UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2005For the fiscal year ended December 31, 2006 | | Commission File Number: 1-5415 |
Commission File Number: 1-5415
A. M. CASTLE & CO.
(Exact name of registrant as specified in its charter)
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| Maryland | | 36-0879160 |
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(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 3400 North Wolf Road, Franklin Park, Illinois | | 60131 |
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| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code(847) 455-7111
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
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Common Stock — $0.01 par value
| | American and Chicago Stock Exchanges |
Series A Cumulative Convertible Preferred Stock —– 0.01 par value | | American and Chicago Stock Exchanges
Not Registered |
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yeso
Noþ
IndicatedIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þo
Indicate by check mark whether the registrant is a large accelerated filer; an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated Filero Accelerated Filerþ Non-Accelerated Filero
IndicatedIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yeso Noþ
State theThe aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $134,858,000.quarter is $262,197,563.
The number of shares outstanding of the registrant’s common stock on March 24, 200614, 2007 was 16,657,02517,047,591 shares.
DOCUMENTS INCORPORATED BY REFERENCE
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| Documents Incorporated by Reference | | Applicable Part of Form 10-K |
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Proxy Statement furnished to Stockholders in connection
with registrant’s Annual Meeting of Stockholders | | Part III |
TABLE OF CONTENTS
PART I
ITEM 1—1 —Business
In this annual report on Form 10-K, “the Company,” “we” or “our” refer to A. M. Castle & Co., a Maryland corporation, and its subsidiaries included in the consolidated financial statements, except as otherwise indicated or as the context otherwise requires.
Business and Markets
A. M. Castle & Co. (“The Company”)Company is a specialty metals and plastics distribution company serving principally the North American market.market, but with a significantly growing global presence. The Company provides a broad range of product inventories as well as value-added processing and supply chain services to a wide array of customers, principally within the producer durable equipment sector of the economy. Particular focus is placed on the aerospace and defense, oil and gas, mining and heavy earth moving equipment segments as well as general engineering applications.
On September 5, 2006, the Company acquired Transtar Intermediate Holdings #2, Inc. (“Transtar”), a wholly owned subsidiary of H.I.G. Transtar Inc.. Transtar is a leading supplier of high performance aluminum alloys to the aerospace and defense industries, supporting the on-going requirements of those markets with a broad range of inventory, processing and supply chain services. As a result of the acquisition, the Company has increased its access to aerospace customers and avenues to cross-sell its other products into this growth market. The acquisition also provides the Company the benefits of deeper access to certain inventories and purchasing synergies, as well as providing the Company an existing platform to sell to markets in Europe and other international markets. The assets of Transtar are included in the Company’s Metals segment because Transtar has similar economic and other characteristics of the Metals segment.
As part of the Company’s restructuring over the past five years, during 2004-2005, the Company purchased its joint venture partners’ interests in Castle de Mexico, S.A. de C.V., and two small Plastics segment subsidiaries.
The Company purchases metals and plastics from many producers. Satisfactory alternative sources are available for all inventory purchased by the Company and itsthe business of the Company would not be materially adversely affected in a material way by the loss of any one supplier.
Purchases are made in large lots and held in the distribution centers until sold, usually in smaller quantities and many timesoften with some value-added processing services performed. The Company’s ability to provide quick delivery, frequently overnight, of a wide variety of specialty metals and plastic products, andalong with its processing capabilities, allow customers to reducelower their own inventory investment by reducing their need to order the large quantities required by producing mills or performperforming additional material processing services. In connection with certain customer programs, principally in the aerospace and defense market, the Company’s business is covered by long-term contracts and commitments.
Approximately 89%90% of 2005’s2006’s consolidated net sales included materials shipped from Company stock. The materials required to fill the balance of sales were obtained from other sources, such as direct mill shipments to customers or purchases from other distributors. Thousands of customers from a wide array of industries are serviced primarily through the Company’s own sales organization. Deliveries are made principally by leased trucks. Common carrier delivery is used in areas not serviced directly by the Company’s fleet.
The Company encounters strong competition both from other metals and plastics distributors and from large distribution organizations, some of which have substantially greater resources. Metals service centers act as supply chain intermediaries between primary metals producers, which necessarily deal in bulk quantities of metals in order to achieve economies of scale, and end-users in a variety of industries that require specialized metal products in significantly smaller quantities. Service centers manage the differences in lead times that exist in the supply chain. While OEMs and other customers often demand delivery within hours, the lead time required by primary metal producers can be as long as several months. Metals service centers also add value to their customers by aggregating purchasing, warehousing and distribution services across a number of end users and by processing metals to meet specific customer needs often with little or no further modification. Metals service centers accounted for approximately one quarter of U.S. steel shipments in 2005 based on volume and generated more than $115 billion in net sales in 2005 according to purchasing.com.
