-----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, AaMv55wZTfJQ41DzzFzQxiUPvAUl6Z1EcIdJcBY1upGAs7MBiBm4vwwozZJKhZuX iO1leeL85QqlflMA6BQqTg== 0001072613-07-002504.txt : 20071029 0001072613-07-002504.hdr.sgml : 20071029 20071029161709 ACCESSION NUMBER: 0001072613-07-002504 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071029 DATE AS OF CHANGE: 20071029 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: 071196681 BUSINESS ADDRESS: STREET 1: 5314 S YALE AVENUE STREET 2: SUITE 1000 CITY: TULSA STATE: OK ZIP: 74135 BUSINESS PHONE: (918)494-0964 MAIL ADDRESS: STREET 1: 5314 S YALE AVENUE STREET 2: SUITE 1000 CITY: TULSA STATE: OK ZIP: 74135 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_15507.txt NORTH AMERICAN GALVANIZING & COATINGS, INC. ================================================================================ 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 SEPTEMBER 30, 2007 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.) 5314 S. YALE AVENUE, SUITE 1000, TULSA, OKLAHOMA 74135 (Address of principal executive offices) (918) 494-0964 (Registrant's telephone number) 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer, as defined in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (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 September 30, 2007: Common Stock $ .10 Par Value.....12,337,651 ================================================================================ 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 Public Accounting Firm 3 Condensed Consolidated Balance Sheets as of September 30, 2007 (unaudited), and December 31, 2006 4 Condensed Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2007 and 2006 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited) 6 Notes to Condensed Consolidated Financial Statements for the three- and nine-month periods ended September 30, 2007 and 2006 (unaudited) 7-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-22 Item 3. Quantitative and Qualitative Disclosure About Market Risk 22 Item 4. Controls and Procedures 23 PART II. OTHER INFORMATION 23-25 SIGNATURES AND CERTIFICATIONS 25 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, the raw materials cost of zinc and the cost of natural gas; changes in economic conditions of the various markets the Company serves, as well as the other risks detailed herein and in the Company's Form 10-K filed on February 14, 2007 with the Securities and Exchange Commission. 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 September 30, 2007, and the related condensed consolidated statements of income for the three- and nine-month periods ended September 30, 2007 and 2006 and of cash flows for the nine-month periods ended September 30, 2007 and 2006. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with the 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 the 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 the 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, 2006, and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 14, 2007, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph related to the adoption of Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006 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 October 29, 2007 3 NORTH AMERICAN GALVANIZING & COATINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------------------------------- UNAUDITED SEPTEMBER 30, DECEMBER 31, ASSETS 2007 2006 ---------- ---------- CURRENT ASSETS: Cash $ 65 $ 1,979 Trade receivables--less allowances of $112 for 2007 and $197 for 2006 13,152 13,032 Inventories 6,175 6,755 Prepaid expenses and other assets 688 836 Deferred tax asset--net 702 784 ---------- ---------- Total current assets 20,782 23,386 PROPERTY, PLANT AND EQUIPMENT--AT COST: Land 2,168 2,167 Galvanizing plants and equipment 39,446 36,843 ---------- ---------- 41,614 39,010 Less--allowance for depreciation (21,498) (18,894) Construction in progress 2,139 1,019 ---------- ---------- Total property, plant and equipment--net 22,255 21,135 GOODWILL--Net 3,448 3,448 OTHER ASSETS 139 242 ---------- ---------- TOTAL ASSETS $ 46,624 48,211 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations $ 97 $ 778 Current portion of bonds payable -- 830 Trade accounts payable 5,895 7,444 Accrued payroll and employee benefits 1,108 1,082 Accrued taxes 1,027 762 Other accrued liabilities 1,509 3,194 ---------- ---------- Total current liabilities 9,636 14,090 ---------- ---------- DEFERRED TAX LIABILITY--Net 678 802 LONG-TERM OBLIGATIONS 2,646 3,318 BONDS PAYABLE -- 4,435 ---------- ---------- Total liabilities 12,960 22,645 ---------- ---------- COMMITMENTS AND CONTINGENCIES (NOTE 6) STOCKHOLDERS' EQUITY (all shares for all periods adjusted for three-for-two stock split on June 8, 2007): Common stock--$.10 par value: Issued--12,366,754 shares in 2007 and 12,314,887 in 2006 1,237 821 Additional paid-in capital 14,439 14,061 Retained earnings 18,143 11,078 Common shares in treasury at cost-- 29,103 in 2007 and 147,379 in 2006 (155) (394) ---------- ---------- Total stockholders' equity 33,664 25,566 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,624 48,211 ========== ==========
See notes to condensed consolidated financial statements. 4 NORTH AMERICAN GALVANIZING & COATINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------------- -------------------------- 2007 2006 2007 2006 ---------- ---------- ---------- ---------- SALES $ 21,541 $ 20,155 $ 68,161 $ 53,793 COSTS AND EXPENSES: Cost of sales 14,535 15,109 46,899 38,811 Selling, general and administrative expenses 2,193 2,119 6,998 6,206 Depreciation and amortization 876 842 2,612 2,134 ---------- ---------- ---------- ---------- Total costs and expenses 17,604 18,070 56,509 47,151 ---------- ---------- ---------- ---------- OPERATING INCOME 3,937 2,085 11,652 6,642 Interest expense 275 172 527 651 Interest income (15) -- (69) -- ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 3,677 1,913 11,194 5,991 INCOME TAX EXPENSE 1,164 809 4,129 2,462 ---------- ---------- ---------- ---------- NET INCOME $ 2,513 $ 1,104 $ 7,065 $ 3,529 ========== ========== ========== ========== NET INCOME PER COMMON SHARE, all periods adjusted for three- for-two stock split on June 8, 2007 (Note 1): Net income Basic $ 0.21 $ 0.09 $ 0.58 $ 0.32 Diluted $ 0.20 $ 0.09 $ 0.56 $ 0.31
