-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DXSiZ51kNYYwWuEMhNAqnhIxXYR8Y7ogynFPjV2FO9CmbXqh9bGXBycLGNF+tnoD /+hvdgKWACuiuVw/acUL/g== 0001072613-05-001211.txt : 20050516 0001072613-05-001211.hdr.sgml : 20050516 20050516161734 ACCESSION NUMBER: 0001072613-05-001211 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050516 DATE AS OF CHANGE: 20050516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH AMERICAN GALVANIZING & COATINGS INC CENTRAL INDEX KEY: 0000055805 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 710268502 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03920 FILM NUMBER: 05834671 BUSINESS ADDRESS: STREET 1: 2250 EAST 73RD STREET STREET 2: SUITE 300 CITY: TULSA STATE: OK ZIP: 74136-6832 BUSINESS PHONE: (918)494-0964 MAIL ADDRESS: STREET 1: 2250 EAST 73RD STREET STREET 2: SUITE 300 CITY: TULSA STATE: OK ZIP: 74136-6832 FORMER COMPANY: FORMER CONFORMED NAME: KINARK CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: KIN ARK OIL CO DATE OF NAME CHANGE: 19690601 FORMER COMPANY: FORMER CONFORMED NAME: KIN ARK OIL & GAS CO DATE OF NAME CHANGE: 19680906 10-Q 1 form10-q_13498.txt FORM 10-Q (MARCH 31, 2005) ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 2005 Commission File No. 1-3920 NORTH AMERICAN GALVANIZING & COATINGS, INC. (Exact name of the registrant as specified in its charter) Delaware 71-0268502 (State of Incorporation) (I.R.S. Employer Identification No.) 2250 East 73rd Street Tulsa, Oklahoma 74136 (Address of principal executive offices) Registrant's telephone number: (918) 494-0964 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 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 defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 2005. Common Stock $ .10 Par Value . . . . . 6,796,948 ================================================================================ NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY Index to Quarterly Report on Form 10-Q Page ---- Part I. Financial Information Forward Looking Statements or Information 2 Item 1. Financial Statements Report of Independent Registered 3 Public Accounting Firm Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited), and December 31, 2004 4-5 Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2005 and 2004 (unaudited) 6 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited) 7 Notes to Condensed Consolidated Interim Financial Statements for the three months ended March 31, 2005 and 2004 (unaudited) 8-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-24 Item 3. Quantitative and Qualitative Disclosure About Market Risks 24-25 Item 4. Controls and Procedures 26 Part II. Other Information 27-28 Signatures and Certifications 29 Forward Looking Statements or Information Certain statements in this Form 10-Q, including information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", constitute "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are typically punctuated by words or phrases such as "anticipates," "estimate," "should," "may," "management believes," and words or phrases of similar import. The Company cautions investors that such forward-looking statements included in this Form 10-Q, or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Company's stockholders and other publicly available statements issued or released by the Company involve significant risks, uncertainties, and other factors which could cause the Company's actual results, performance (financial or operating) or achievements to differ materially from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences could include, but are not limited to, changes in demand, prices, and the raw materials cost of zinc; changes in economic conditions of the various markets the Company serves, as well as the other risks detailed herein and in the Company's reports filed with the Securities and Exchange Commission. The Company believes that the important factors set forth in the Company's cautionary statements at Exhibit 99 to this Form 10-Q could cause such a material difference to occur and investors are referred to Exhibit 99 for such cautionary statements. 2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of North American Galvanizing & Coatings, Inc. We have reviewed the accompanying condensed consolidated balance sheet of North American Galvanizing & Coatings, Inc. and subsidiary (the "Company") as of March 31, 2005, and the related condensed consolidated statements of operations and comprehensive income and of cash flows for the three-month periods ended March 31, 2005 and 2004. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of North American Galvanizing & Coatings, Inc. and subsidiary as of December 31, 2004, and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated April 12, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/Deloitte & Touche LLP - ------------------------------------ Tulsa, Oklahoma May 13, 2005 3 NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited March 31 December 31 (Dollars in Thousands) 2005 2004 - ------------------------------------------------------------------------------------ ASSETS Current Assets Cash $ 280 $ 634 Trade receivables, net 6,412 4,654 Inventories 6,517 5,693 Prepaid expenses and other assets 1,160 521 Deferred tax asset, net 423 723 ---------- ---------- Total Current Assets 14,792 12,225 ---------- ---------- Property, Plant and Equipment, at Cost Land 2,167 1,967 Galvanizing plants and equipment 35,211 32,805 ---------- ---------- 37,378 34,772 Less: Accumulated depreciation (14,480) (13,861) Construction in progress 287 220 ---------- ---------- Total Property, Plant and Equipment, Net 23,185 21,131 ---------- ---------- Goodwill, net of accumulated amortization 3,389 3,389 Other Assets 316 369 ---------- ---------- TOTAL ASSETS $ 41,682 $ 37,114 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current maturities of long-term obligations $ 715 $ 604 Current portion of bonds payable 700 692 Subordinated notes payable 981 -- Trade accounts payable 928 582 Accrued payroll and employee benefits 762 717 Other taxes 224 405 Other accrued liabilities 765 604 ---------- ---------- Total Current Liabilities 5,075 3,604 ---------- ---------- Deferred Tax Liability, Net 1,027 944 Long-Term Obligations 11,364 7,347 Bonds Payable 5,758 5,934 Subordinated Notes Payable -- 976 ---------- ---------- Total Liabilities 23,224 18,805 ---------- ---------- Commitments and Contingencies (Note 6) -- -- Stockholders' Equity Common stock 819 819 Additional paid-in capital 17,252 17,304 Retained earnings 5,996 5,899
4
Common shares in treasury at cost (5,661) (5,661) ---------- ---------- Total Stockholders' Equity 18,458 18,309 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,682 $ 37,114 ========== ==========
See notes to condensed consolidated interim financial statements. 5 NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three Months Ended March 31 ------------------------ (Dollars in Thousands Except per Share Amounts) 2005 2004 - -------------------------------------------------------------------------------- Sales $ 9,280 $ 8,558 Cost of sales 6,842 6,005 Selling, general & administrative expenses 1,448 1,395 Depreciation expense 619 684 ---------- ---------- Total Costs and Expenses 8,909 8,084 ---------- ---------- Operating Income 371 474 Interest expense, net 225 161 Other -- (25) ---------- ---------- Income before income taxes 146 338 Income tax expense 49 128 ---------- ---------- Net Income $ 97 $ 210 ---------- ---------- Other Comprehensive Loss: Unrealized holding gain on investment -- 19 Less: reclassification adjustment for realized gain included in net income -- (25) ---------- ---------- Other Comprehensive Loss $ -- $ (6) ---------- ---------- Comprehensive Income $ 97 $ 204 ---------- ---------- Net Income Per Common Share Basic and Diluted $ 0.01 $ 0.03
See notes to condensed consolidated interim financial statements. 6 NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited
Three Months Ended March 31 ------------------------ (Dollars in Thousands) 2005 2004 - ---------------------------------------------------------------------------------- Operating Activities Net income $ 97 $ 210 Loss from disposal of fixed assets -- 7 Depreciation and amortization 619 684 Sale of investment securities -- (25) Deferred income taxes 383 (8) Non-cash directors' fees 52 17 Changes in assets and liabilities, net of effects from purchase of galvanizing assets (Note 2): Accounts receivable, net (811) (583) Inventories and other assets (508) (923) Accounts payable, accrued liabilities and other 371 363 ---------- ---------- Cash Provided by (Used In) Operating Activities 203 (258) Investing Activities Payment for purchase of a galvanizing operation (4,129) -- Proceeds from sale of assets -- 92 Capital expenditures (393) (277) ---------- ---------- Cash Used in Investing Activities (4,522) (185) Financing Activities Payment on bonds (168) (157) Proceeds from long-term obligations 8,970 5,075 Payments on long-term obligations (4,837) (4,408) ---------- ---------- Cash Provided by Financing Activities 3,965 510 ---------- ---------- Increase (Decrease) in Cash and Cash Equivalents (354) 67 Cash and Cash Equivalents: Beginning of Year 634 56 ---------- ---------- End of Year $ 280 $ 123 ========== ========== Cash paid during the year for: Interest $ 261 $ 246 Income taxes $ 9 --