In order to capture scale efficiencies and remain competitive, many primary metal producers are consolidating their operations and focusing on their core production activities. These producers have increasingly outsourced metals distribution and inventory management to metals service centers. This process of outsourcing allows them to work with a relatively small number of intermediaries rather than many end customers. As a result, metals service centers are now providing a range of services for their customers, including metal purchasing, processing and supply chain management services. As of May 2005, over 300,000 North American OEMs, contractors and fabricators purchase some or all of their metal requirements from metals service centers.
These end users of metal products benefit from the inventory management and just-in-time delivery capabilities of metals service centers, which enable them to reduce inventory and labor costs and to decrease capital requirements. These services, which help end users optimize production, are not generally provided by the primary producers.
At December 31, 2005,2006, the Company had 1,6042,016 full-time employees in its operations throughout the United States, Canada, Mexico, France and Mexico.the United Kingdom. Of these, 286284 are represented by collective bargaining units, principally the United Steelworkers of America.
Business Segments
The Company distributes and performs processing on both metals and plastics. Although the distribution processes are similar, different customer markets, supplier bases and types of products exist. Additionally, our Chief Executive Officer reviews and manages these two businesses separately. As such, these businesses are considered reportable segments according to Statement onthe Financial Accounting Standards (SFAS)Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 131 “Disclosures about Segments of an Enterprise and Related Information” and are reported accordingly in the Company’s various public filings. None of the Company’s reportable segments has any special working capital requirements.
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In 2005,2006, the Metals segment accounted for roughly 89%approximately 90% of the company’sCompany’s revenues, and its Plastics segment the remaining 11%10%. The Company’s customer base is well diversified with no single customer accounting for more than 3% of total 2006 net sales. In the last three years, the percentages of total sales of the two segments were approximately as follows:
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| | | 2005 | | 2004 | | 2003 | | 2006 | | 2005 | | 2004 | |
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| Metals | | | 89 | % | | | 88 | % | | | 88 | % | | | 90 | % | | | 89 | % | | | 88 | % |
| Plastics | | | 11 | % | | | 12 | % | | | 12 | % | | | 10 | % | | | 11 | % | | | 12 | % |
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| | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Metals Segment
In its metals business, Castle’sthe Company’s market strategy focuses on highly engineered specialty grades and alloys of metals as well as specialized processing services geared to meet very tight specifications. Core products include carbon, alloynickel alloys, aluminum, stainless steels and stainless steels; nickel alloys; and aluminum.carbon. Inventories of these products assume many forms such as plate, sheet, extrusions round bar, hexagon, square and flat bars; plates; tubing; and sheetbars, tubing and coil. Depending on the size of the facility and the nature of the markets it serves, servicedistribution centers are equipped as needed with bar saws, plate saws, oxygen and plasma arc flame cutting machinery, water-jet cutting equipment, stress relieving and annealing furnaces, surface grinding equipment, cut-to-length levelers and sheet shearing equipment. This segment also performs various specialized fabrications for its customers through a network of pre-qualified subcontractors.subcontractors, and the Company’s H-A Industries division, which thermally processes, turns, polishes and straightens alloy and carbon bar.
The Company has its flagshipprimary metals distribution center and corporate headquarters in Franklin Park, Illinois. This center serves metropolitan Chicago and a nine-state area. In addition, there are 45 distribution centers in various other cities in North America and Europe (see Item 2). The Company recently
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announced its plans to open a new metals distribution facility in Alabama during the first half of 2006 as it continues to broaden its geographic market reach into the southeastern region of the U.S. The Franklin Park, Los Angeles and Cleveland distribution centers are the largest facilities and, together, account for approximately 36% of all metals sales.
Our customer base includes many Fortune 500 companies as well as thousands of medium and smaller sized firms. The customer base is well diversified across a wide range of industries with no single customer accounting for more than 3% of the Company’s consolidated net sales. A coast-to-coast network of metals service centers within North America provides next-day delivery to most of the segments’ markets, and two-day delivery to virtually all of the rest. Listed below are the other operating subsidiaries and divisions included in the Company’s Metals segment, along with a brief summary of their business activities.
Oliver Steel Plate Company processes and distributes thick carbon steel plate from its Cleveland area plant.
H-A Industries, located just across the Indiana state line near Chicago, thermally processes, turns, polishes and straightens alloy and carbon bar.
On January 1, 2004 the Company purchased the remaining 50% interest in Castle de Mexico, S.A. de C.V. from its joint venture partner. Castle de Mexico, S.A. de C.V. services a wide range of businesses within the producer durable goods sector located in Mexico. As a wholly owned entity, the operations and reported results of Castle de Mexico, S.A. de C.V. have been included in the Company’s Metals segment reporting since the purchase date.
In 1998, the Company formed Metal Express, a small order metals distribution company in which it had a 60% interest. On May 1, 2002 the Company purchased the remaining interest in Metal Express from its joint venture partner.
