Transmission Group are valued using the last-in, first-out (LIFO) method. Reserves are established for excess, obsolete and rework inventories based on age, estimates of salability and forecasted future demand. Management records an allowance for doubtful accounts receivable based on historical experience and expected trends. A significant reduction in demand or significant worsening of customer credit quality could materially impact the Company's consolidated financial statements. Property, plant and equipment is stated on the basis of cost and depreciated principally on a straight-line method based on the estimated useful lives of the related assets, generally three to 40 years.
Investments in unconsolidated joint ventures or affiliates ("joint ventures") over which the Company has significant influence are accounted for under the equity method of accounting, whereby the investment is carried at the cost of acquisition, plus the Company's equity in undistributed earnings or losses since acquisition. Investments in joint ventures over which the Company does not have the ability to exert significant influence over the investee's operating and financing activities are accounted for under the cost method of accounting. The Company's
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investment in TAMCO is accounted for under the equity method. Investments in Ameron Saudi Arabia, Ltd., Bondstrand, Ltd. and Oasis-Ameron, Ltd. are accounted for under the cost method due to management's current assessment of the Company's influence over these joint ventures.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the estimated future, undiscounted cash flows from the use of an asset are less than its carrying value, a write-down is recorded to reduce the related assets to estimated fair value.
The Company is self insured for a portion of the losses and liabilities primarily associated with workers' compensation claims and general, product and vehicle liability. Losses are accrued based upon the Company's estimates of the aggregate liability for claims incurred using historical experience and certain actuarial assumptions followed in the insurance industry. The estimate of self insurance liability includes an estimate of incurred but not reported claims, based on data compiled from historical experience. Actual experience could differ significantly from these estimates and could materially impact the Company's consolidated financial statements.
The Company follows the guidance of Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers' Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," when accounting for pension and other postretirement benefits. Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and the performance of plan assets that are controlled and invested by third-party fiduciaries. Delayed recognition of differences between actual results and expected or estimated results is a guiding principle of these standards. Such delayed recognition provides a gradual recognition of benefit obligations and investment performance over the working lives of the employees who benefit under the plans, based on various assumptions. Assumed discount rates are used to calculate the present values of benefit payments which are projected to be made in the future, including projections of increases in employee's annual compensation and health care costs. Management also projects the future return on invested assets based principally on prior performance. These projected returns reduce the net benefit costs the Company records in the current period. Actual results could vary significantly from projected results, and such deviation could materially impact the Company's consolidated financial statements. Management consults with its actuaries when determining these assumptions. Unforecasted program changes, including termination, freezing of benefits or acceleration of benefits, could result in an immediate recognition of unrecognized benefit obligations; and such recognition could materially impact the Company's consolidated financial statements.
Management incentive compensation is accrued based on current estimates of the Company's ability to achieve short-term and long-term performance targets.
Deferred income tax assets and liabilities are computed for differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amounts expected to be realized. Quarterly income taxes are estimated based on the mix of income by jurisdiction forecasted for the full fiscal year. The Company believes that it has adequately provided for tax-related matters. The Company is subject to examination by taxing authorities in various jurisdictions. Matters raised upon audit may involve substantial amounts and could be material. Management considers it unlikely that resolution of any such matters would have a material adverse effect upon the Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended August 29, 2004, the Company generated cash from operating activities of $20.0 million, compared to $29.5 million in the same period in 2003. The lower operating cash flow in 2004 was primarily due to lower earnings and reduced liabilities, partially offset by lower current assets, principally receivables. Liabilities decreased due to payments of employee benefits and income taxes. Receivables declined primarily due to collections by the Water Transmission Group associated with completed projects.
Net cash used in investing activities totaled $12.8 million during the nine months ended August 29, 2004, compared to $9.6 million in the same period in 2003. In 2004, net cash used in investing activities consisted of proceeds from the sale of assets of $.3 million, offset by capital expenditures of $13.1 million. Capital expenditures were primarily for normal replacement and upgrades of machinery and equipment. During the fiscal year ending November 30, 2004, the Company anticipates spending between $15 and $20 million on capital expenditures. Capital expenditures are expected to be funded by existing cash balances, cash generated from operations or additional borrowings.