See notes to condensed consolidated interim financial statements. 7 NORTH AMERICAN GALVANIZING & COATINGS, INC.AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 and 2004 UNAUDITED NOTE 1. BASIS OF PRESENTATION The condensed consolidated interim financial statements included in this report have been prepared by North American Galvanizing & Coatings, Inc. (the "Company") pursuant to its understanding of the rules and regulations of the Securities and Exchange Commission for interim reporting and include all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation. The condensed consolidated interim financial statements include the accounts of the Company and its subsidiary. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures are adequate to make the information presented not misleading. However, these interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. The financial data for the interim periods presented may not necessarily reflect the results to be anticipated for the complete year. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses for each of the periods. Actual results will be determined based on the outcome of future events and could differ from the estimates. The Company's sole business is hot dip galvanizing and coatings which is conducted through its wholly owned subsidiary, North American Galvanizing Company ("NAG"). NOTE 2. BUSINESS EXPANSION - PURCHASE OF ASSETS On February 28, 2005, NAGalv-Ohio, Inc., a subsidiary of North American Galvanizing Company, purchased certain galvanizing assets of Gregory Industries, Inc., located in Canton, Ohio, for a cash purchase price of $3.7 million plus approximately $0.4 million in purchase related expenses. The purchase expands the service area of North American Galvanizing into the northeast region of the United States.The results of the operations of NAGalv-Ohio, Inc. have been included in the consolidated financial statements since February 28, 2005. No goodwill was recognized in the purchase. The net purchase price was allocated as follows: Current assets $1.8 million Net property, plant & equipment 2.3 ---- Purchase price $4.1 million ---- 8 Pro-forma unaudited results of operations of the Company for the quarters ended March 31, 2005 and 2004, prepared as if the purchase had taken place on January 1 of each period, would have been as follows: Quarter Ended March 31 - -------------------------------------------------------------------------------- (Dollars in Thousands, Except per Share Amounts) 2005 2004 - -------------------------------------------------------------------------------- Sales $ 10,383 $ 9,953 Net Income (Loss) (23) 94 Earnings per share: Basic and Diluted $ -- $ .01 -------- -------- NOTE 3. STOCK OPTIONS The Company accounts for its stock option plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", under which no compensation cost has been recognized for stock option awards. Had compensation cost for the Company's stock option plans been determined according to the methodology of Statement of Financial Accounting Standard No.123, "Accounting for Stock Based Compensation" ("SFAS No. 123"), the Company's pro forma net earnings and basic and diluted earnings per share for the quarters ended March 31, 2005 and 2004 would have been as follows: Quarter Ended March 31 - -------------------------------------------------------------------------------- (Dollars in Thousands, Except per Share Amounts) 2005 2004 - -------------------------------------------------------------------------------- Net Income, as reported $ 97 $ 210 Deduct: Total stock-based employee compensation expense determined under fair value based methods, net of tax $ (53) $ (14) ---------- Pro forma net income $ 44 $ 196 ---------- ---------- Earnings per share: Basic - as reported $ .01 $ .03 ---------- ---------- Basic - pro forma $ .01 $ .03 ---------- ---------- Diluted - as reported $ .01 $ .03 ---------- ---------- Diluted - pro forma $ .01 $ .03 ---------- ---------- The fair value of options granted under the Company's stock option plans was estimated using the Black-Scholes option-pricing model with the following assumptions used: Quarter Ended March 31 -------------------- 2005 2004 -------------------- Volatility 54% 66% Discount Rate 4% 4% Dividend Yield 0% 0% Fair Value $ 1.72 $ .90 9 In the first quarter of 2005, the Company issued stock options for 50,000 shares at $2.50 per share, and issued stock options for 25,000 shares at $1.70 per share in the first quarter of 2004. In December 2004, the FASB issued SFAS No. 123(R), which is a revision of SFAS No. 123. This revised statement establishes accounting standards for all transactions in which an entity exchanges its equity instruments for goods and services focusing primarily on accounting for transactions with employees and carrying forward prior guidance for share-based payments for transactions with non-employees. SFAS No. 123(R) eliminates the intrinsic value measurement method of accounting in APB Opinion 25 and generally requires measuring the cost of the employee services received in exchange for an award of equity instruments based on the fair value of the award on the date of the grant. The standard requires grant date fair value to be estimated using either an option-pricing model which is consistent with the terms of the award or a market observed price, if such a price exists. Such costs must be recognized over the period during which an employee is required to provide service in exchange for the award. The standard also requires estimating the number of instruments that will ultimately be issued, rather than accounting for forfeitures as they occur. The effective date of SFAS No. 123(R) was originally to be the first reporting period beginning after June 15, 2005, however in April 2005, the Securities and Exchange Commission adopted a new rule amending the effective date to January 1, 2006. The Company expects to adopt SFAS No. 123(R) effective January 1, 2006. SFAS No. 123(R) permits companies to adopt its requirements using either a "modified prospective" method, or a "modified retrospective" method. Under the "modified prospective" method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123(R) for all share-based payments granted after that date, and based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123(R). Under the "modified retrospective" method, the requirements are the same as under the "modified prospective" method, but also permits entities to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS No. 123. The Company plans to adopt SFAS No. 123(R) under the modified prospective method on January 1, 2006 and does not anticipate the adoption to have a material effect on the consolidated financial statements of the Company. NOTE 4. INCOME PER COMMON SHARE Basic earnings per common share for the periods presented are computed based upon the weighted average number of shares outstanding. Diluted earnings per common share for the periods presented are based on the weighted average shares outstanding, adjusted for stock unit grants and for the assumed exercise of stock options and warrants using the treasury stock method. Three Months Ended March 31 Number of Shares - --------------------------- ------------------------------------ 2005 2004 --------------- --------------- Basic 6,796,948 6,791,996 Diluted 7,567,038 7,484,395 10 The options excluded from the calculation of diluted earnings per share, due to the option price being higher than the share market value, are 63,500 and 311,500 at March 31, 2005 and 2004, respectively. NOTE 5. LONG-TERM OBLIGATIONS March 31 December 31 (Dollars in Thousands) 2005 2004 ---------------------- -------- -------- Revolving line of credit $ 7,118 $ 4,919 Term loan 4,942 3,013 9.5% note due 2015 19 19 -------- -------- $ 12,079 $ 7,951 Less current portion (715) (604) -------- -------- $ 11,364 $ 7,347 -------- -------- In February 2005, the Company amended a three-year bank credit agreement that was scheduled to expire in December 2007 and extended its maturity to February 28, 2008. Subject to borrowing base limitations, the amended agreement provides (i) an $8,000,000 maximum revolving credit facility for working capital and general corporate purposes and (ii) a $5,001,000 term loan that combined the outstanding principal balance of the existing term loan with additional financing for the