Plastics Segment
The Company’s Plastics segment consists exclusively of Total Plastics, Inc. (TPI)(“TPI”), headquartered in Kalamazoo, Michigan. This segment stocks and distributes a wide variety of plastics in forms that include plate, rod, tube, clear sheet, tape, gaskets and fittings. Processing activities within this segment include cut to length, cut to shape, bending and forming according to customer specifications.
The Plastics segmentsegment’s diverse customer base consists of companies in the retail (point-of-purchase), marine, office furniture and fixtures, transportation and general manufacturing industries. No single customer accounts for more than 3% of this segment’s consolidated net sales.
Up until 2004, TPI included two majority-owned joint ventures, Advanced Fabricating Technology (“Aftech”) and Paramont Machine Company. Paramont became a wholly-owned subsidiary of TPI in March 2004 through the purchase of the remaining joint venture partner’s interest. On September 30, 2005, TPI purchased the joint venture partner’s remaining interest in Aftech. TPI has locations throughout the upper Northeast and Midwest portions of the U.S. and one facility in Florida (see Item 2) from which it services a wide variety of users of industrial plastics.
Joint Venture
Since March 31, 2001, theThe Company has heldholds a 50% joint venture interest in Kreher Steel Co., a Midwest metals distributor, focusing on customers whose primary need is for immediate, reliable delivery of large quantities of alloy, special bar quality (SBQ) and stainless bars. EquityThe Company’s equity in the earnings from this joint venture is reported separately in the Company’s consolidated statement of operations.
Access to SEC Filings
The Company makes available free of charge on or through its Web site at www.amcastle.com the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.Commission (the “SEC”).
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ITEM 1A —Risk Factors
Our business, operations and financial conditionscondition are subject to various risks and uncertainties. Current or potential investors should carefully consider the risks and uncertainties described below, together with all other information in this annual report on Form 10-K and other documents filed with the SEC, before making any investment decisions with respect to the Company’s securities.
Cyclical MarketsOur future operating results depend on a number of factors beyond our control, such as the prices for metals, which could cause our results to be adversely affected.
The prices we pay for raw materials, both metals and plastics, and the prices we charge for products may fluctuate depending on many factors not in our control, including general economic conditions (both domestic and international), competition, production levels, import duties and other trade restrictions and currency fluctuations. To the extent metals prices decline, we would generally expect lower sales and possibly lower net income, depending on the timing of the price changes. To the extent we are not able to pass on to our customers any increases in our raw materials prices, our results of operations may be adversely affected. In addition, because we maintain substantial inventories of metals in order to meet the just-in-time delivery requirements of our customers, a reduction in our selling prices could result in lower profit margins or, in some cases, losses, either of which would reduce our profitability.
The CompanyWe service industries that are highly cyclical, and any downturn in our customers’ industries could reduce our revenue and profitability.
Many of our products are sold to customers in industries that experience significant fluctuations in demand based on economic conditions, energy prices, consumer demand and other factors beyond our control. As a result of this volatility in the industries we serve, when one or more of our customers’ industries experiences a decline, we may have difficulty increasing or maintaining our level of sales or profitability if we are not able to divert sales of our products to customers in other industries. We have made a strategic decision to focus sales resources on certain industry segments, specifically the aerospace and defense segments. As a result, there is subjectsome risk that adverse business conditions in these segments could be detrimental to cyclicalour sales. We are also particularly sensitive to market demand trends. Significant changes withintrends in the manufacturing sector of the North American economyeconomy.
We may not be able to realize the benefits we anticipate from the Transtar acquisition.
We may not be able to realize the benefits we anticipate from the Transtar acquisition. Achieving those benefits depends on the timely, efficient and successful execution of a number of post-acquisition events, including our integration of Transtar. Factors that could affect our ability to achieve these benefits include:
| • | | difficulties in integrating and managing personnel, financial reporting and other systems used by Transtar; |
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| • | | the failure of Transtar to perform in accordance with our expectations; |
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| • | | any future goodwill impairment charges that we may incur with respect to the assets of Transtar; |
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| • | | failure to achieve anticipated synergies between our business units and the business units of Transtar; and |
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| • | | the loss of Transtar’s customers. |
If Transtar’s business does not operate as we anticipate, it could materially harm our business, financial condition and results of operations. In addition, as a result of the Transtar acquisition, we assumed all of Transtar’s liabilities. We may learn additional information about Transtar’s business that adversely affects us, such as unknown or contingent liabilities, issues relating to internal controls over financial reporting and issues relating to compliance with the Sarbanes-Oxley Act or other applicable laws. As a result, there can be no assurance that the Transtar acquisition will be successful or will not, in fact, harm our business. Among other things, if Transtar’s liabilities are greater than projected, or if there are obligations of Transtar of which we were not aware at the time of completion of the acquisition, our business could be materially adversely affected.