See notes to condensed consolidated financial statements. 5 NORTH AMERICAN GALVANIZING & COATINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------- 2007 2006 ---------- ---------- OPERATING ACTIVITIES: Net income $ 7,065 $ 3,529 Gain on disposal of assets -- 19 Depreciation 2,612 2,134 Deferred income taxes (42) (699) Non-cash share-based compensation 441 61 Non-cash directors' fees 321 352 Changes in operating assets and liabilities: Accounts receivable--net (120) (5,030) Inventories and other assets 831 49 Accounts payable, accrued liabilities and other (3,354) 4,559 ---------- ---------- Cash provided by operating activities 7,754 4,974 INVESTING ACTIVITIES: Capital expenditures (3,321) (944) Purchase of investment -- (1,008) ---------- ---------- Cash used in investing activities (3,321) (1,952) FINANCING ACTIVITIES: Payments on long-term obligations (12,388) (19,948) Proceeds from long-term obligations 11,035 16,089 Payment on bonds (5,265) (544) Payment on subordinated notes payable -- (1,000) Tax benefits realized from stock options exercised 232 320 Proceeds from exercise of stock options 194 771 Purchase of common stock for the treasury (152) (3) Cash paid for fractional shares pursuant to stock split effected by stock dividend (3) -- Proceeds from the exercise of stock warrants -- 57 ---------- ---------- Cash used in financing activities (6,347) (4,258) DECREASE IN CASH AND CASH EQUIVALENTS (1,914) (1,236) CASH AND CASH EQUIVALENTS: Beginning of year 1,979 1,367 ---------- ---------- End of year $ 65 $ 131 ========== ========== CASH PAID DURING THE YEAR FOR: Interest $ 444 $ 750 ========== ========== Income taxes $ 4,214 $ 1,419 ========== ========== NON-CASH INVESTING AND FINANCING ACTIVITIES: Acquisitions of fixed assets under capital lease obligations $ 137 $ 244 ========== ========== Acquisitions of fixed assets included in accounts payable at period end $ 411 $ -- ========== ==========
See notes to condensed consolidated financial statements. 6 NORTH AMERICAN GALVANIZING & COATINGS, INC.AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND 2006 UNAUDITED NOTE 1. BASIS OF PRESENTATION The condensed consolidated 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 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, 2006. 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"). The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", or FIN 48, on January 1, 2007. FIN 48 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a taxing authority. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2003. In the second quarter of 2006, the Internal Revenue Service (IRS) commenced an examination of the Company's Federal income tax return for 2004 and subsequently added years 2003 and 2005 to the examination. This examination was completed in the second quarter of 2007 resulting in a required tax payment of $266,000, primarily due to timing differences of deductions taken in prior year returns. Upon the adoption of FIN 48, the Company commenced a review of all open tax years in all jurisdictions. The Company does not believe it has included any "uncertain tax positions" in its Federal income tax return or any of the state income tax returns it is currently filing. The Company has made an evaluation of the potential impact of additional state taxes being assessed by jurisdictions in which the Company does not currently consider itself liable. The Company does not anticipate that such additional taxes, if any, would result in a material change to its financial position. In connection with the adoption of FIN 48, the Company will include future interest and penalties, if any, related to uncertain tax positions as a component of its provision for taxes. The board of directors declared a three-for-two stock split effected by a stock dividend for all shareholders of record on May 24, 2007, payable on June 8, 2007. All share and per share data (except par value) have been adjusted to reflect the effect of the stock split for all periods presented. In addition, the number of shares of common stock issuable upon the exercise of outstanding stock options and the vesting of other stock awards, as 7 well as the number of shares of common stock reserved for issuance under our share-based compensation plans, were proportionately increased in accordance with the terms of those respective agreements and plans. NOTE 2. STOCK OPTIONS At September 30, 2007 the Company has two share-based compensation plans, which are shareholder-approved, the 2004 Incentive Stock Plan and the Director Stock Unit Program (Note 7). The Company's 2004 Incentive Stock Plan (the Plan) permits the grant of share options and shares to its employees and directors for up to 1,875,000 shares (adjusted for three-for-two stock split) of common stock. The Company believes that such awards better align the interests of its employees and directors with those of its shareholders. Option awards are granted with an exercise price equal to the market price of the Company's stock at the date of grant; those option awards usually vest based on 4 years of continuous service and have 10-year contractual terms. The compensation cost for the Plan was $161,000 and $32,000 for the three-months ended September 30, 2007 and 2006, respectively, and $441,000 and $61,000 for the nine- months ended September 30, 2007 and 2006, respectively. No tax benefit was recognized in income tax expense for the 2007 incentive stock plan compensation cost. There was no share-based compensation cost capitalized during 2006 or 2007. Option exercises and subsequent sales of the related stock created tax benefits of $232,000 and $320,000 for the Company, which were recognized in stockholder's equity, in the nine-month periods ended September 30, 2007 and 2006. 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:
Three Months Ended Nine Months Ended September 30 September 30 - -------------------------------------------------------------------------------------------------------------------------- Dollars in Thousands, Except per Share Amounts 2007 2006 2007 2006 - -------------------------------------------------------------------------------------------------------------------------- Volatility -- -- 66% 54% Discount Rate -- -- 4.6% 4.7% Dividend Yield -- -- -- -- Fair Value, adjusted for three-for-two stock split -- -- $ 2.36 $ 1.00
In the first nine months of 2007, the Company issued stock options for 502,500 shares at $3.47 per share, and issued stock options for 251,250 shares at $1.53 per share in the first nine-months of 2006, as adjusted to reflect the three-for-two stock split effected in the form of a stock dividend on June 8, 2007. NOTE 3. EARNINGS 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 the assumed exercise of stock options and warrants using the treasury stock method. The shares and earnings per share for all periods have been adjusted to reflect the Company's three-for-two stock split effected in the form of a share dividend on June 8, 2007.