purchase of assets of a galvanizing facility (Note 2). Term loan payments are based on a seven-year amortization schedule with equal monthly payments of principal and interest, and a final balloon payment in February 2008. The term loan may be prepaid without penalty. The revolving line of credit may be paid down without penalty, or additional funds may be borrowed up to the maximum line of credit. At March 31, 2005, the Company had unused borrowing capacity of $482,000 under the line of credit, based on the underlying borrowing base of accounts receivable and inventory. At March 31, 2005, $12,060,000 was outstanding under the bank credit agreement, and $400,000 was reserved for outstanding irrevocable letters of credit to secure payment of current and future workers' compensation claims. Substantially all of the Company's accounts receivable, inventories, fixed assets and the common stock of its subsidiary are pledged as collateral under the agreement, and the credit agreement is secured by a full and unconditional guaranty from NAG. Amounts borrowed under the agreement bear interest at the prime rate of JPMorgan Chase Bank or the LIBOR rate, at the option of the Company, subject to a rate margin adjustment determined by the Company's consolidated debt service coverage ratio. The interest rate on these borrowings was 6.00% at March 31, 2005. In the event the Company fails to maintain a consolidated debt service coverage ratio for any fiscal quarter of at least 1.25 to 1.00, the Applicable LIBOR Rate Margin will be increased to 5.75% and the Applicable Prime Rate Margin will be increased to 3.00%. Thereafter, the increased rate margin will remain in effect until such time as the Company has maintained a consolidated debt service coverage ratio greater than or equal to 1.25 to 1.00 for a subsequent fiscal quarter. 11 In the event the Company fails to maintain a consolidated EBITDA to capital expenditures plus current maturity of long-term debt ratio for any fiscal quarter of not less than 1.00 to 1.00, the increase in the Applicable LIBOR Rate Margin ranges from 3.75% to 5.75%, and the increase in the Applicable Prime Rate Margin ranges from 1.00% to 3.00%. The credit agreement requires the Company to maintain compliance with covenant limits for current ratio, debt to tangible net worth ratio, debt service coverage ratio and a capital expenditures ratio. At March 31, 2005, the Company was in compliance with the covenants, except for the capital expenditures ratio for which a waiver was obtained from the bank. The actual financial ratios compared to the required ratios, were as follows: Current Ratio - actual 1.21 vs minimum required of 1.0; Debt to Tangible Net Worth - actual 1.54 vs maximum permitted of 2.5; Debt Service Coverage - actual 1.39 vs minimum permitted of 1.25; Capital Expenditures Ratio - actual 0.97 vs minimum required of 1.0. NOTE 6. COMMITMENTS AND CONTINGENCIES The Company has commitments with domestic and foreign zinc producers and brokers to purchase zinc used in its hot dip galvanizing operations. Commitments for the future delivery of zinc reflect rates then quoted on the London Metals Exchange and are not subject to price adjustment or are based on such quoted prices at the time of delivery. At March 31, 2005 the aggregate commitments for the procurement of zinc at fixed prices were approximately $3.4 million. The Company reviews these fixed price contracts for losses using the same methodology employed to estimate the market value of its zinc inventory. The Company had unpriced commitments for the purchase of approximately 5 million pounds of zinc at March 31, 2005. The Company's financial strategy includes evaluating the selective use of derivative financial instruments to manage zinc and interest costs. As part of its inventory management strategy, the Company expects to continue evaluating hedging instruments to minimize the impact of zinc price fluctuations. The Company had no derivative instruments required to be reported at fair value at March 31, 2005 or December 31, 2004, and did not utilize derivatives in the quarter ended March 31, 2005 or the year ended December 31, 2004, except for those forward purchase agreements, which are accounted for as normal purchases. The Company's total off-balance sheet contractual obligations at March 31, 2005, consist of $2,509,000 for long-term operating leases for vehicles, office space, office equipment, galvanizing facilities and galvanizing equipment and approximately $3,400,000 for zinc purchase commitments. The various leases for galvanizing facilities, including option renewals, expire from 2005 to 2017. A lease for galvanizing equipment expires in 2007. NAG was notified in 1997 by the Illinois Environmental Protection Agency ("IEPA") that it was a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation, and Liability Information System ("CERCLIS") in connection with cleanup of an abandoned site formerly owned by Sandoval Zinc Co. Since then approximately 30 additional PRPs have been identified by the IEPA. A 12 number of the PRPs (approximately 12 to 15) have agreed to work together and with IEPA on a voluntary basis. The Company has been and continues to participate in this volunteer group. The group has retained consultants and legal representatives familiar with IEPA regulations. This volunteer group, with its consultants, has cooperated with IEPA in attempting to better define the environmental issues associated with the Sandoval Zinc site. To that extent, this voluntary group prepared and submitted to IEPA in August 2000 a work plan. The purpose of this work plan is to attempt to define the extent of environmental remediation that might be required, assess risks, and review alternatives to addressing potential remediation. The IEPA has yet to respond to this proposed work plan or suggest any other course of action, and there has been no activity in regards to this issue during 2005. Therefore, the Company has no basis for determining potential exposure and estimated remediation costs at this time. On August 30, 2004, the Company was informed by counsel for the Metropolitan Water Reclamation District of Greater Chicago (the "Water District") that the Water District had, on August 25, 2004 filed a Second Amended Complaint in the United States District Court, Northern District of Illinois, Eastern Division, naming North American Galvanizing & Coatings, Inc. (formerly known as Kinark Corporation) as an added defendant. Counsel for the Water District also gave the Company notice of the Water District's intent to file (or amend the Complaint to include) a Citizens Suit under the Resource Compensation and Recovery Act ("RCRA") against North American Galvanizing & Coatings, Inc., pursuant to Section 7002 of RCRA, 42 U.S.C. Section 6972. This Second Amended Complaint seeks enforcement of an August 12, 2004 default judgment in the amount of $1,810,463 against Lake River Corporation and Lake River Holding Company, Inc. in connection with the operation of a storage terminal by Lake River Corporation in violation of environmental laws. Lake River Corporation conducted business as a subsidiary of the Company until June 30, 2000, at which time Lake River Corporation was sold to Lake River Holding Company, Inc. and ceased to be a subsidiary of the Company. The Second Amended Complaint asserts that prior to the sale of Lake River Corporation, the Company directly operated the Lake River facility and, accordingly, seeks to have the Court pierce the corporate veil of Lake River Corporation and enforce the default judgment order of August 12, 2004 against the Company. The Company denies the assertions set forth in the Water District's Complaint and on November 13, 2004 filed a partial motion for dismissal of the Second Amended Complaint. In December 2004, the Water District filed a Third Amended complaint in the litigation, adding two claims: (1) a common law claim for nuisance; and (2) a claim under the federal Resource Conservation and Recovery Act, in which the Water District argues that the Company is responsible for conditions on the plaintiff's property that present an "imminent and substantial endangerment to human health and the environment." In January 2005 and March 2005, the Company filed partial motions to dismiss plaintiff's third amended complaint, in the United States District Court, Northern District of Illinois, Eastern Division. On April 12, 2005, the Court issued an order denying in part and granting in part the Company's partial motion to dismiss plaintiff's third amended complaint. The Company is reviewing the Court's order and expects to file an appeal. The Company has denied any liability with respect to this claim and intends to vigorously defend this case. At this time, the Company has not determined the amount of any liability that may result from this matter or whether such liability, if any, would have a material adverse effect on the Company's financial condition, results of operations, or liquidity. 