A substantial portion of our sales are concentrated in the aerospace and defense industries and thus our financial performance is highly dependent on the conditions of those industries.
A substantial portion of our sales are concentrated to customers in the aerospace and defense industries. The aerospace and defense industries tend to be highly cyclical, and capital spending by airlines, aircraft manufacturers, governmental agencies and defense contractors may be influenced by a variety of factors including current and predicted traffic levels, aircraft fuel pricing, labor issues, competition,
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the retirement of older aircraft, regulatory changes, the issuance of contracts, terrorism and related safety concerns, general economic conditions, worldwide airline profits and backlog levels. Additionally, a significant amount of work that we perform under contract in these industries tends to be for a few large customers. A reduction in capital spending in the aerospace, aviation or defense industries could have a material impactsignificant effect on the Company’s sales and profitability.
Material Price Volatility
The prices the Company paysdemand for its materials, both metals and plastics, may fluctuate due to market factors beyond its control. Theour products, which could have an adverse effect on our financial performance or results of the Companyoperations.
Our substantial indebtedness could be materially impacted by future material cost fluctuations particularly if, due to market factors, it is unable to pass-through these increases to its customers.
Material Availability
The Company’srestrict our operating flexibility, adversely affect our financial position, decrease our liquidity and impair our ability to secure a sufficient quantityoperate our business.
As of materialDecember 31, 2006, we had $226.1 million in total indebtedness. We incurred approximately $147.0 million in bank borrowings in connection with our acquisition of Transtar. Our high level of debt could adversely affect our operating flexibility and adversely affect our financial position in several significant ways, including the following:
| • | | a substantial portion of our cash flows from operations will be dedicated to paying interest and principal on our debt and, therefore, will not be available for other purposes; |
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| • | | our ability to borrow additional funds or capitalize on significant business opportunities may be limited; and |
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| • | | a portion of our debt will be subject to fluctuating interest rates, which could adversely affect our profits if interest rates increase. |
We are vulnerable to interest rate fluctuations on our indebtedness, which could hurt our operating results.
We are exposed to various interest rate risks that arise in the normal course of business. We finance our operations with fixed and variable rate borrowings. Market risk arises from changes in variable interest rates. Under our revolving credit facility, our interest rate on borrowings is subject to changes based on fluctuations in the LIBOR and prime rates of interest.
Disruptions in the supply of raw materials could adversely affect our ability to meet our customer demands and our revenues and profitability.
We have few long-term contracts to purchase metals. Accordingly, if for any reason our primary suppliers of metals should curtail or discontinue their delivery of raw materials to us at competitive prices and in a timely manner, and at a competitive price is critical to meeting its customer’s needs.our business could suffer. Unforeseen disruptions in itsour supply basebases could materially impact operating resultsour ability to deliver products to customers. The number of available suppliers could be reduced by factors such as industry consolidation and bankruptcies affecting steel and metal producers. If we are unable to obtain sufficient amounts of raw materials from our traditional suppliers, we may not be able to obtain such raw materials from alternative sources at competitive prices to meet our delivery schedules, which could have an adverse impact on our revenues and profitability.
Our industry is highly competitive, which may force us to lower our prices and may have an adverse effect on net income.
The principal markets that we serve are highly competitive. Competition is based principally on price, service, quality, production capabilities, inventory availability and timely delivery. We compete in a highly fragmented industry. Competition in the future.various markets in which we participate comes from a large number of value-added metals processors and service centers on a regional and local basis, some of which have greater financial resources than we do and some of which have more established brand names in the local markets we serve. We also compete to a lesser extent with primary metals producers who typically sell to very large customers requiring shipments of large volumes of metal. Increased competition could force us to lower our prices or to offer increased services at a higher cost to us, which could reduce our operating profit and net income.
International Operations
The Company serves and operates in certain international markets thatOur business could expose itbe adversely affected by a disruption to political, economic or currency related risks. As the Company operates internationally, primarily in Canada and Mexico, management believes these risks to be relatively minor.
Primary Distribution Hubour primary distribution hub.
The Company’s
Our largest facility, in Franklin Park, Illinois, serves as a primary distribution center that ships product to our other facilities as well as external customers. This same facility also serves as the Company’sour headquarters and houses itsour primary information systems. TheOur business could be adversely impacted by a major disruption withinat this operationfacility in the event of:
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| §• | | Damagedamage to or inoperability of itsour warehouse or related systemssystems; |
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| §• | | Aa prolonged power or telecommunication failurefailure; |
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| §• | | Aa natural disaster such as fire, tornado or floodflood; |
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| §• | | Ana work stoppage; or |
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| • | | an airplane crash or act of war or terrorism on-site or nearby as the facility is located within seven miles of O’Hare International airportAirport (a major U.S. airport) and lies below certain take-off and landing flight patterns. |
The Company has appropriateWe have data storage and retrieval procedures that include off-site system capabilities. However, a prolonged disruption of the services and capabilities of theour Franklin Park facility and operation could adversely impact our financial performance. Additionally, we are in the Company’sprocess of implementing new information technology systems and any disruption relating to our current or new information technology systems may have an adverse affect on our financial performance.