Net cash used in financing activities was $1.9 million during the nine months ended August 29, 2004, compared to $9.7 million used in the same period in 2003. The net cash used in financing activities in 2004 consisted of a net issuance of debt of $.7 million, debt issuance costs of $.5 million, payment of common stock dividends of $5.0 million, and a net issuance of common stock of $3.0 million. Issuance of common stock related to exercised stock options.
In June 2004, the Company extended a $100 million revolving credit facility with six banks (the "Revolver"). Under the Revolver, the Company may, at its option, borrow at floating interest rates based on specified margins over money market rates, at any time until June 2008, when all borrowings under the Revolver must be repaid.
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The Company's lending agreements contain various restrictive covenants, including the requirement to maintain specified amounts of net worth and restrictions on cash dividends, borrowings, liens, investments and guarantees. The Company is required to maintain consolidated net worth of $195.0 million plus 50% of net income and 75% of the proceeds from any equity issued after February 28, 2004. The Company's consolidated net worth exceeded the covenant amount by $66.7 million as of August 29, 2004. The Company is required to maintain a consolidated leverage ratio of consolidated funded indebtedness to earnings before interest, taxes, depreciation and amortization ("EBITDA") of no more than 2.75 times. As of August 29, 2004, the Company maintained a debt leverage ratio of 1.73 times EBITDA. Lending agreements require that the Company maintain qualified consolidated tangible assets at least equal to the outstanding secured funded indebtedness. As of August 29, 2004, qualifying tangible assets equaled 1.73 times funded indebtedness. Under the most restrictive fixed charge coverage ratio, the sum of EBITDA and rental expense less cash taxes must be at least 1.5 times the sum of interest expense, rental expense, dividends and scheduled funded debt payments. As of August 29, 2004, the Company maintained a ratio of 1.94 times.
Cash and cash equivalents at August 29, 2004 totaled $25.9 million, an increase of $5.5 million from November 30, 2003. At August 29, 2004, the Company had total debt outstanding of $95.0 million and approximately $113 million in unused committed and uncommitted credit lines available from foreign and domestic banks. The Company's highest borrowing and the average borrowing level during 2004 were $96.8 million and $95.1 million, respectively.
In June 2004, the Company terminated two executive benefit programs in consideration of ongoing costs, anticipated legislative restrictions on such programs, and a preference for executive benefit plans having more predictable costs. Ameron previously purchased life insurance policies to cover benefits under the plans. The cash surrender values of these policies totaled approximately $26.9 million as of August 29, 2004 and exceeded the amount (totaling $25.6 million) that would be required if lump-sum payments were elected by all plan participants. During the quarter ended August 29, 2004, $24.7 million was paid to participants to settle most of the obligations of the Company under the plans. The settlement payments were made using existing cash balances, and the life insurance policies continued to be held for investment purposes and to reduce income taxes. Management anticipates that, going forward, a portion of the life insurance policies will be liquidated and a portion of the policies will continue to be held for general investment purposes.
Management believes that cash flow from operations and current cash balances, together with currently available lines of credit, will be sufficient to meet operating requirements in 2004. Cash available from operations could be affected by any general economic downturn or any decline or adverse changes in the Company's business, such as a loss of customers or significant raw material price increases. Management does not believe it likely that business or economic conditions will worsen or that costs will increase sufficiently to impact short-term liquidity.
The Company's contractual obligations and commercial commitments at August 29, 2004 are summarized as follows (in thousands):
Payments Due by Period
-------------------------------------------------
Less than 1 - 3 3 - 5 After 5
Contractual Obligations Total 1 year years years years
-----------------------------------------------------------------------------------------------------------
Long-Term Debt (a) $ 95,012 $ 8,333 $ 36,667 $24,312 $25,700
Operating Leases 35,564 4,705 5,384 4,537 20,938
--------------------------------------------------
Total Contractual Obligations (b) $130,576 $ 13,038 $ 42,051 $28,849 $46,638
==================================================
Commitments Expiring
Per Period
---------------------------------------------------
Less than 1 - 3 3 - 5 After 5
Commercial Commitments Total 1 year years years years
-----------------------------------------------------------------------------------------------------------
Standby Letters of Credit (c) $ 2,300 $ 2,300 $ - $ - $ -
--------------------------------------------------
Total Commercial Commitments (b) $ 2,300 $ 2,300 $ - $ - $ -
==================================================
(a) Included in long-term debt is $4,312 outstanding under a revolving credit facility, and bank lines
supported by the Revolver, which is due in 2008.