THREE MONTHS ENDED SEPTEMBER 30 NUMBER OF SHARES - ------------------------------- -------------------------- 2007 2006 ---------- ---------- Basic 12,350,267 11,707,428 Diluted 12,861,519 12,137,058
8
NINE MONTHS ENDED SEPTEMBER 30 NUMBER OF SHARES - ------------------------------- -------------------------- 2007 2006 ---------- ---------- Basic 12,292,268 11,041,278 Diluted 12,732,235 11,392,164
There were no options with strike prices higher than the share market value at September 30, 2007 or September 30, 2006. NOTE 4. LONG-TERM OBLIGATIONS
September 30 December 31 (DOLLARS IN THOUSANDS) 2007 2006 ---------------------- ---------- ---------- Capital lease obligations $ 402 $ 328 Revolving credit facility 2,325 -- Term loan -- 3,751 Other 16 17 ---------- ---------- $ 2,743 $ 4,096 Less current portion (97) (778) ---------- ---------- $ 2,646 $ 3,318 ---------- ----------
On May 17, 2007, the Company entered into a new credit agreement between the Company as borrower and Bank of America, N.A. as administrative agent, swing line lender and letter of credit issuer. The existing credit agreement, scheduled to expire on February 28, 2008, was cancelled, and the term loan of $3.5 million was prepaid without any penalty. The new credit agreement provides for a revolving credit facility in the aggregate principal amount of $25 million with future increases of up to an aggregate principal amount of $10 million at the discretion of the lender. The credit facility matures on May 16, 2012, with no principal payments required before the maturity date and no prepayment penalty. The purpose of the new facility is to refinance a former credit agreement, term debt, and bond debt, provide for issuance of standby letters of credit, acquisitions, and for other general corporate purposes. At September 30, 2007, the Company had unused borrowing capacity of $22.5 million, based on $2.3 million in borrowings outstanding under the revolving credit facility, and $0.2 million of 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. The credit agreement provides for an applicable margin ranging from 0.75% to 2.00% over LIBOR and commitment fees ranging from 0.10% to 0.25% depending on the Company's Funded Debt to EBITDA Ratio (as defined). The applicable margin was 0.75% at September 30, 2007. The variable interest rate including the applicable margin was 5.88% as of September 30, 2007. The credit agreement requires the Company to maintain compliance with covenant limits for leverage ratio, asset coverage ratio, and a basic fixed charge coverage ratio. At September 30, 2007, the Company was in compliance with the covenants. The actual financial ratios compared to the required ratios, were as follows: Leverage Ratio - actual .16 versus maximum allowed of 3.25; Asset Coverage Ratio - actual 15.54 vs. minimum required of 1.50; Basic Fixed Charge Coverage Ratio - actual 6.21 versus minimum required of 1.25. 9 NOTE 5. BONDS PAYABLE During the first quarter of 2000, the Company issued $9,050,000 of Harris County Industrial Development Corporation Adjustable Rate Industrial Development Bonds, Series 2000 (the "Bonds"). The Bonds were senior to other debt of the Company. All of the bond proceeds, which were held in trust by Bank One Trust Company, N.A. ("Trustee"), were used by NAG for the purchase of land and construction of a hot dip galvanizing plant in Harris County, Texas. The galvanizing plant was completed and began operation in the first quarter of 2001. The Internal Revenue Service reviewed the Harris County Industrial Development Corporation Adjustable Rate Industrial Development Bonds and compliance with the Internal Revenue Code section (IRC) 144(a)(4)(ii)'s dollar limitation on capital expenditures within a relevant period. The IRS review concerned whether two operating leases commencing in January 2001 were conditional sales contracts, not true leases, according to Revenue Ruling 55-540. As a result of the review, in March, 2007, the Company entered into a settlement agreement (the "Closing Agreement") with the Harris County Industrial Development Corporation and the Commissioner of the Internal Revenue Service ("IRS"). Pursuant to the terms of the Closing Agreement, the Company agreed to make a payment to the IRS of $101,260 in settlement of the issues referenced above. As of December 31, 2006 the Company had recorded an estimated liability of $145,000 related to this matter. Furthermore, the Company agreed to redeem all outstanding Bonds on or before July 2, 2007 and subsequently redeemed the bonds on July 2, 2007. The Company used proceeds from the new five-year credit facility to redeem the bonds, as specifically contemplated in the agreement. 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 September 30, 2007 the aggregate commitments for the procurement of zinc at fixed prices were approximately $2.4 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 no unpriced commitments for zinc purchases at September 30, 2007. 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 September 30, 2007 or December 31, 2006, and did not utilize derivatives in the nine-month period ended September 30, 2007 or the year ended December 31, 2006, except for the forward purchase agreements described above, which are accounted for as normal purchases. The Company's total off-balance sheet contractual obligations at September 30, 2007, consist of approximately $1.1 million for long-term operating leases for vehicles, office space, office equipment, galvanizing facilities and galvanizing equipment and approximately $2.4 million for zinc purchase commitments. The various leases for galvanizing facilities, including option renewals, expire from 2007 to 2017. 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 $1,810,463.34 against 10 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 September 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 denied 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, the Company filed a partial motion to dismiss the Third Amended Complaint. 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 filed an appeal with the Seventh Circuit Court of Appeals requesting dismissal of the sole CERCLA claim contained in the Third Amended Complaint that was not dismissed by the United States District Court's April 12, 2005 order. On January 17, 2007, the Seventh Circuit affirmed the judgment of the United States District Court, stating that the Water District has a right of action under CERCLA. The Company is evaluating the judgment and expects to file a motion for reconsideration with the Seventh Circuit. Meanwhile, litigation and discovery in the trial court have been stayed pending mediation. As a result of the mediation, on April 11, 2007, the Company entered into an Agreement in Principle establishing terms for a conditional settlement. Under the terms of the Agreement in Principle, the Company has agreed to fund 50% of the cost, up to $350,000, to enroll the site in the Illinois Voluntary Site Remediation Program. These funds will be used to prepare environmental reports for approval by the Illinois Environmental Protection Agency. The parties' shared objective is to obtain a "no further remediation determination" from the Illinois EPA based on a commercial / industrial cleanup standard. If the cost to prepare these reports equals or exceeds $700,000, additional costs above $700,000 ($350,000 per party) will be borne 100% by the Water District. If a remediation plan is required based on the site assessment, the Company has also agreed to fund 50% of the cost to implement the remediation plan, up to a maximum of $1 million. If the cost to implement the plan is projected to exceed $2 million, then the Water District will have the option to terminate the agreement and resume the litigation. The Water District will have to choose whether to accept or reject the $1 million funding commitment from the Company before accepting any payments from the Company for implementation of the remediation plan. The Company does not believe that it can determine whether any cleanup is required or if any final cleanup cost is likely to exceed $2 million until additional data has been collected and analyzed in connection with the environmental reports. If the Water District elects to accept the maximum funding commitment, the Company has also agreed to remove certain piping and other equipment from one of the parcels. The cost to remove the piping is estimated to be between $35,000 and $60,000. Although the boards of both the Water District and the Company have approved the Agreement in Principle, the agreement of the parties must be embodied in a formal settlement agreement, which is currently in process. The Company has recorded a liability for $350,000 related to the Water District claim in recognition of its currently known and estimable funding commitment under the Agreement in Principle. In the event that the Water District rejects the funding commitment described above, the potential claim could exceed the amount of the previous default judgment. As neither a site evaluation nor a remediation plan has been developed, the Company is unable to make a reasonable estimate of the amount or range of further loss, if any, that could result. Such a liability, if any, could have a material adverse effect on the Company's financial condition, results of operations, or liquidity. 11 NAG was notified in 1997 by the Illinois Environmental Protection Agency ("IEPA") that it was one of approximately 60 potentially responsible parties ("PRPs") 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. A number of the PRPs 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 estimated timeframe for resolution of the IEPA contingency is unknown. 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 since 2001. The Company does not have any liability accrued relating to the IEPA matter. Until the work plan is approved and completed, the range of potential loss or remediation, if any, is unknown. In addition, the allocation of potential loss between the 60 potentially responsible parties is unknown and not reasonably estimable. Therefore, the Company has no basis for determining potential exposure and estimated remediation costs at this time. The lease term of a galvanizing facility located in Tulsa, Oklahoma, occupied by Reinforcing Services, Inc. ("RSI"), a subsidiary of North American Galvanizing Company, expired July 31, 2003 and was not renewed. RSI exercised an option to purchase the facility, and the landlord contested the Company's right to exercise the option. RSI filed a lawsuit against the landlord seeking enforcement of the right to exercise the option and requested a summary judgment in its favor. The court ruled in favor of RSI and as a result, RSI purchased the facility on June 29, 2007. 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 frequent changes in environmental technology, laws and regulations management cannot reasonably quantify the Company's potential future costs in this area. North American Galvanizing & Coatings, Inc. and its subsidiary are parties to a number of other lawsuits and environmental matters which are not discussed herein. Management of the Company, based upon their analysis of known facts and circumstances and reports from legal counsel, does not believe that any other such matter will have a material adverse effect on the results of operations, financial conditions or cash flows of the Company. NOTE 7. 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 a stock unit grant, payable to the Director five years following the year of deferral. For 2006 and 2007, all of the Company's Outside Directors elected to defer 100% of the annual board fee and the Company's chief executive officer and Inside Director has elected to defer a corresponding amount of his salary. Outside Directors currently receive an annual fee of $35,000, payable quarterly, which includes attendance at board meetings and service on committees of the board. 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 first day of the quarter. For the first nine months of 2006, the fees and salary deferred by the Directors represented a total of 188,382 stock unit grants valued at $1.87 per stock unit. In the first nine 12 months of 2007, fees and salary deferred by the Directors represented a total of 61,705 stock unit grants valued at $5.21 per stock unit. Both the 2006 and 2007 stock unit grants and average unit value of the grant were adjusted to reflect the Company's three-for-two stock split effected in the form of a stock dividend on June 8, 2007. NOTE 8. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS T. Stephen Gregory, a director of North American Galvanizing & Coatings, Inc. is the chairman of the board and a shareholder of Gregory Industries, Inc., a customer of the Company. Total sales to Gregory Industries, Inc. for the nine-month periods ended September 30, 2007 and 2006 were approximately $1.0 million and $1.4 million, respectively. The amount due from Gregory Industries, Inc. included in trade receivables at September 30, 2007 and December 31, 2006 was approximately $0.2 million and $0.3 million, respectively. 13 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 three-month period ended September 30, 2007, there were no significant changes to the Company's critical accounting policies previously disclosed in Form 10-K for the year ended December 31, 2006. The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", or FIN 48, on January 1, 2007. FIN 48 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a taxing authority. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2003. In the second quarter of 2006, the Internal Revenue Service (IRS) commenced an examination of the Company's Federal income tax return for 2004 and subsequently added years 2003 and 2005 to the examination. This examination was completed in the second quarter of 2007 resulting in a required tax payment of $266,000, primarily due to timing differences of deductions taken in prior year returns. Upon the adoption of FIN 48, the Company commenced a review of all open tax years in all jurisdictions. The Company does not believe it has included any "uncertain tax positions" in its Federal income tax return or any of the state income tax returns it is currently filing. The Company has made an evaluation of the potential impact of additional state taxes being assessed by jurisdictions in which the Company does not currently consider itself liable. The Company does not anticipate that such additional taxes, if any, would result in a material change to its financial position. In connection with the adoption of FIN 48, the Company will include future interest and penalties, if any, related to uncertain tax positions as a component of its provision for taxes. 