13 The lease term of a galvanizing facility occupied by Reinforcing Services, Inc. ("RSI"), a subsidiary of North American Galvanizing Company, expired July 31, 2003 and has not been renewed. RSI has exercised an option to purchase the facility, and the landlord is contesting the Company's right to exercise this option. RSI has filed a lawsuit against the landlord seeking enforcement of the right to exercise the option. This litigation is in the discovery stage and management expects there will be no disruption to its galvanizing business being conducted at the facility. The Company will continue to have additional environmental compliance costs associated with operations in the galvanizing business. The Company is committed to complying with the environmental legislation and regulations affecting its operations. Due to the uncertainties associated with future environmental technologies, regulatory interpretations, and prospective legislative activity, management cannot reasonably quantify the Company's potential future costs in this area. The Company expenses or capitalizes, where appropriate, environmental expenditures that relate to current operations as they are incurred. Such expenditures are expensed when they are attributable to past operations and are not expected to contribute to current or future revenue generation. The Company records liabilities when remediation or other environmental assessment or clean-up efforts are probable and the cost can be reasonably estimated. Various litigation arising in the ordinary course of business is pending against the Company. Management believes that resolution of the Company's litigation and environmental matters should not materially affect the Company's consolidated financial position or liquidity. Should future developments cause the Company to record an additional liability for environmental matters, litigation or customer claims, the recording of such a liability could have a material impact on the results of operations for the period involved. NOTE 7. TREASURY STOCK The Company did not issue any shares from Treasury in the first quarter of 2005. In the first quarter of 2005, a program whereby Outside Directors received shares of Company stock issued from Treasury as payment for their quarterly board fee was replaced with a Director Stock Unit Program (Note 8). In the first quarter of 2004, the Company issued 11,206 shares of its common stock from Treasury to outside Directors of the Company as payment for their quarterly board fee in lieu of cash payments. Those shares were valued at the average closing price of North American Galvanizing & Coatings, Inc. common stock for a prior 30-day period, as reported by the American Stock Exchange. Such shares were issued pursuant to the Directors' prior election and notice to the Company to receive up to all of their 2004 quarterly board fees in the Company's stock in lieu of cash. NOTE 8. DIRECTOR STOCK UNIT PROGRAM On January 1, 2005, the Company implemented the Director Stock Unit Program (approved by the stockholders at the Annual Meeting held July 21, 2004) under which a Director is required to defer 50% of his or her board fee and may elect to defer up to 100% of his or her board fee, plus a matching contribution by the Company that varies from 25% to 75% depending on the level of deferral. Such deferrals are converted into 14 a stock unit grant, payable to the Director five years following the year of deferral. All of the Company's Outside Directors have elected to defer 100% of the annual board fee for 2005, and the Company's chief executive officer and Inside Director has elected to defer a corresponding amount of his salary in 2005. Outside Directors currently receive an annual fee of $20,000, which includes attendance at board meetings and service on committees of the board. In the first quarter of 2005, fees and salary deferred by the Directors represented a total of 26,250 stock unit grants valued at $2.00 per stock unit. The value of a stock unit grant is the average of the closing prices for a share of the Company's stock for the 10 trading days before the date the director fees otherwise would have been payable in cash. 15 NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL North American Galvanizing is a leading provider of corrosion protection for iron and steel components fabricated by its customers. Hot dip galvanizing is the process of applying a zinc coating to fabricated iron or steel material by immersing the material in a bath consisting primarily of molten zinc. Based on the number of its operating plants, the Company is one of the largest merchant market hot dip galvanizing companies in the United States. During the quarter ended March 31, 2005, there were no significant changes to the Company's critical accounting policies previously disclosed in Form 10-K for the year ended December 31, 2004. On February 28, 2005, NAGalv-Ohio, Inc., a subsidiary North American Galvanizing Company, purchased the hot-dip galvanizing assets of a galvanizing facility located in Canton, Ohio. The transaction was structured as an asset purchase, pursuant to an Asset Purchase Agreement dated February 28, 2005 by and between NAGalv-Ohio, Inc., and the privately owned Gregory Industries, Inc. for all of the plant, property and equipment of Gregory Industries' galvanizing operation. Sales for the Canton galvanizing operation for its most recent fiscal year ended May 28, 2004 were approximately $7.0 million. Operating results of the purchased galvanizing business are included in the Company's financial statements commencing from the date of the purchase on February 28, 2005. The Company's galvanizing plants offer a broad line of services including centrifuge galvanizing for small threaded products, sandblasting, chromate quenching, polymeric coatings, and proprietary INFRASHIELDSM Coating Application Systems for polyurethane protective linings and coatings over galvanized surfaces. The Company's engineers and plant managers collaborate with steel fabricators and design and engineering firms to provide customized assistance with initial fabrication design, project estimates and steel chemistry selection. The Company's galvanizing and coating operations are composed of eleven facilities located in Colorado, Kentucky, Missouri, Ohio, Oklahoma, Tennessee and Texas. These facilities operate galvanizing kettles ranging in length from 16 feet to 62 feet, and have lifting capacities ranging from 12,000 pounds to 40,000 pounds. The Company maintains a sales and service network coupled with its galvanizing plants, supplemented by national account business development at the corporate level. In a typical year, the Company will galvanize in excess of 300,000,000 pounds of steel products for approximately 1,800 customers nationwide. All of the Company's sales are generated for domestic customers whose end markets are principally in the United States. The Company markets its galvanizing and coating services directly to its customers and does not utilize agents or distributors. Although 16 hot dip galvanizing is considered a mature service industry, the Company is actively engaged in developing new markets through participation in industry trade shows, metals trade associations and presentation of technical seminars by its national marketing service team. Hot dip galvanizing provides metals corrosion protection for many product applications used in commercial, construction and industrial markets. The Company's galvanizing can be found in almost every major application and industry that requires corrosion protection where iron or steel is used, including the following end user markets: o highway and transportation, o power transmission and distribution, o wireless and telecommunications, o utilities, o petrochemical processing, o infrastructure including buildings, airports, bridges and power generation o industrial grating, o wastewater treatment; fresh water storage and transportation o pulp and paper, o pipe and tube, o food processing, o agricultural (irrigation systems) o recreation (boat trailers, marine docks, stadium scaffolds) o bridge and pedestrian handrail o commercial and residential lighting poles o original equipment manufactured products, including general fabrication As a value-added service provider, the Company's revenues are directly influenced by the level of economic activity in the various end markets that it serves. Economic activity in those markets that results in the expansion and/or upgrading of physical facilities (i.e., construction) may involve a time-lag factor of several months before translating into a demand for galvanizing fabricated components. Despite the inherent seasonality associated with large project