(b) The Company has no capitalized lease obligations, unconditional purchase obligations, guarantees, or
standby repurchase obligations.
(c) Not included are standby letters of credit totaling $16,065 supporting industrial development bonds with a
principal of $15,700. The principal amount of the industrial development bonds is included in long-term debt.
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RESULTS OF OPERATIONS
General
The Company had a net loss of $8.8 million, or $1.05 per diluted share, on sales of $155.4 million for the quarter ended August 29, 2004, compared to net income of $7.7 million, or $.94 per diluted share, on sales of $155.2 million for the same period in 2003. Both the Performance Coatings & Finishes and Infrastructure Products Groups had higher sales. Sales of the Fiberglass-Composite Pipe Group were
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flat, and sales of the Water Transmission Group were lower. The loss was primarily caused by the costs related to the curtailment and settlement of the executive benefit plans, totaling $12.8 million. Lower profits from consolidated operations was partially offset by the improved performance of TAMCO, the Company's 50%-owned steel manufacturing venture. Total profits from consolidated operations declined in the third quarter compared to the same period in 2003. Higher income from the Fiberglass-Composite Pipe and Infrastructure Products Groups partially offset declines by the Performance Coatings & Finishes and Water Transmission Groups.
The Company had a net loss of $4.7 million, or $.56 per diluted share, on sales of $435.6 million for the nine months ended August 29, 2004. The Company earned $17.7 million, or $2.19 per diluted share, on sales of $433.6 million for the same period of 2003. The loss in 2004 came from lower income from consolidated operations, due partly to labor disputes and weak market conditions in the first half of 2004, and the curtailment and settlement costs associated with termination of the benefit plans. Mitigating the decline was the improvement of TAMCO. The Performance Coatings & Finishes and Fiberglass-Composite Pipe Groups had higher sales primarily due to the impact of changing foreign currency rates. Sales of the Water Transmission and Infrastructure Products Groups declined because of the labor disputes that took place earlier in the year. The Water Transmission Group was also impacted by weak demand in its primary market, the western U.S. Year-to-date net income declined as lower gross profits and higher selling, general and administrative expenses were partially offset by higher equity earnings of TAMCO and lower income taxes.
Sales
Sales were flat in the third quarter of 2004, compared to the same period in 2003. Performance Coatings & Finishes' sales increased slightly due primarily to favorable changes in foreign exchange rates. Sales of the Fiberglass-Composite Pipe Group were flat, and the increase in sales by the Infrastructure Products Group was more than offset by the sales decline of the Water Transmission Group.
Year-to-date sales increased by $2.0 million in 2004, compared to the same period in 2003. In addition to the disruption caused by the first-half labor disputes, sales increases caused by changing foreign exchange rates and higher demand for fiberglass pipe were offset by reduced demand in markets served by the Water Transmission Group.
Performance Coatings & Finishes' sales increased by $2.0 million in the third quarter and by $9.5 million in the nine months ended August 29, 2004, compared to the same periods in 2003. The 2004 quarterly and year-to-date increases came from changing foreign exchange rates, as sales in foreign currencies by international operations were converted based on a weaker U.S. dollar. Sales in local currencies by operations outside the U.S. were slightly higher, offset by lower sales by U.S. operations. Improvements came with the sales of fire protection coatings in Europe and coil coatings in New Zealand. Sales of protective coatings in the U.S. and Europe declined as a result of continued weakness in spending in the industrial and chemical markets. Additionally, sales of coatings for use in offshore oil and gas production weakened in 2004 as offshore construction slowed in the U.S. The anticipated upturn in spending by industrial customers in the U.S. and Europe remains slower than expected.
Fiberglass-Composite Pipe's sales decreased by $.6 million in the third quarter and increased by $3.4 million in the nine months ended August 29, 2004, compared to the same periods in the prior year. Changing foreign exchange rates contributed to a portion of the improvements. The Fiberglass-Composite Pipe Group continued to benefit from a strong performance from Asian operations. Year-to-date sales from operations in Singapore and Malaysia were lower than in 2003 due to project timing, but sales accelerated in the third quarter due to strong demand for fiberglass piping for use in Asian marine and offshore construction markets. Sales in the U.S. were down slightly for the quarter and the full year because of the weak industrial market and lower activity in the U.S. offshore construction market. Sales of oilfield tubing for onshore application was down for the quarter and flat for the year to date. Overall, demand for fiberglass piping remains robust, driven by higher oil prices. Additionally, the escalating cost of competing products, especially steel piping, is enhancing the competitiveness of fiberglass piping.