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 mechanical and chemical engineers 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 2006, the Company galvanized in excess of 400,000,000 pounds of steel products for approximately 1,700 customers nationwide. All of the Company's sales are generated for 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 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. 14 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 industrial grating, o infrastructure including buildings, airports, bridges and power generation; o wastewater treatment, o 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, and 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 coating 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 standard industry technical 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 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 galvanizing plants is linked to a centralized 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. 15 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: return on capital employed, 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 each month, or more frequently, and compared to prior periods, the current business plan and to standard performance criteria, as applicable. 16 RESULTS OF OPERATIONS The following table shows the Company's results of operations for the three- and nine-month periods ended September 30, 2007 and 2006:
(Dollars in thousands) THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------- 2007 2006 ------------------------- ------------------------- % OF % OF AMOUNT SALES AMOUNT SALES ---------- ---------- ---------- ---------- Sales $ 21,541 100.0% $ 20,155 100.0% Cost of sales 14,486 67.5% 15,109 75.0% Selling, general and administrative expenses 2,212 10.2% 2,119 10.5% Depreciation and amortization 876 4.1% 842 4.2% ---------- ---------- ---------- ---------- Operating income 3,967 18.3% 2,085 10.3% Interest expense 275 1.3% 172 0.9% Interest Income 15 0.1% -- -- ---------- ---------- ---------- ---------- Income before income taxes 3,707 17.1% 1,913 9.5% Income tax expense 1,164 5.4% 809 4.0% ---------- ---------- ---------- ---------- Net income $ 2,543 11.7% $ 1,104 5.5% ========== ========== ========== ========== (Dollars in thousands) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------- 2007 2006 ------------------------- ------------------------- % OF % OF AMOUNT SALES AMOUNT SALES ---------- ---------- ---------- ---------- Sales $ 68,161 100.0% $ 53,793 100.0% Cost of sales 46,850 68.8% 38,811 72.1% Selling, general and administrative expenses 7,017 10.3% 6,206 11.5% Depreciation and amortization 2,612 3.8% 2,134 4.0% ---------- ---------- ---------- ---------- Operating income 11,682 17.1% 6,642 12.3% Interest expense 527 0.8% 651 1.2% Interest Income 69 0.1% -- -- ---------- ---------- ---------- ---------- Income before income taxes 11,224 16.4% 5,991 11.1% Income tax expense 4,129 6.1% 2,462 4.6% ---------- ---------- ---------- ---------- Net income $ 7,095 10.4% $ 3,529 6.6% ========== ========== ========== ==========
17 2007 COMPARED TO 2006 SALES. Sales for the three-months and nine-months ended September 30, 2007 increased 7% and 27%, respectively, over the prior year. The increase in third quarter and first nine months' revenues was due to a higher average sales price compared to the same periods in 2006. Sales prices have increased in response to increases in zinc costs. Volumes for the third quarter 2007 were 9% lower than the third quarter 2006. Volumes for the nine months ended September 30, 2007 were 4% lower than the same period in the prior year. Lower volumes are a result of the Company's focus to review and accept customer orders only at adequate margin levels and the scheduled shutdown of the Canton plant to replace the kettle and furnace during the month of July, 2007. COST OF GOODS SOLD. Total cost of goods sold for the three-months ended September 30, 2007 was lower than prior year cost of goods sold for the same period due to a decrease in volume of 9%. Variable costs per unit from year to year were comparable, except for direct labor and plant overhead. Increases in direct labor costs of $.3 million due to wage and incentive pay increases and increased overtime pay were offset by reductions in other plant overhead of $.3 million. For the first nine months of 2007, cost of goods sold increased $8.0 million over the same period in 2006. Of the $8.0 million increase, $6.8 million was due to an increase in zinc costs, $.9 million due to an increase in labor costs, and $.3 million due to increases in other plant overhead costs. Year-to-date September 2007 other overhead costs include a one-time charge of $.3 million related to Lake River environmental site assessment costs recorded in the first quarter of 2007. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A increased $.1 million, or 4.3%, in the third quarter of 2007 compared to the prior year, but decreased as a percentage of revenues from 10.5% in 2006 to 10.3% in 2007. In the first nine months of 2007, SG&A increased $.8 million, or 13.15%, compared to the same period in the prior year, but decreased as a percentage of revenues from 11.5% in 2006 to 10.3% in 2007. Increases in both periods were primarily due to increases in personnel costs, primarily non-cash share-based compensation, and legal, audit and tax expenses, including expenses related to compliance with Sarbanes-Oxley 404, offset by a reduction in the provision for doubtful accounts. In addition, a one-time charge to amortize the remaining deferred bond and loan origination costs related to the IRB Bond agreement, $.2 million, was recorded in the first quarter of 2007. DEPRECIATION EXPENSE. Depreciation expense for the first nine months of 2007 increased $.5 million, from the same period in 2006, primarily due to a change in depreciation method for two newer galvanizing facilities. The Company previously used the units of production method for machinery and equipment at these facilities. Effective July 1, 2006, the Company changed to the straight-line method. OPERATING INCOME. For the quarter ended September 30, 2007, operating income was $3.9 million compared to $2.1 million for the third quarter of 2006. The operating income for the nine-months ended September 30, 2007 was $11.7 million compared to $6.6 million for the same 2006 period. The increase in operating income is due to an increase in average selling prices. INCOME TAXES. The Company's effective income tax rates for the third quarter of 2007 and 2006 were 31.4% and 42.2%, respectively. For the nine months ended September 30, 2007 and 2006, the effective tax rates were 36.8% and 41.1%, respectively. The effective tax rates differ from the federal statutory rate primarily due to state income taxes, the section 199 domestic production deduction, and minor adjustments to previous tax estimates. NET INCOME. For the third quarter of 2007, the Company reported net income of $2.5 million compared to net income of $1.1 million for the third quarter of 2006. For the nine months ended September 30, 2007, the net income was $7.1 million compared to $3.5 million for the nine months ended September 30, 2006. The increase in net income is due to an increase in average selling prices. 