construction work, the Company maintains a relatively stable revenue stream throughout the year by offering fabricators, large and small, reliable and rapid turn-around service. The Company records revenues when the galvanizing and customer billing processes are completed. The Company generates all of its operating cash from such revenues, and utilizes a line of credit secured by the underlying accounts receivable and zinc inventory to facilitate working capital needs. Each of the Company's galvanizing plants operate in a highly competitive environment underscored by pricing pressures, primarily from other public and privately-owned galvanizers and alternative forms of corrosion protection, such as paint. The Company's long-term response to these challenges has been a sustained strategy focusing on providing a reliable quality of galvanizing to industry ASTM specifications and rapid turn-around time on every project, large and small. Key to the success of this strategy is the Company's continuing commitment and long-term record of reinvesting earnings to upgrade its galvanizing facilities and provide technical innovations to 17 improve production efficiencies; and to construct new facilities when market conditions present opportunities for growth. The Company is addressing long-term opportunities to expand its galvanizing and coatings business through programs to increase industry awareness of the proven, unique benefits of galvanizing for metals corrosion protection. Each of the Company's independently operated galvanizing plants is linked to a centralized control system involving sales order entry, facility maintenance and operating procedures, quality assurance, purchasing and credit and accounting that enable the plant to focus on providing galvanizing and coating services in the most cost-effective manner. The principal raw materials essential to the Company's galvanizing and coating operations are zinc and various chemicals which are normally available for purchase in the open market. KEY INDICATORS Key industries which historically have provided the Company some indication of the potential demand for galvanizing in the near-term, (i.e., primarily within a year) include highway and transportation, power transmission and distribution, telecommunications and the level of quoting activity for regional metal fabricators. In general, growth in the commercial/industrial sectors of the economy generates new construction and capital spending which ultimately impacts the demand for galvanizing. Key operating measures utilized by the Company include new orders, zinc inventory, tons of steel galvanized, revenue, pounds and labor costs per hour, zinc usage related to tonnage galvanized, and lost-time safety performance. These measures are reported and analyzed on various cycles, including daily, weekly and monthly. The Company utilizes a number of key financial measures to evaluate the operations at each of its galvanizing plants, to identify trends and variables impacting operating productivity and current and future business results, which include: sales, gross profit, fixed and variable costs, selling and general administrative expenses, operating cash flows, capital expenditures, interest expense, and a number of ratios such as profit from operations and accounts receivable turnover. These measures are reviewed by the Company's operating and executive management monthly, or more frequently, and compared to prior periods, the current business plan and to standard performance criteria, as applicable. KEY DEVELOPMENTS In the last three years, the Company reported a number of developments supporting its strategic program to reposition its galvanizing business in the national market. In February 2005, the Company expanded galvanizing operations into the northeast region of the United States with the purchase of the assets of a galvanizing facility located in Canton, Ohio. This strategic expansion provides NAG an important, established customer base of major fabricators serving industrial, OEM, and highway markets as well as residential and commercial markets for lighting poles. Canton's 52 foot long dipping kettle is designed to handle large steel structures, such as bridge beams, utility poles and other steel structural components that require galvanizing for extended-life corrosion 18 protection. The Canton plant also processes small parts used construction, such as nuts and anchor rods, in a dedicated facility with a smaller 16 foot dipping kettle and a spinner operation. In January 2003, the Company opened its St. Louis galvanizing plant, replacing a small plant at the same location. This large facility is providing NAG a strategic basic for extending its geographic area of service. A 51-foot kettle at this facility provides the largest galvanizing capacity in the St. Louis region. In 2004, production tonnage at St. Louis more than doubled compared to production at the plant it replace. In January 2003, the Company expanded services at its Nashville galvanizing plant with the installation of a state-of-the-art Spinner line to galvanize small products, including bolts and threaded material. In the third quarter of 2002, the Company announced the introduction of INFRASHIELDSM Coating, a specialty polymer coating system that is designed to be applied over hot dip galvanized material slated for harsh operating conditions. The INFRASHIELDSM coating technology results in superior corrosion protection by combining cathodic protection with a non-conductive coating. RESULTS OF OPERATIONS The following table shows the Company's results of operations for the quarters ended March 31, 2005 and 2004:
Quarters Ended March 31 ------------------------------------------------------------ 2005 2004 -------------------------- --------------------------- (Dollars in Thousands) Amount % of Sales Amount % of Sales - ---------------------- ---------- ---------- ---------- ---------- Sales $ 9,280 100.0% $ 8,558 100.0% Cost of sales 6,842 73.7% 6,005 70.2% ---------- ---------- ---------- ---------- Gross profit 2,438 26.3% 2,553 29.8% Selling, general & administrative expenses 1,448 15.6% 1,395 16.3% Depreciation and amortization 619 6.7% 684 8.0% ---------- ---------- ---------- ---------- Operating income 371 4.0% 474 5.5% Interest expense, net 225 2.4% 161 1.9% Other -- -- (25) (0.3)% ---------- ---------- ---------- ---------- Income before income taxes 146 1.6% 338 3.9% Income tax expense 49 0.5% 128 1.5% ---------- ---------- ---------- ---------- Net Income $ 97 1.1% $ 210 2.4% ========== ========== ========== ==========
2005 COMPARED TO 2004 Sales. Sales for the quarter ended March 31, 2005 increased 8.4% to $9,280,000 from sales of $8,558,000 for the first quarter of 2004. Higher sales for the first quarter of 2005 reflect a one-month contribution of $683,000 from the Canton, Ohio galvanizing facility that was purchased February 28, 2005. NAG experienced sharply lower volume in the first two months of 2005 compared to the same months a year ago, due to lower than expected demand from fabricators. However, in March 2005 we began to experience the anticipated increase in business projected by our customers, resulting in a 5.2% same 19 plant volume improvement over the same month a year ago. In the first quarter of 2005, our average selling prices for galvanizing and related coating services remained relatively even with the average selling prices in the first quarter of 2004. GROSS PROFIT. Gross profit of $2,438,000 for the first quarter of 2005 decreased $115,000, or 4.5%, from $2,553,000 for the first quarter of 2004, reflecting higher energy and raw material costs and the impact on productivity due to low volume in January and February. Gross profit as a percentage of sales was 26.3% compared to 29.8% in 2004. DEPRECIATION EXPENSE. Depreciation expense for the first quarter of 2005 decreased $65,000, or 9.5%, to $619,000 compared to $684,000 for the first quarter of 2004. The decrease for 2005 relates primarily to assets becoming fully depreciated. Depreciation as a percentage of sales was 6.7% in the first quarter of 2005 compared to 8.0% in 2004. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A increased $53,000, or 3.8%, in the first quarter of 2005 to $1,448,000 compared to $1,395,000 in the first quarter of 2004. The increase for 2005 primarily relates to costs incurred for increases in administrative staff, and higher legal, audit and director fees. SG&A as a percentage of sales was 15.6% in the first quarter of 2005 compared to 16.3% in 2004. INTEREST EXPENSE. Interest expense increased to $225,000 in the first quarter of 2005 from $161,000 in 2004, primarily due to higher interest rates on variable-rate debt and higher debt related to the purchase of a galvanizing facility in the first quarter of 2005. INCOME TAXES. The Company's effective income tax rates for the first quarters of 2005 and 2004 were 33.6% and 37.0%, respectively. The rate for 2005 differed from the federal statutory rate due to state income taxes and a minor adjustment to prior estimates. The rate for 2004 differed primarily due to state income taxes. NET INCOME. For the first quarter of 2005, the Company reported net income of $97,000 compared to net income of $210,000 for the first quarter of 2004. The earnings per share for 2005 was $.01 per share, basic and fully diluted, compared to $.03 per share, basic and fully diluted, for 2004. 