General Business RisksWe operate in international markets, which expose us to a number of risks.
Other typical business
We serve and operate in certain international markets, which expose us to political, economic and currency related risks. We operate in Canada, Mexico, France, and the United Kingdom. An act of war or terrorism could disrupt international shipping schedules, cause additional delays in importing our products into the United States or increase the costs required to do so. Fluctuations in the value of the U.S. dollar versus foreign currencies could reduce the value of these assets as reported in our financial statements, which could reduce our stockholders’ equity. If we do not adequately anticipate and respond to these risks include legal and regulatory climate, labor retention and relations, and cost management. Management regularly assesses these andthe other risks relative to the business and adjusts internal practices and policies to help mitigate their impact on the Company’s performance. The Company also maintains insurance coverage to reasonably protect the Company from catastrophic losses.
The Company competesinherent in an industry that contains many competitors, some of which are larger with greater financial resources available to them.
Though reasonable measures and protective practices are in place, there can be no assurance that the significant occurrence of one or multiple risks, identified or unknown, will notinternational operations, it could have a material adverse effect on our operating results.
Some of our workforce is represented by labor unions, which may lead to work stoppages.
Approximately 284 of our employees are unionized, which represented approximately 14.1% of our employees at December 31, 2006, including our primary distribution center in Franklin Park. We cannot predict how stable our relationships with these labor organizations will be or whether we will be able to meet union requirements without impacting our financial condition. The unions may also limit our flexibility in dealing with our workforce. Work stoppages and instability in our union relationships could negatively impact the Company’stimely processing and shipment of our products, which could strain relationships with customers and cause a loss of revenues that would adversely affect our results of operations.
We could incur substantial costs in order to comply with, or to address any violations under, environmental and employee health and safety laws, which could significantly increase our operating expenses and reduce our operating income.
Our operations are subject to various environmental statutes and regulations, including laws and regulations governing materials we use. In addition, certain of our operations are subject to international, federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Our operations are also subject to various employee safety and health laws and regulations, including those concerning occupational injury and illness, employee exposure to hazardous materials and employee complaints. Certain of our facilities are located in industrial areas, have a history of heavy industrial use and have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Currently unknown cleanup obligations at these facilities, or enterpriseat off-site locations at which materials from our operations were disposed of, could result in future expenditures that cannot be currently quantified but which could have a material adverse effect on our financial position, results of operations or cash flows.
Antidumping and other duties could be imposed on us, our suppliers and our products.
The imposition of an antidumping or other increased duty on any products that we import could have a material adverse effect on our financial condition. For example, under United States law, an antidumping duty may be imposed on any imports if two conditions are met. First, the Department of Commerce must decide that the imports are being sold in the United States at less than fair value. Second, the International
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Trade Commission, the “ITC”, must determine that a United States industry is materially injured or threatened with material injury by reason of the imports. The ITC’s determination of injury involves a two-pronged inquiry: first, whether the industry is materially injured and second, whether the dumping, and not other factors, caused the injury. The ITC is required to analyze the volume of imports, the effect of imports on United States prices for like merchandise, and the effects the imports have on United States producers of like products, taking into account many factors, including lost sales, market share, profits, productivity, return on investment and utilization of production capacity.
Increases in energy prices would increase our operating costs and we may be unable to pass these increases on to our customers in the form of higher prices, which may reduce our profitability.
We use energy to process and transport our products. Our operating costs increase if energy costs, including electricity, gasoline and natural gas, rise. During periods of higher energy costs, we may not be able to recover our operating cost increases through price increases without reducing demand for our products. In addition, we generally do not hedge our exposure to higher prices via energy futures contracts. Increases in energy prices will increase our operating costs and may reduce our profitability if we are unable to pass the increases on to our customers.
We may not be able to retain or expand our customer base if the United States manufacturing industry continues to erode.
Our customer base primarily includes manufacturing and industrial firms in the United States, some of which are, or have considered, relocating production operations outside the United States or outsourcing particular functions to locations outside the United States. Some customers have closed as they were unable to compete successfully with foreign competitors. Our facilities are located in the United States and to the extent our customers close or relocate operations to locations where we do not have a presence, we could lose all or a portion of their business.
Any prolonged disruption of Company processing centers could harm its business.
We have dedicated processing centers that permit us to produce standardized products in large volumes while maintaining low operating costs. Any prolonged disruption in the operations of any of these facilities, whether due to labor or technical difficulties, destruction or damage to any of the facilities or otherwise, could materially adversely affect our business and results of operations.
Our operating results are subject to the seasonal nature of our customers’ businesses.