18 LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow from operations and borrowings under credit facilities have consistently been adequate to fund its current working capital and base capital spending requirements. During 2007 and 2006, operating cash flow and borrowings under credit facilities have been the primary sources 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 nine months of 2007 and 2006 was $7.8 million and $5.0 million, respectively. The increase of $2.8 million in cash flow from operations in 2007 was due to increased net income. Cash of $3.4 million used in 2007 investing activities through September 30 consisted of capital expenditures for equipment, upgrade of existing galvanizing facilities, and purchase of the galvanizing facility in Tulsa, Oklahoma, previously leased by RSI, as described in Note 6. Investing activities in the first nine months of 2006 included $0.9 million in capital expenditures and $1.0 million for purchase of an investment. The Company expects base capital expenditures for 2007 to approximate $4.0 million. During the first nine months of 2007, total debt (current maturities and long-term obligations and bonds payable) decreased by $6.6 million to $2.7 million. Other financing activity during the first nine months of 2007 was proceeds from stock option exercises of $.2 million, tax benefits on stock option exercises of $.2 million, and purchase of common stock for the treasury of $.2 million. During the first nine months of 2006, total debt (current maturities and long-term obligations and bonds payable) decreased $5.1 million to $9.6 million. Other financing activities for first nine months of 2006 included proceeds from stock options exercises of $.8 million and tax benefit realized from stock option exercises of $.3 million. On May 17, 2007, the Company entered into a new credit agreement between the Company as borrower and Bank of America, N.A. as administrative agent, swing line lender and letter of credit issuer. The existing credit agreement, scheduled to expire on February 28, 2008, was cancelled, and the term loan of $3.5 million was prepaid without any penalty. The new credit agreement provides for a revolving credit facility in the aggregate principal amount of $25 million with future increases of up to an aggregate principal amount of $10 million at the discretion of the lender. The credit facility matures on May 16, 2012, with no principal payments required until maturity and no prepayment penalty. The purpose of the new facility is to refinance a former credit agreement, term debt, and bond debt, provide for issuance of standby letters of credit, acquisitions, and for other general corporate purposes. At September 30, 2007, the Company had unused borrowing capacity of $22.5 million, based on $2.3 million in borrowings outstanding under the revolving credit facility, and $.2 million of 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. The credit agreement provides for an applicable margin ranging from .75% to 2.00% over LIBOR and commitment fees ranging from .10% to ..25% depending on the Company's Funded Debt to EBITDA Ratio (as defined). The applicable margin was .75% at September 30, 2007. The variable interest rate including the applicable margin was 5.88% as of September 30, 2007. The credit agreement requires the Company to maintain compliance with covenant limits for leverage ratio, asset coverage ratio, and a basic fixed charge coverage ratio. At September 30, 2007, the Company was in compliance with the covenants. The actual financial ratios compared to the required ratios, were as follows: Leverage Ratio - actual .16 versus maximum allowed of 3.25; Asset Coverage Ratio - actual 15.54 vs. minimum required of 1.50; Basic Fixed Charge Coverage Ratio - actual 6.21 versus minimum required of 1.25. 19 The Internal Revenue Service has reviewed the Harris County Industrial Development Corporation Adjustable Rate Industrial Development Bonds and compliance with the Internal Revenue Code section (IRC) 144(a)(4)(ii)'s dollar limitation on capital expenditures within a relevant period. The IRS review concerned whether two operating leases commencing in January 2001 were conditional sales contracts, not true leases, according to Revenue Ruling 55-540. As a result of the review, in March, 2007, the Company entered into a settlement agreement (the "Closing Agreement") with the Harris County Industrial Development Corporation and the Commissioner of the Internal Revenue Service ("IRS"). Pursuant to the terms of the Closing Agreement, the Company agreed to make a payment to the IRS of $101,260 in settlement of the issues referenced above. As of December 31, 2006 the Company had recorded an estimated liability of $145,000 related to this matter. . Furthermore, the Company agreed to redeem all outstanding Bonds on or before July 2, 2007 and subsequently redeemed the bonds on July 2, 2007. The Company used proceeds from the new five-year credit facility to redeem the bonds, as specifically contemplated in the agreement. The Company's total off-balance sheet contractual obligations at September 30, 2007, consist of approximately $1.1 million for long-term operating leases for vehicles, office space, office equipment, galvanizing facilities and galvanizing equipment and approximately $2.4 million for zinc purchase commitments. The various leases for galvanizing facilities, including option renewals, expire from 2007 to 2017. 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 can be for up to one year. 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 nine months of 2007 and 2006 was approximately $1.5 million and $.9 million, respectively, for the disposal and recycling of wastes generated by the galvanizing operations. Year-to-date September 2007 costs include a one-time charge of $.3 million related to Lake River environmental site assessment costs recorded in the first quarter of 2007. 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 $1,810,463.34 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 September 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 denied 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, the 20 Company filed a partial motion to dismiss the Third Amended Complaint. 