2004 COMPARED TO 2003 SALES. North American Galvanizing's sales for the quarter ended March 31, 2004 were $8,558,000, an increase of 6.4% over sales of $8,040,000 for the same period in 2003. Total production volume in the first quarter of 2004 increased 6.0% over the first quarter of 2003, reflecting modest increases in capital goods spending and construction related demand for galvanizing. Slightly stronger average selling prices, primarily due to product mix, also contributed to increased sales revenue in the first quarter of 2004. In 2003, the lower demand for galvanizing due to weaknesses in the economy adversely impacted North American Galvanizing's sales. Over the course of 2003, we lowered our operating break-even cost structure. GROSS PROFIT. Gross profit for the first quarter of 2004 increased 25.3% to $2,553,000, compared to $2,037,000 in the first quarter of 2003. Gross profit as a percentage of sales increased to 29.8% from 25.3% in 2003, primarily due to higher production volume and 20 an improved operating cost structure. Improved gross profit margins in the first quarter of 2004, as compared to the first quarter of 2003, reflect the contributions from increased production volume to cover fixed costs, lower costs for insurance and natural gas, plus improved labor efficiency. Despite the highly competitive environment for galvanizing, the Company expects the improved gross profit margins achieved in the first-quarter of 2004 can be sustained, provided demand for galvanizing does not abate. DEPRECIATION EXPENSE. Depreciation expense for the first quarter of 2004 was $684,000, compared to $775,000 for the same period a year ago. The decrease in depreciation expense for 2004 is due to significant assets becoming fully depreciated in 2003. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A decreased 3.9% to $1,395,000 in the first quarter of 2004, from $1,452,000 in 2003. The decrease primarily reflects lower costs of insurance premiums of $58,000, lower sales and administrative salary expense of $39,000, which were partially offset by increased fees for legal services of $46,000. The Company anticipates its 2004 insurance costs will continue to compare favorably with 2003 due to a restructuring of its insurance program, but travel expenses are expected to increase in support of the Company's sales and marketing programs. In addition to sales and service support teams assigned to each of its regional galvanizing plants, NAG is committing corporate-level marketing resources to expand and develop new national account business. INTEREST EXPENSE. Interest expense for the first quarter of 2004 decreased by $147,000 to $161,000. A number of factors contributed to the $147,000 reduction in interest expense: lower average borrowings for working capital; lower average interest rates on variable rate debt; reduction in term loan balances and lower fees for letters of credit. Variable rate debt decreased from 4.5% to 4.25% as a result of changes in the prime rate. The Company's average outstanding line of credit borrowings for the first quarter of 2004 were $3,129,000 compared to $4,035,000 for 2003. Interest expense also decreased due to a lower interest rate on the Company's industrial revenue bonds. In September 2003, the Company amended the bond agreement to more nearly reflect the interest rate earned by the bondholders. The amendment provides that the bond trustee will evaluate the interest account at the end of each calendar quarter and refund the excess amount determined, if any, and rebate such excess to the Company. The Company has elected to apply any such rebates to offset the cost of a letter of credit related to the industrial revenue bonds. In the first quarter of 2004, the Company was refunded excess bond interest of $41,000. There was no comparable recognition of excess bond interest in the first quarter of 2003. The Company's interest expense for the first quarter of 2004 was not impacted by inflation. OTHER. In the first quarter of 2004, the Company liquidated its total investment in equity securities and realized a gain of $25,000. INCOME TAXES. The Company's effective income tax rates, including taxes related to discontinued operations in 2003, for the first quarters of 2004 and 2003 were 37.9% and 41.9%, respectively. The rate for 2003 differed from the federal statutory rate primarily due to state income taxes and adjustments to the estimate of the deferred tax asset accounts. The rate for 2004 differed primarily from the federal statutory rate due to state income taxes. S21 LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow from operations and borrowings under credit facilities have consistently been adequate to fund its current facilities working capital and capital spending requirements. During the three-month periods ended March 31, 2005 and 2004, operating cash flow and borrowings under credit facilities have been the primary source of liquidity. The Company monitors working capital and planned capital spending to assess liquidity and minimize cyclical cash flow. Cash flow from operating activities for the first three months of 2005 and 2004 was $203,000 and ($258,000), respectively. The increase of $461,000 in 2005 cash flow from operations was due primarily to changes in working capital and utilization of tax net operating loss carrybacks. Cash of $4,522,000 used in 2005 investing activities through March 31 consisted of $4,129,000 to acquire certain assets of Gregory Industries' Inc. and capital expenditures of $393,000 for equipment to maintain galvanizing facilities. Capital expenditures of $277,000 for the comparable three-month period of 2004 were for equipment to maintain galvanizing facilities, offset by proceeds of $92,000 from the sale of investment securities. For the remainder of 2005, expected capital expenditures of approximately $1,600,000 are budgeted for the Company's existing galvanizing facilities. Total debt (current and long-term obligations) increased $3,965,000 to $19,518,000 in the three months ended March 31, 2005. Financing activities for this period of 2005 included payments of $168,000 to a bond sinking fund, proceeds of $8,970,000 from a bank line of credit and term loan, and payments of $4,837,000 on bank term loans and other obligations. In February 2005, the Company amended a three-year bank credit agreement that was scheduled to expire in December 2007 and extended its maturity to February 28, 2008. Subject to borrowing base limitations, the amended agreement provides (i) an $8,000,000 maximum revolving credit facility for working capital and general corporate purposes, and (ii) a $5,001,000 term loan. At March 31, 2005, $12,060,000 was outstanding under the bank credit agreement, and $400,000 was reserved for outstanding irrevocable letters of credit for workers' compensation insurance coverage. The Company's commitment to repay the remaining balance of $6,458,000 of tax-exempt adjustable rate industrial revenue bonds issued in 2000 is fully secured by an irrevocable letter of credit issued by Bank One Oklahoma, N.A., in favor of Bank One Trust Company. At March 31, 2005, the Company had $482,000 available borrowing capacity, net of outstanding letters of credit, under its revolving line of credit based on the borrowing base calculated under the agreement. During April 2005, the available borrowing capacity under the revolving line of credit improved to approximately $956,000, primarily reflecting an improvement in turnover of trade accounts receivable. The Company believes that its ability to continue to generate cash from operations and its bank credit facilities will provide adequate capital resources and liquidity to support operations and capital expenditures plans for 2005. 22 At March 31, 2005, the Company's Capital Expenditures Ratio of 0.97 was not in compliance with a 1.0 Ratio covenant under its bank credit agreement, for which the Company received a waiver from the bank. The Company expects to be in compliance with the Capital Expenditures Ratio for the remainder of 2005, based on obtaining from the bank a modification in the method for calculating the Capital Expenditures Ratio. The Company has various commitments primarily related to long-term debt, industrial revenue bonds, operating lease commitments and zinc purchase commitments. The Company's off-balance sheet contractual obligations at March 31, 2005, consist of $1,867,000 for long-term operating leases for office space, galvanizing facilities and galvanizing equipment, $642,000 for vehicle and office equipment operating leases and $3,411,000 for zinc purchase commitments. The various leases for galvanizing facilities, including option renewals, expire from 2005 to 2017. A lease for galvanizing equipment expires in 2007. The vehicle and office equipment leases expire annually on various dates through 2010. NAG periodically enters into fixed price purchase commitments with domestic and foreign zinc producers to purchase a portion of its requirements for its hot dip galvanizing operations; commitments for the future delivery of zinc are typically up to one year. The Company expects to fund these commitments with cash generated from operations and continuation of existing bank credit agreements as they mature. The Company had the following contractual obligations and commercial commitments as of March 31, 2005 (in thousands):