A portion of our customers experience seasonal slowdowns. Our revenues in the months of July, November and December traditionally have been lower than in other months because of a reduced number of shipping days and holiday or vacation closures for some customers. Consequently, our sales in the first two quarters of the year are usually higher than in the third and fourth quarters. As a result, analysts and investors may inaccurately estimate the effects of seasonality on our results of operations in one or more future quarters and, consequently, our operating results may fall below expectations.
We may face product liability claims that are costly and create adverse publicity.
If any of the products we sell cause harm to any of our customers, we could be exposed to product liability lawsuits. If we were found liable under product liability claims, we could be required to pay substantial monetary damages. Further, even if we successfully defended ourself against this type of claim, we could be forced to spend a substantial amount of money in litigation expenses, our management could be required to spend valuable time in the defense against these claims and its reputation could suffer, any of which could harm our business.
ITEM 1B —Unresolved SEC Staff Comments
None
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ITEM 2 —Properties
The Company’s principal executive offices are atlocated in its Franklin Park plantfacility near Chicago, Illinois. All properties and equipment are sufficient for the Company’s current level of activities. Distribution centers and sales offices are maintained at each of the following locations, all of which are owned, except as indicated:
| | | | | | | | | |
| | | Approximate | | Approximate |
| | | Floor Area in | | Floor Area in |
| Locations | | Square Feet | | Square Feet |
| Castle Metals | | |
| Metals Segment | | |
| Bedford Heights, Ohio | | | 374,400 | |
| Birmingham, Alabama | | | 76,000 | |
| Charlotte, North Carolina | | 116,500 | | | 116,500 | |
| Chicago area - | | |
| Franklin Park, Illinois | | 522,600 | | |
| Cleveland area - | | |
| Bedford Heights, Ohio | | 374,400 | | |
| Dallas, Texas | | 78,000 | | | 78,000 | |
| Edmonton, Alberta | | | 38,300 | (1) | | | 38,300 | (1) |
| Fairfield, Ohio | | | 186,000 | (1) | | | 166,000 | (1) |
| Franklin Park, Illinois | | | 522,600 | |
| Hammond, Indiana (H-A Industries) | | | | 243,000 | (1) |
| Houston, Texas | | 109,100 | | | 109,100 | |
| Kansas City, Missouri | | | 118,000 | (1) | | | 118,000 | (1) |
| Kent, Washington | | | 31,100 | (1) | | | 31,100 | (1) |
| Los Angeles area - | | |
| Minneapolis, Minnesota | | | 65,200 | |
| Mississauga, Ontario | | | | 60,000 | (1) |
| Monterrey, Mexico | | | | 55,000 | (1) |
| Montreal, Quebec | | | | 38,760 | (1) |
| Paramount, California | | | 155,500 | (1) | | | 155,500 | (1) |
| Montreal, Quebec | | | 26,100 | (1) | |
| Minneapolis, Minnesota | | 65,200 | | |
| Philadelphia, Pennsylvania | | 71,600 | | | 71,600 | |
| Riverdale, Illinois | | | | 115,000 | (1) |
| Stockton, California | | | 60,000 | (1) | | | 60,000 | (1) |
| Mississauga, Ontario | | | 60,000 | (1) | |
| Twinsburg, Ohio | | | | 120,000 | (1) |
| Wichita, Kansas | | | 58,800 | (1) | | | 58,800 | (1) |
| Winnipeg, Manitoba | | 50,000 | | | 50,000 | |
| Worcester, Massachusetts | | 56,000 | | | 56,000 | |
| | | |
| Sales Offices (Leased) | | |
| Sales Offices (1) | | |
| Cincinnati, Ohio | | |
| Milwaukee, Wisconsin | | |
| Phoenix, Arizona | | |
| Tulsa, Oklahoma | | |
| | | |
| Castle de Mexico | | |
| Monterrey, Mexico | | | 55,000 | (1) | |
| H-A Industries | | |
| Hammond, Indiana | | | 243,000 | (1) | |
| Keystone Tube Company LLC | | |
| Riverdale, Illinois | | | 115,000 | (1) | |
| Oliver Steel Plate Company | | |
| Twinsburg, Ohio | | | 120,000 | (1) | |
| Metal Express, LLC | | |
| Hartland, Wisconsin | | | 4,000 | (1) | | | 4,000 | (1) |