The Water Transmission Group's sales declined $5.5 million in the third quarter and $11.2 million in the nine months ended August 29, 2004, compared to the same periods in 2003. The declines were the result of weak market conditions and labor disputes at two of the Group's principal plants in Southern California in the first half of 2004. Workers at the two plants struck in early February. Agreement was reached at one of the plants in the first quarter, at the end of February, and at the second plant in the second quarter, at the end of March. Sales of protective lining products for sewer pipe also declined due to a cyclical slowdown in the waste water market and increased competition from alternative products and suppliers. Revenue is recognized in the Water Transmission Group primarily under the percentage of completion method and is subject to a certain level of estimation, which affects the timing of revenue recognition, costs and profits. Estimates are reviewed on a consistent basis and are adjusted when actual results are expected to significantly differ from those estimates. The market for concrete and steel pressure pipe remains soft in the western U.S., affected by a cyclical lull in infrastructure spending and government budgetary constraints. Even though the business may be able to make up much of the revenue lost in the first half due to the strikes, full-year results may be below the high levels of the last several years. Compounding the current market conditions are limits on the availability of steel. Ameron anticipates that sufficient steel will be provided to meet its forecasted commitments; however, the ability to service unforecasted demand may be limited. The needs for fresh and waste water infrastructure remain high in the western U.S.
Sales of the Infrastructure Products Group increased $4.3 million in the third quarter and remained relatively flat in the nine months ended August 29, 2004, compared to the same periods in 2003. Sales of Hawaiian operations were higher in the quarter and lower year to date. Hawaiian operations recovered from a labor dispute at the Company's principal aggregates and ready-mix concrete operations on Oahu in Hawaii which began in February and ended in early April. Construction spending in Hawaii was deferred during the strikes, and demand
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remains strong for aggregates and ready-mix concrete used in residential and commercial construction. Sales of poles were higher for the third quarter and the year, benefiting from the level of housing construction throughout the U.S., spurred by low interest rates..
Gross Profit
Gross profit in the third quarter of 2004 was $38.2 million, or 24.6% of sales, compared to $42.4 million, or 27.4% of sales, in the third quarter of 2003. Gross profit in the nine months ended August 29, 2004 was $104.8 million, or 24.1% of sales. The corresponding profit and margin in the nine months ended August 31, 2003 was $115.4 million and 26.6%. Gross profit decreased $4.2 million in the third quarter and $10.7 million in the nine months ended August 29, 2004 due to lower margins and the impact in the first half of the strikes on plant utilization. In addition, a $2.0 million expense was recorded in the third quarter in anticipation of a year-end LIFO adjustment associated with higher steel prices.
Gross profit of the Performance Coatings & Finishes Group was flat in the third quarter of 2004 and declined $.6 million in the nine months ended August 29, 2004, compared to the same periods in 2003. Quarterly and year-to-date profit margins were adversely impacted as the weaker dollar lowered profits on sales by European operations into dollar-based markets in the Middle East and the former Soviet Union. Manufacturing costs increased in the U.S. due to lower plant utilization and higher costs.
Fiberglass-Composite Pipe's gross profit decreased $1.1 million in the third quarter and increased $.6 million in the nine months ended August 29, 2004, compared to 2003. Year-to-date profits increased due to higher sales. Profit margins declined in both periods due to changes in product mix.
Water Transmission's gross profit decreased $1.5 million in the third quarter and $6.6 million in the nine months ended August 29, 2004, compared to the same periods in 2003. Corresponding margins also declined. The decreases were primarily the result of lower profit on the mix of business as competitive pressures impacted margins because of the slow market conditions. Profits were also affected by inefficient plant utilization caused by the strikes in the first half of 2004 and higher workers' compensation costs.
Gross profit of the Infrastructure Products Group increased $.4 million in the third quarter and decreased $1.8 million for the nine months ended August 29, 2004, compared to the same periods in 2003. The decrease was caused by weather and the labor dispute in Hawaii in the first half of 2004, which reduced profits on lower sales and affected plant efficiencies.