Payment Due or Commitment Expiration by Period -------------------------------------------------------------------------------------------- More Than Total 2005 2006 2007 2008 2009 5 Years -------- -------- -------- -------- -------- -------- -------- Industrial revenue bonds $ 6,458 $ 693 $ 731 $ 767 $ 806 $ 851 $ 2,610 Long-term debt 12,060 696 714 714 9,936 -- -- Subordinated notes 1,000 -- 1,000 -- -- -- -- Facilities leases 1,867 425 489 457 114 114 268 Vehicle/equipment leases 642 239 132 99 84 60 28 Zinc purchase commitments 3,411 3,411 -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Total contractual cash obligations $ 25,438 $ 5,464 $ 3,066 $ 2,037 $ 10,940 $ 1,025 $ 2,906 ======== ======== ======== ======== ======== ======== ======== Other contingent commitments: Letters of credit* $ 6,858 $ 1,093 $ 731 $ 767 $ 806 $ 851 $ 2,610
*Amount includes letter of credit relating to debt outstanding under the industrial revenue bond agreement. 23 ENVIRONMENTAL MATTERS The Company's facilities are subject to extensive environmental legislation and regulations affecting their operations and the discharge of wastes. The cost of compliance with such regulations in the first quarter of 2005 and 2004 was approximately $302,000 and $228,000,respectively, for the disposal and recycling of wastes generated by the galvanizing operations. NAG was notified in 1997 by the Illinois Environmental Protection Agency ("IEPA") that it was a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation, and Liability Information System ("CERCLIS") in connection with cleanup of an abandoned site formerly owned by Sandoval Zinc Co. Since then approximately 30 additional PRPs have been identified by the IEPA. A number of the PRPs (approximately 12 to 15) have agreed to work together and with IEPA on a voluntary basis. The Company has been and continues to participate in this volunteer group. The group has retained consultants and legal representatives familiar with IEPA regulations. This volunteer group, with its consultants, has cooperated with IEPA in attempting to better define the environmental issues associated with the Sandoval Zinc site. To that extent, this voluntary group prepared and submitted to IEPA in August 2000 a work plan. The purpose of this work plan is to attempt to define the extent of environmental remediation that might be required, assess risks, and review alternatives to addressing potential remediation. The IEPA has yet to respond to this proposed work plan or suggest any other course of action, and there has been no activity in regards to this issue during 2005. Therefore, the Company has no basis for determining potential exposure and estimated remediation costs at this time.The Company is committed to complying with all federal, state and local environmental laws and regulations and using its best management practices to anticipate and satisfy future requirements. As is typical in the galvanizing business, the Company will have additional environmental compliance costs associated with past, present, and future operations. Management is committed to discovering and eliminating environmental issues as they arise. Because of the frequent changes in environmental technology, laws and regulations management cannot reasonably quantify the Company's potential future costs in this area. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's operations include managing market risks related to changes in interest rates and zinc commodity prices. INTEREST RATE RISK. The Company is exposed to financial market risk related to changes in interest rates. Changing interest rates will affect interest paid on the Company's variable rate debt. At March 31, 2005, the Company's outstanding debt of $19,518,000, net of a $19,000 discount, consisted of the following: Variable rate debt aggregating $12,060,000 under the bank credit agreement, with an effective rate of 4.2%; $6,458,000 under the industrial revenue bond agreement, with an effective rate of 3.5%; and, fixed rate debt consisting of $1,000,000 of 10% subordinated promissory notes and a 9.5% term note of $19,000. The borrowings under all of the Company's debt obligations at March 31, 2005 are due as follows: $1,389,000 in 2005; $2,445,000 in 2006; $1,481,000 24 in 2007 and $14,222,000 in years 2008 through 2013. Each increase of 10 basis points in the effective interest rate would result in an annual increase in interest charges on variable rate debt of approximately $18,500 based on March 31, 2005 outstanding borrowings. The actual effect of changes in interest rates is dependent on actual amounts outstanding under the various loan agreements. The Company monitors interest rates and has sufficient flexibility to renegotiate the loan agreement, without penalty, in the event market conditions and interest rates change. ZINC PRICE RISK. NAG periodically enters into fixed price purchase commitments with domestic and foreign zinc producers to purchase a portion of its zinc requirements for its hot dip galvanizing operations. Commitments for the future delivery of zinc, typically up to one (1) year, reflect rates quoted on the London Metals Exchange. At March 31, 2005, the aggregate fixed price commitments for the procurement of zinc was approximately $3,400,000. With respect to these zinc fixed price purchase commitments, a hypothetical decrease of 10% in the market price of zinc from the March 31, 2005 level represented a potential lost gross margin opportunity of approximately $340,000. The Company's financial strategy includes evaluating the selective use of derivative financial instruments to manage zinc and interest costs. As part of its inventory management strategy, the Company recognizes that hedging instruments may be effective in minimizing the impact of zinc price fluctuations. The Company's current zinc forward purchase commitments (Note 6) are considered derivatives, but the Company has elected to account for these purchase commitments as normal purchases. 25 ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. During the quarter ended March 31, 2005, the Company purchased the assets of a galvanizing business located in Canton, Ohio and undertook a review and evaluation of that operation's internal controls over financial reporting, including the implementation of a number of controls consistent with its established galvanizing operations. The Company will continue to integrate this acquired business into its internal control over financial reporting. There have been no other significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken. 26 PART II OTHER INFORMATION Item 1. Legal Proceedings. On August 30, 2004, the Company was informed by counsel for the Metropolitan Water Reclamation District of Greater Chicago (the "Water District") that the Water District had, on August 25, 2004 filed a Second Amended Complaint in the United States District Court, Northern District of Illinois, Eastern Division, naming North American Galvanizing & Coatings, Inc. (formerly known as Kinark Corporation) as an added defendant. Counsel for the Water District also gave the Company notice of the Water District's intent to file (or amend the Complaint to include) a Citizens Suit under the Resource Compensation and Recovery Act ("RCRA") against North American Galvanizing & Coatings, Inc., pursuant to Section 7002 of RCRA, 42 U.S.C. Section 6972. This Second Amended Complaint seeks enforcement of an August 12, 2004 default judgment in the amount of $1,810,463 against Lake River Corporation and Lake River Holding Company, Inc. in connection with the operation of a storage terminal by Lake River Corporation in violation of environmental laws. Lake River Corporation conducted business as a subsidiary of the Company until June 30, 2000, at which time Lake River Corporation was sold to Lake