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 filed an appeal with the Seventh Circuit Court of Appeals requesting dismissal of the sole CERCLA claim contained in the Third Amended Complaint that was not dismissed by the United States District Court's April 12, 2005 order. On January 17, 2007, the Seventh Circuit affirmed the judgment of the United States District Court, stating that the Water District has a right of action under CERCLA. The Company is evaluating the judgment and expects to file a motion for reconsideration with the Seventh Circuit. Meanwhile, litigation and discovery in the trial court have been stayed pending mediation. As a result of the mediation, on April 11, 2007, the Company entered into an Agreement in Principle establishing terms for a conditional settlement. Under the terms of the Agreement in Principle, the Company has agreed to fund 50% of the cost, up to $350,000, to enroll the site in the Illinois Voluntary Site Remediation Program. These funds will be used to prepare environmental reports for approval by the Illinois Environmental Protection Agency. The parties' shared objective is to obtain a "no further remediation determination" from the Illinois EPA based on a commercial / industrial cleanup standard. If the cost to prepare these reports equals or exceeds $700,000, additional costs above $700,000 ($350,000 per party) will be borne 100% by the Water District. If a remediation plan is required based on the site assessment, the Company has also agreed to fund 50% of the cost to implement the remediation plan, up to a maximum of $1 million. If the cost to implement the plan is projected to exceed $2 million, then the Water District will have the option to terminate the agreement and resume the litigation. The Water District will have to choose whether to accept or reject the $1 million funding commitment from the Company before accepting any payments from the Company for implementation of the remediation plan. The Company does not believe that it can determine whether any cleanup is required or if any final cleanup cost is likely to exceed $2 million until additional data has been collected and analyzed in connection with the environmental reports. If the Water District elects to accept the maximum funding commitment, the Company has also agreed to remove certain piping and other equipment from one of the parcels. The cost to remove the piping is estimated to be between $35,000 and $60,000. Although the boards of both the Water District and the Company have approved the Agreement in Principle, the agreement of the parties must be embodied in a formal settlement agreement, which is currently in process. The Company has recorded a liability for $350,000 related to the Water District claim in recognition of its currently known and estimable funding commitment under the Agreement in Principle. In the event that the Water District rejects the funding commitment described above, the potential claim could exceed the amount of the previous default judgment. As neither a site evaluation nor a remediation plan has been developed, the Company is unable to make a reasonable estimate of the amount or range of further loss, if any, that could result. Such a liability, if any, could have a material adverse effect on the Company's financial condition, results of operations, or liquidity. NAG was notified in 1997 by the Illinois Environmental Protection Agency ("IEPA") that it was one of approximately 60 potentially responsible parties ("PRPs") 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. A number of the PRPs 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 estimated timeframe for resolution of the IEPA contingency is unknown. 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 since 2001. The Company 21 does not have any liability accrued relating to the IEPA matter. Until the work plan is approved and completed, the range of potential loss or remediation, if any, is unknown. In addition, the allocation of potential loss between the 60 potentially responsible parties is unknown and not reasonably estimable. 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 frequent changes in environmental technology, laws and regulations management cannot reasonably quantify the Company's potential future costs in this area. North American Galvanizing & Coatings, Inc. and its subsidiary are parties to a number of other lawsuits and environmental matters which are not discussed herein. Management of the Company, based upon their analysis of known facts and circumstances and reports from legal counsel, does not believe that any such matter will have a material adverse effect on the results of operations, financial conditions or cash flows of the Company. 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 September 30, 2007, the Company's outstanding debt of $2.6 million consisted primarily of variable rate debt aggregating $2.3 million under the bank credit agreement, with an effective rate of 5.8%. The borrowings under all of the Company's debt obligations at September 30, 2007 are due as follows: $.1 million in years 2008 through 2011 and $2.3 million in 2012. 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 $2,300 based on September 30, 2007 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 September 30, 2007, the aggregate fixed price commitments for the procurement of zinc were approximately $2.4 million (Note 6). With respect to these zinc fixed price purchase commitments, a hypothetical decrease of 10% in the market price of zinc from the September 30, 2007 level represented a potential lost gross margin opportunity of approximately $240,000. 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 are considered derivatives, but the Company has elected to account for these purchase commitments as normal purchases. 22 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. The Company's certifying officers have indicated that there were no significant changes in internal controls over financial reporting that have occurred during the fiscal quarter ended September 30, 2007 that materially affected, or were reasonably likely to materially affect, internal controls over financial reporting. 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 $1,810,463.34 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 September 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 denied 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, the Company filed a partial motion to dismiss the Third Amended Complaint. 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 filed an appeal with the Seventh Circuit Court of Appeals requesting dismissal of the sole CERCLA claim contained in the Third Amended Complaint that was not dismissed by the United States District Court's April 12, 2005 order. On January 17, 2007, the Seventh Circuit affirmed the judgment of the United States District Court, stating that the Water District has a right of action under CERCLA. The Company is evaluating the judgment and expects to file a motion for reconsideration with the Seventh Circuit. Meanwhile, litigation and discovery in the trial court have been stayed pending mediation. As a result of the mediation, on April 11, 2007, the Company entered into an Agreement in Principle establishing terms for a conditional settlement. Under the terms of the Agreement in Principle, the Company has agreed to fund 50% of the cost, up to $350,000, to enroll the site in the Illinois Voluntary Site Remediation Program. These funds 23 will be used to prepare environmental reports for approval by the Illinois Environmental Protection Agency. The parties' shared objective is to obtain a "no further remediation determination" from the Illinois EPA based on a commercial / industrial cleanup standard. If the cost to prepare these reports equals or exceeds $700,000, additional costs above $700,000 ($350,000 per