Selling, General and Administration Expenses ("SG&A")
SG&A totaled $35.4 million, or 22.8% of sales, in the third quarter of 2004, compared to $32.1 million, or 20.7% of sales, in the third quarter of 2003. The increase was due to higher compensation expense of $1.0 million, higher stock compensation expense of $.7 million, higher insurance and pension costs of $.6 million and higher expenses associated with legal claims of $1.3 million, offset by lower product development costs of $1.2 million. Additionally, SG&A expenses were $.6 million higher as costs of foreign operations translated into higher U.S. dollars due to exchange rate changes.
For the nine months ended August 29, 2004, SG&A totaled $100.4 million, or 23.0% of sales. Corresponding expenses totaled $92.6 million, or 21.4% of sales, in the same period of 2003. SG&A increased $7.7 million on higher pension and insurance costs of $2.2 million, higher stock compensation expense of $.4 million, the impact of changing foreign exchange rates of $3.0 million, and higher legal expenses and consulting fees of $2.7 million. Additionally in 2003, SG&A included a recovery of roughly $1.0 million, representing amounts agreed to be reimbursed to the Company by its own and a supplier's insurance companies for past legal fees and costs in excess of the negotiated settlement of the Central Arizona Project lawsuits.
Pension Plan Curtailment/Settlement
In June 2004, the Company terminated two executive benefit plans in consideration of ongoing costs, anticipated legislative restrictions on such programs, and a preference for executive benefit plans having more predictable costs. The Company incurred a pretax expense of $12.8 million due to the termination of the plans and distributions to plan participants. The Company recorded this expense in accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." SFAS No. 88 requires settlement accounting if the cost of all settlements, including lump-sum retirement benefits paid, in a year exceeds, or is expected to exceed, the total of the service and interest cost components of pension expense for the same period.
Ameron previously purchased life insurance policies to cover benefits under the plans. The cash surrender values of these policies totaled approximately $26.9 million as of August 29, 2004 and exceeded the amount of lump-sum payments (totaling approximately $25.6 million) required to settle all plan obligations. Termination and settlement of the plans is expected to reduce benefit expenses in future years, as well as reduce the approximately $2.7 million benefit expense forecasted for fiscal 2004 by approximately $1.3 million. Ameron charged $2.1 million under the plans in fiscal 2003.
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Other Income
Other income declined from $2.7 million in the third quarter of 2003 to $.7 million in the third quarter of 2004. Other income declined from $8.7 million in the nine months ended August 31, 2003 to $2.8 million in the same period in 2004. Other income in all periods included royalties and fees from licensees, foreign currency transaction gains or losses, and other miscellaneous income. Additionally, other income in the year-to-date 2003 period included dividends from Ameron's concrete-pipe and fiberglass-pipe ventures in Saudi Arabia of $2.6 million and $2.2 million, respectively. The fiberglass-pipe venture is benefiting from strong demand for fiberglass pipe. The concrete-pipe venture is suffering from a cyclical lull in projects in Saudi Arabia, and dividends from the concrete pipe venture are expected to be less than in the prior year. A gain of $2.5 million on the sale of Ameron's minority interest in a Mexican coatings venture was recognized during the third quarter of 2003.
Interest
Net interest expense totaled $1.2 million in the third quarter of 2004, compared to $1.8 million in the third quarter of 2003. The reduction in net interest expense was due to lower debt levels in the third quarter of 2004.
Net interest expense was lower in the nine months ended August 29, 2004, compared to the same period in 2003, as a result of lower interest rates in combination with lower debt levels.
Provision for Income Taxes
Income taxes declined to $2.9 million in the third quarter of 2004 from $3.8 million in the third quarter of 2003. Income taxes declined to $3.0 million in the nine months ended August 29, 2004, compared to $8.7 million in the comparable period of 2003. Taxes were recorded in the third quarter, even with a pretax loss, due to IRS limitations on the deductibility of a portion of the settlements associated with the executive benefit plan terminations. Lower earnings are anticipated from domestic operations for the full year, which is expected to impact the full-year tax rates. Income from certain foreign operations and joint ventures is taxed at rates that are lower than the U.S. statutory tax rates.
The termination of the two benefit programs mentioned above is expected to result in an increase in tax rates for 2004. Approximately $18.5 million of the payouts are not expected to receive an associated tax benefit due to restrictions on the deductibility of certain executive compensation.