River Holding Company, Inc. and ceased to be a subsidiary of the Company. The Second Amended Complaint asserts that prior to the sale of Lake River Corporation, the Company directly operated the Lake River facility and, accordingly, seeks to have the Court pierce the corporate veil of Lake River Corporation and enforce the default judgment order of August 12, 2004 against the Company. The Company denies the assertions set forth in the Water District's Complaint and on November 13, 2004 filed a partial motion for dismissal of the Second Amended Complaint. In December 2004, the Water District filed a Third Amended complaint in the litigation, adding two claims: (1) a common law claim for nuisance; and (2) a claim under the federal Resource Conservation and Recovery Act, in which the Water District argues that the Company is responsible for conditions on the plaintiff's property that present an "imminent and substantial endangerment to human health and the environment." In January 2005 and March 2005, the Company filed partial motions to dismiss plaintiff's third amended complaint, in the United States District Court, Northern District of Illinois, Eastern Division. On April 12, 2005, the Court issued an order denying in part and granting in part the Company's partial motion to dismiss plaintiff's third amended complaint. The Company is reviewing the Court's order and expects to file an appeal. The Company has denied any liability with respect to this claim and intends to vigorously defend this case. At this time, the Company has not determined the amount of any liability that may result from this matter or whether such liability, if any, would have a material adverse effect on the Company's financial condition, results of operations, or liquidity. The lease term of a galvanizing facility occupied by Reinforcing Services, Inc. ("RSI"), a subsidiary of North American Galvanizing Company, expired July 31, 2003 and has not been renewed. RSI has exercised an option to purchase the facility, and the landlord is contesting the Company's right to exercise this option. RSI has filed a lawsuit against the landlord seeking enforcement of the right to exercise the option. This litigation is in the discovery stage and management expects there will be no disruption to its galvanizing business being conducted at the facility. 27 Item 2. Changes in Securities and Use of Proceeds - Not applicable. Item 3. Defaults Upon Senior Securities - Not applicable. Item 4. Submission of Matters to a Vote of Security Holders - Not applicable. Item 5. Other Information - Not applicable. Item 6. Exhibits. (a) Exhibits 3.1 The Company's Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 (Reg. No. 333-4937) file on June 7, 1996). 3.2 The Company's Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q dated March 31, 1996). 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification pursuant to Section 301 of the Sarbanes-Oxley Act of of 2002. 32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99 Cautionary Statements by the Company Related to Forward-Looking Statements. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: NORTH AMERICAN GALVANIZING & COATINGS, INC. (Registrant) /s/ Paul R. Chastain ----------------------------------- Vice President and Chief Financial Officer (Principal Financial Officer) Date: May 16, 2005 29 EX-31.1 2 exh31-1_13498.txt 302 CERTIFICATION - C.E.O. EXHIBIT 31.1 ------------ CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, the undersigned Ronald J. Evans, President and Chief Executive Officer of North American Galvanizing & Coatings, Inc., hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of North American Galvanizing & Coatings, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly 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; 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 the 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. Date: May 16, 2005 /s/ Ronald J. Evans ----------------------- President and Chief Executive Officer EX-31.2 3 exh31-2_13498.txt 302 CERTIFICATION - C.F.O. EXHIBIT 31.2 ------------ CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, the undersigned Paul R. Chastain, Vice President and Chief Financial Officer of North American Galvanizing & Coatings, Inc., hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of North American Galvanizing & Coatings, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly 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; 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 the 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. Date: May 16, 2005 /s/ Paul R. Chastain -------------------- Vice President and Chief Financial Officer (Principal Financial Officer) EX-32 4 exh32_13498.txt 906 CERTIFICATION - C.E.O. / C.F.O. EXHIBIT 32 ---------- CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Each of the undersigned hereby certifies in his capacity as an officer of North American Galvanizing & Coatings, Inc. (the "Company") that the Quarterly Report of the Company on Form 10-Q for the period ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and the results of operations of the Company. NORTH AMERICAN GALVANIZING & COATINGS, INC. ------------------------------------------- (Registrant) /s/ Ronald J. Evans ----------------------------- President and Chief Executive Officer /s/ Paul R. Chastain ----------------------------- Vice President and Chief Financial Officer (Principal Financial Officer) Date: May 16, 2005 EX-99 5 exh99_13498.txt CAUTIONARY STATEMENTS EXHIBIT 99 ---------- CAUTIONARY STATEMENTS BY THE COMPANY REGARDING FORWARD LOOKING STATEMENTS Certain statements in this Form 10-Q, including information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (together, the "Securities Acts"). The Securities Acts provide certain "safe harbor" provisions for forward-looking statements. The Company desires to take advantage of the "safe harbor" provisions of the Securities Acts and is including these cautionary statements ("Cautionary Statements") pursuant to the Provisions of the Securities Acts with the intention of obtaining the benefits of the "safe harbor" provisions. In order to comply with the terms of the "safe harbor" in the Securities Acts, the Company cautions investors that forward-looking statements included in this Form 10-K, or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Company's stockholders and other publicly available statements issued or released by the Company involve substantial risks, uncertainties, and other factors which could cause the Company's actual results, performance (financial or operating) or achievements to differ materially from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. The Company believes the following important factors could cause such a material difference to occur: 1. The Company's ability to grow through the acquisition and development of galvanizing or the acquisition of ancillary businesses. 2. The Company's ability to identify suitable acquisition candidates, to consummate or complete construction projects, or to profitably operate or successfully integrate enterprises into the Company's other operations. 3. The Company's ability to secure the capital and the related cost of such capital necessary to fund its future growth through acquisition and development, as well as internal growth. 4. The level of competition in the Company's industries and the possible entry of new, well-capitalized competitors into the Company's markets. 5. Uncertainties and changes in environmental compliance costs associated with past, present and future operations. 6. Uncertainties and changes related to federal, state and local regulatory policies, including environmental laws related to the galvanizing. 7. The Company's ability to staff its galvanizing operations appropriately with qualified personnel, including in times of shortages of such personnel and to maintain a satisfactory relationship with labor unions. 8. The pricing and availability of equipment, materials and inventories, including zinc "pigs", the major component used in the hot dip galvanizing industry. 9. Uncertainties and changes in general economic conditions. 10. Uncertainties and changes in several industries to which the company's businesses are closely tied, such as highway and transportation, communications and energy. 11. Performance issues with key suppliers and subcontractors. 12. Uncertainties related to the retention of key customers in each of the Company's business segments. The words "believe," "expect," "anticipate," "project," "plan" and similar expressions identify forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The foregoing review of significant factors should not be construed as exhaustive or as an admission regarding the adequacy of disclosures previously made by the Company. -----END PRIVACY-ENHANCED MESSAGE-----