| Other Locations (15) | | | 112,000 | (1) | | | 112,000 | (1) |
| | | | | |
| Transtar | | |
| United States | | |
| Kennesaw, Georgia | | | | 87,500 | (1) |
| Orange, Connecticut | | | | 32,144 | (1) |
| Orange, Connecticut | | | | 25,245 | (1) |
| Dallas, Texas | | | | 74,880 | (1) |
| Torrance, California | | | | 12,171 | (1) |
| Gardena, California | | | | 33,435 | (1) |
| Gardena, California | | | | 117,000 | (1) |
| Wichita, Kansas | | | | 42,000 | (1) |
| Wichita, Kansas | | | | 48,000 | (1) |
| Kent, Washington | | | | 65,000 | (1) |
| | | |
| Europe | | |
| Due Pre’ Cadeau, France | | | | 25,600 | (1) |
| Letchworth, England | | | | 40,000 | (1) |
| | | | | |
| | | |
| Total Metals Segment | | 2,826,200 | | | 3,497,835 | |
| | | | | | | |
58
| | | | | | | | | |
| | | Approximate | | Approximate |
| | | Floor Area in | | Floor Area in |
| Locations | | Square Feet | | Square Feet |
| | | | | | |
| Total Plastics, Inc. | | |
| Plastics Segment | | |
| Baltimore, Maryland | | | 24,000 | (1) | | | 24,000 | (1) |
| Cleveland, Ohio | | | 8,600 | (1) | | | 8,600 | (1) |
| Detroit, Michigan | | | 22,000 | (1) | | | 22,000 | (1) |
| Elk Grove Village, Illinois | | | 22,500 | (1) | | | 22,500 | (1) |
| Fort Wayne, Indiana | | | 9,600 | (1) | | | 9,600 | (1) |
| Grand Rapids, Michigan | | 42,500 | | | 42,500 | |
| Harrisburg, Pennsylvania | | | 13,900 | (1) | | | 13,900 | (1) |
| Indianapolis, Indiana | | | 13,500 | (1) | | | 13,500 | (1) |
| Kalamazoo, Michigan | | | 81,000 | (1) | | | 81,000 | (1) |
| Mt. Vernon, New York | | | 27,000 | (1) | | | 30,000 | (1) |
| New Philadelphia, Ohio | | | 10,700 | (1) | | | 15,700 | (1) |
| Pittsburgh, Pennsylvania | | | 8,500 | (1) | | | 8,500 | (1) |
| Rockford, Michigan | | | 53,600 | (1) | | | 53,600 | (1) |
| Tampa, Florida | | | 17,700 | (1) | | | 17,700 | (1) |
| Trenton, New Jersey | | | 6,000 | (1) | | | 6,000 | (1) |
| Worcester, Massachusetts | | 11,000 | | | 11,000 | |
| | | | | | | |
| | |
| Total Plastics Segment | | 372,100 | | | 380,100 | |
| | | | | | | |
GRAND TOTAL | | 3,198,300 | | | 3,877,935 | |
| | | | | | | |
| | |
| (1) | | Leased: See Note 3 in4 to the Consolidated Notes to Financial StatementsCompany’s consolidated financial statements for information regarding lease agreements. |
9
ITEM 3 —Legal Proceedings
The Company is thea defendant in several lawsuits arising out offrom the conductoperation of its business. These lawsuits are incidental and occur in the normal course of the Company’s business affairs. It is the opinion of the Company’s in-house counsel, based on current knowledge, that no uninsured liability will result from the outcome of this litigation that would have a material adverse effect on the consolidated results of operations, financial condition or cash flows of the Company.
ITEM 4 —Submission of Matters to a Vote of Security Holders
No items were submitted to a vote of security holders during the fourth quarter of fiscal 2005.2006.
PART II
ITEM 5 —Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
A. M. Castle & Co.’s Common Stockcommon stock trades on the American and Chicago Stock Exchanges under the ticker symbol “CAS”. As of March 1, 20062, 2007 there were approximately 1,2741,161 shareholders of record and an estimated 4,2924,311 beneficial shareholders. The Company paid $4.1 million in cash dividends on its common stock in 2006. There were no dividends paid in 2005 or 2004. On January 30, 2006 the Company announced a $0.06 per share cash dividend payable February 27th to shareholders of record February 13, 2006.2005.
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management”, for information regarding common stock authorized for issuance under equity compensation plans.
6
See Part III, Item 11, “Executive Compensation” for information regarding comparison of five year cumulative total return.
The Company did not purchase any of its equity securities during the fourth quarter of 2006.