Equity in Earnings of Joint Venture, Net of Taxes
Equity income, which consists of Ameron's share of the results of TAMCO, increased from $.2 million in the third quarter of 2003 to $4.6 million in the third quarter of 2004. In the nine months ended August 29, 2004, equity income totaled $8.5 million, compared to less than $.1 million in the nine months ended August 29, 2004. Ameron owns 50% of TAMCO, a mini-mill that produces steel rebar for the construction industry in the western U.S. TAMCO performed well throughout 2004 due to regional demand for steel and higher prices. The worldwide market for steel products increased dramatically in 2004 because of demand for steel in China. TAMCO is projected to perform well throughout 2004.
Item 3. Quantitative and Qualitative Market Risk Disclosure
No material changes have occurred in the quantitative and qualitative market risk disclosure of the Company as presented in Ameron's 2003 Annual Report.
The Company utilizes significant quantities of steel, primarily by the Water Transmission Group and, to a lesser extent, the Infrastructure Products Group. The Company's principal steel suppliers have placed the Company's operations on allocation. Management believes that sufficient steel will be provided to meet forecasted commitments, at agreed prices.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of August 29, 2004 pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic Securities and Exchange Commission filings. No significant changes were made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to August 29, 2004.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Any of the above statements that refer to the Company's estimated or anticipated future results are forward-looking and reflect the Company's current analysis of existing trends and information. Actual results may differ from current expectations based on a number of factors affecting Ameron's businesses, including competitive conditions and changing market conditions. Matters affecting the economy generally, including the state of economies worldwide, can affect the Company's results. These forward-looking statements represent the Company's judgment only as of the date of this report. Since actual results could differ materially, the reader is cautioned not to rely on these forward-looking statements. Moreover, the Company disclaims any intent or obligation to update these forward looking statements.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is one of numerous defendants in various asbestos-related personal injury lawsuits. These cases generally seek unspecified damages for asbestos-related diseases based on alleged exposure to products previously manufactured by the Company and others, and at this time the Company is generally not aware of the extent of injuries allegedly suffered by the individuals or the facts supporting the claim that injuries were caused by the Company's products. Based upon the information available to it at this time, the Company is not in a position to evaluate its potential exposure, if any, as a result of such claims. Hence, no amounts have been accrued for loss contingencies related to these lawsuits in accordance with SFAS No. 5, "Accounting for Contingencies." The Company continues to vigorously defend all such lawsuits. As of August 29, 2004, the Company was a defendant in asbestos-related cases involving 18,963 claimants, compared to 18,998 claimants as of May 31, 2004. The Company is not in a position to estimate the number of additional claims that may be filed against it in the future. For the quarter ended August 29, 2004, there were new claims involving two claimants, dismissals and/or settlements involving 37 claimants and no judgments. Net costs and expenses incurred by the Company for the quarter ended August 29, 2004 in connection with asbestos-related claims were less than $.2 million.
The Company is one of numerous defendants in various silica-related personal injury lawsuits. These cases generally seek unspecified damages for silica-related diseases based on alleged exposure to products previously manufactured by the Company and others, and at this time the Company is not aware of the extent of injuries allegedly suffered by the individuals or the facts supporting the claim that injuries were caused by the Company's products. Based upon the information available to it at this time, the Company is not in a position to evaluate its potential exposure, if any, as a result of such claims. Hence, no amounts have been accrued for loss contingencies related to these lawsuits in accordance with SFAS No. 5. The Company continues to vigorously defend all such lawsuits. As of August 29, 2004, the Company was a defendant in silica-related cases involving 7,760 claimants, compared to 7,776 claimants as of May 31, 2004. The Company is not in a position to estimate the number of additional claims that may be filed against it in the future. For the quarter ended August 29, 2004, there were new claims involving 203 claimants, dismissals and/or settlements involving 219 claimants and no judgments. Net costs and expenses incurred by the Company for the quarter ended August 29, 2004 in connection with silica-related claims were less than $.2 million.