party) will be borne 100% by the Water District. If a remediation plan is required based on the site assessment, the Company has also agreed to fund 50% of the cost to implement the remediation plan, up to a maximum of $1 million. If the cost to implement the plan is projected to exceed $2 million, then the Water District will have the option to terminate the agreement and resume the litigation. The Water District will have to choose whether to accept or reject the $1 million funding commitment from the Company before accepting any payments from the Company for implementation of the remediation plan. The Company does not believe that it can determine whether any cleanup is required or if any final cleanup cost is likely to exceed $2 million until additional data has been collected and analyzed in connection with the environmental reports. If the Water District elects to accept the maximum funding commitment, the Company has also agreed to remove certain piping and other equipment from one of the parcels. The cost to remove the piping is estimated to be between $35,000 and $60,000. Although the boards of both the Water District and the Company have approved the Agreement in Principle, the agreement of the parties must be embodied in a formal settlement agreement, which is currently in process. The Company has recorded a liability for $350,000 related to the Water District claim in recognition of its currently known and estimable funding commitment under the Agreement in Principle. In the event that the Water District rejects the funding commitment described above, the potential claim could exceed the amount of the previous default judgment. As neither a site evaluation nor a remediation plan has been developed, the Company is unable to make a reasonable estimate of the amount or range of further loss, if any, that could result. Such a liability, if any, could have a material adverse effect on the Company's financial condition, results of operations, or liquidity. The lease term of a galvanizing facility located in Tulsa, Oklahoma, occupied by Reinforcing Services, Inc. ("RSI"), a subsidiary of North American Galvanizing Company, expired July 31, 2003 and was not renewed. RSI exercised an option to purchase the facility, and the landlord contested the Company's right to exercise the option. RSI filed a lawsuit against the landlord seeking enforcement of the right to exercise the option and requested a summary judgment in its favor. The court ruled in favor of RSI and as a result, RSI purchased the facility on June 29, 2007. ITEM 1A. RISK FACTORS. There are no material changes from risk factors as previously disclosed in the Company's Annual Report on Form 10-K filed on February 14, 2007. ITEM 2. UNREGISTERED SALES OF EQUITY 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. 24 ISSUER PURCHASES OF EQUITY SECURITIES
Total Approximate Number of Dollar Value Shares of Shares Total Purchased that May Yet Number of Average as Part of be Purchased Period Shares Price Paid Publicly Under (from/to) Purchased per Share Announced Plan the Plan ---------- ---------- ---------- ---------- May 1, 2007 - May 31, 2007 50 $ 16.28 133,046 $ 761,027 August 1, 2007 - August 31, 2007 28,500 5.33 161,546 609,122 ---------- ---------- ---------- ---------- Total 28,550 $ 5.45 161,546 $ 609,122 ========== ========== ========== ==========
In August 1998, the Board of Directors authorized $1,000,000 for a share repurchase program for shares to be purchased in private or open market transactions. Unless terminated earlier by resolution of the Board of Directors, the program will expire when the Company has purchased shares with an aggregate purchase price of no more than $1,000,000. ITEM 6. EXHIBITS NO. DESCRIPTION 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) filed on September 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 September 30, 1996). 15 Awareness Letter of Deloitte & Touche LLP. 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities and 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) BY: /S/ BETH B. HOOD -------------------------------------- Vice President and Chief Financial Officer (Principal Financial Officer) Date: October 29, 2007 25 EX-15 2 exh-15_15507.txt AWARENESS LETTER FROM DELOITTE & TOUCHE EXHIBIT 15 ---------- AWARENESS LETTER OF DELOITTE & TOUCHE LLP October 29, 2007 North American Galvanizing & Coatings, Inc. 5314 South Yale Avenue Suite 1000 Tulsa, Oklahoma 74135 We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of North American Galvanizing & Coatings, Inc. and subsidiary for the three- and nine- month periods ended September 30, 2007 and 2006, as indicated in our report dated October 29, 2007; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, is incorporated by reference in Registration Statements No. 333-133848 on Form S-8 and No. 333-61393 on Form S-3 of North American Galvanizing & Coatings, Inc. (formerly Kinark Corporation). We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ Deloitte & Touche LLP Tulsa, Oklahoma EX-31.1 3 exh31-1_15507.txt SECTION 302 CERTIFICATION OF C.E.O. EXHIBIT 31.1 ------------ CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ronald J. Evans, President and Chief Executive Officer of North American Galvanizing & Coatings, Inc., 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 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 report; 4. The registrant's other certifying officer(s) 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(s) 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: October 29, 2007 /s/ Ronald J. Evans ----------------------------------------- EX-31.2 4 exh31-2_15507.txt SECTION 302 CERTIFICATION OF C.F.O. EXHIBIT 31.2 ------------ CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Beth B. Hood, Vice President and Chief Financial Officer of North American Galvanizing & Coatings, Inc., 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 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 report; 4. The registrant's other certifying officer(s) 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(s) 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: October 29, 2007 /s/ Beth B. Hood ----------------------------------------- EX-32 5 exh32_15507.txt SECTION 906 CERTIFICATION OF C.E.O. & C.F.O. EXHIBIT 32 ---------- CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of North American Galvanizing & Coatings, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2007 as filed with the Securities and Exchange Commission (the "Report"), each of the undersigned hereby certifies in his or her capacity as an office of the Company, pursuant to 18 U.S.C. ss. 1350, as adopted by ss. 906 of the Sarbanes-Oxley Act of 2002, that to his or her knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) 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 the results of operations of the Company. NORTH AMERICAN GALVANIZING & COATINGS, INC. (Registrant) /s/ Ronald J. Evans ----------------------------------------- President and Chief Executive Officer (Principal Executive Officer) /s/ Beth B. Hood ----------------------------------------- Vice President and Chief Financial Officer (Principal Financial Officer) Date: October 29, 2007 -----END PRIVACY-ENHANCED MESSAGE-----