In April 2003 the Company was served with a complaint in an action brought by J. Ray McDermott, Inc., J. Ray McDermott, S.A. and SparTEC, Inc. in the District Court of Harris County, Texas against the Company and two co-defendants, in connection with certain coatings supplied by defendants in 2002 for an offshore production facility known as a SPAR. Plaintiffs allege that the Company's co-defendants improperly supplied coatings which contained lead and/or lead chromate, and that as a result the Company and its co-defendants are liable to plaintiffs for all costs associated with removal and replacement of those coatings. Plaintiffs' petition alleged a claim for damages in an unspecified amount. The matter is in active discovery. Plaintiffs' economic expert estimates plaintiffs' damages at approximately $21 million. The Company believes that it has meritorious defenses to this action. Based upon the information available to it at this time, the Company is not in a position to evaluate the ultimate outcome of this matter.
Item 2. Changes in Securities
Terms of lending agreements place restrictions on cash dividends, stock repurchases, borrowings, investments and guarantees. Under the most restrictive provisions of these agreements, approximately $9.2 million of consolidated retained earnings were not restricted at August 29, 2004.
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ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a)
Total
Number of
Shares (or
Units)
Purchased
(b)
Average
Price
Paid per
Share (or
Unit
(c)
Number of
Shares (or
Units)
Purchased as
Part of
Publicly
Announced
Plans or
Programs
(d)
Maximum
Number (or
Approximate
Dollar Value) of
Shares (or
Units) that
May Yet Be
Purchased under
the Plans or
Programs **
6/1/04 thru 6/27/04
-
N/A
-
N/A
6/28/04 thru 8/1/04
-
N/A
-
N/A
8/2/04 thru 8/29/04
-
N/A
-
N/A
**Shares may be repurchased by the Company to pay taxes applicable to the vesting of employee's restricted stock. However, because neither the amount of such taxes nor the share price on the date of such repurchases are known at this time, it is not possible to estimate the numbers of such shares that would be so repurchased.
Item 5. Other Information
In June 2004, the Company terminated two executive benefit plans in consideration of ongoing costs, anticipated legislative restrictions on such programs, and a preference for executive benefit plans having more predictable costs. The Company incurred a one-time pretax expense of $12.8 million due to the termination of the plans and distributions to plan participants. The Company recorded this expense in accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." SFAS No. 88 requires settlement accounting if the cost of all settlements, including lump-sum retirement benefits paid, in a year exceeds, or is expected to exceed, the total of the service and interest cost components of pension expense for the same period.
Ameron previously purchased life insurance policies to cover benefits under the plans. The cash surrender values of these policies (totaling approximately $26.9 million) exceed the amount of lump-sum payments (totaling $25.6 million) required to settle all plan obligations. Termination and settlement of the plans is expected to reduce benefit expenses in future years, as well as reduce the approximately $2.7 million benefit expense forecasted for fiscal 2004 by approximately $1.3 million. Ameron charged $2.1 million under the plans in fiscal 2003.
Item 6. Exhibits and Reports on Form 8-K
A Form 8-K was filed on June 28, 2004 to report the Company's financial results for the second quarter ended May 31, 2004, as reported in a press release dated June 25, 2004.
A Form 8-K was filed on June 28, 2004 to report, under Item 5, the Company's quarterly dividend of $.20 per share, as reported in a press release dated June 28, 2004.
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INDEX OF EXHIBITS Number and Description
of Exhibit (31.1) Section 302 Certification of Chief Executive Officer (31.2) Section 302 Certification of Chief Financial Officer (32) Section 906 Certification of Chief Executive Officer and Chief Financial Officer* * A
signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by
the Company and furnished to the Securities and Exchange
Commission or its staff upon request. |
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Signature Page
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.
Ameron International Corporation
Date: September 24, 2004
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Gary Wagner |
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Exhibit 31.1
SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James S. Marlen, Chairman of the Board, President and Chief Executive Officer of Ameron International Corporation (the "Registrant"), certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of the Registrant;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
September 24, 2004
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James S. Marlen |
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Exhibit 31.2
SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Gary Wagner, Senior Vice President and Chief Financial Officer of Ameron International Corporation (the "Registrant"), certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of the Registrant;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
September 24, 2004
|
Gary Wagner |
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Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. ss.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*
In connection with the Quarterly Report on Form 10-Q of Ameron International Corporation (the "Company") for the fiscal quarter ended August 29, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James S. Marlen, Chairman of the Board, President and Chief Executive Officer of the Company and I, Gary Wagner, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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* A signed original of this written statement required by Section 906 has been provided to Ameron International Corporation and will be retained by Ameron International Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
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