The following table sets forth for the periods indicated the range of the high and low stock price:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | —STOCK PRICE RANGE— | | | —STOCK PRICE RANGE— |
| | | 2005 | | 2004 | | | 2006 | | 2005 |
| | | Low | | High | | Low | | High | | | Low | | High | | Low | | High |
| | | | |
| First Quarter | | $ | 11.35 | | $ | 17.25 | | $ | 6.63 | | $ | 9.21 | | | $ | 22.16 | | $ | 31.31 | | $ | 11.35 | | $ | 17.25 | |
| Second Quarter | | $ | 11.05 | | $ | 16.11 | | $ | 7.35 | | $ | 11.00 | | | $ | 23.61 | | $ | 44.25 | | $ | 11.05 | | $ | 16.11 | |
| Third Quarter | | $ | 13.88 | | $ | 17.97 | | $ | 8.60 | | $ | 11.81 | | | $ | 25.34 | | $ | 34.86 | | $ | 13.88 | | $ | 17.97 | |
| Fourth Quarter | | $ | 15.02 | | $ | 24.52 | | $ | 10.25 | | $ | 13.90 | | | $ | 24.15 | | $ | 34.20 | | $ | 15.02 | | $ | 24.52 | |
Below is a summary by month of shares purchased by the Company during the fourth quarter of 2005:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | (d) Maximum |
| | | | | | | (c) Total Number | | Number (or |
| | | | | | | of Shares (or | | Approximate |
| | | | | | | | | | | Units) Purchased | | Dollar Value) of |
| | | | | | | | | | | as Part of | | Shares (or Units) |
| | | | | | | | | | | Publicly | | that May Yet Be |
| | | (a) Total Number | | (b) Average Price | | Announced | | Purchased |
| | | of Shares (or | | Paid per Share | | Plans or | | (Under the Plans |
| Period | | Units) Purchased | | (or Unit) | | Programs | | or Programs) |
| |
| October 1 — October 31 | | | 16,488 | * | | | 19.49 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| November 1 — November 30 | | | 327,796 | * | | | 19.93 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| December 1 — December 31 | | | 7,796 | * | | | 21.47 | | | | — | | | | — | |
| | | |
| Total | | | 352,080 | * | | | 19.94 | | | | — | | | | — | |
| | | |
| | |
* | | Reflects shares of the Company’s common stock which were tendered by employees in lieu of cash when exercising stock options. |
ITEM 6 —Selected Financial Data
| | | | | | | | | | | | | | | | | | | | | |
| (dollars in millions, except share data) | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
| |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 959.0 | | | $ | 761.0 | | | $ | 543.0 | | | $ | 538.1 | | | $ | 593.3 | |
| Income (loss) from continuing operations | | | 38.9 | | | | 15.4 | | | | (19.9 | ) | | | (10.8 | ) | | | (6.8 | ) |
| Income (loss) per share from continuing operations | | | 2.37 | | | | 0.92 | | | | (1.32 | ) | | | (0.74 | ) | | | (0.48 | ) |
| Cash dividends declared per common share | | | — | | | | — | | | | — | | | | — | | | | 0.50 | |
| | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data (December 31): | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 423.7 | | | | 383.0 | | | | 338.9 | | | | 352.6 | | | | 327.4 | |
| Total debt | | | 80.1 | | | | 101.4 | | | | 108.3 | | | | 112.3 | | | | 119.9 | |
| Stockholders’ equity | | | 175.5 | | | | 130.4 | | | | 113.7 | | | | 130.9 | | | | 117.2 | |
The Company adopted FAS 123R, “Share-Based Payment,” as its method to account for stock-based compensation (see Note 10 to the consolidated financial statements).| | | | | | | | | | | | | | | | | | | | | |
| (dollars in millions, except per share data) | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 |
| |
| Net sales | | $ | 1,177.6 | | | $ | 959.0 | | | $ | 761.0 | | | $ | 543.0 | | | $ | 538.1 | |
| Net income (loss) (continuing operations) | | | 55.1 | | | | 38.9 | | | | 15.4 | | | | (19.9 | ) | | | (10.8 | ) |
| Earnings (loss) per diluted share (continuing operations) | | | 2.89 | | | | 2.11 | | | | 0.82 | | | | (1.32 | ) | | | (0.74 | ) |
| Cash dividends declared per common share | | | 0.24 | | | | — | | | | — | | | | — | | | | — | |
Data as of December 31: | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 655.1 | | | | 423.7 | | | | 383.0 | | | | 338.9 | | | | 352.6 | |
| Long-term debt | | | 90.1 | | | | 73.8 | | | | 89.8 | | | | 100.0 | | | | 108.8 | |
| Total debt | | | 226.1 | | | | 80.1 | | | | 101.4 | | | | 108.3 | | | | 112.3 | |
| Stockholders’ equity | | | 215.9 | | | | 175.5 | | | | 130.4 | | | | 113.7 | | | | 130.9 | |
710
ITEM 7 —Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial ReviewInformation regarding the business and markets of A.M. Castle & Co. and its subsidiaries (the “Company”), including its reportable segments, is included in ITEM 1 “Business” of this annual report onForm 10-K.
This section may contain statements that constitute “forward-looking statements” pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are identified by words such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, predict”, or “project” and similar expressions. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially from those presented. In addition, certain risk factors identified in ITEM 1A of this document may affect the Company’s businesses. As a result, past financial results may not be a reliable indicator of future performance.
The following discussion should be read in conjunction with ITEM 6 “Selected Financial Data” and the information containedCompany’s consolidated financial statements and related Notes thereto in the Consolidated FinancialITEM 8 “Financial Statements and Notes.Supplementary Data”.
EXECUTIVE OVERVIEW
2006 marked several major accomplishments for our company including record financial results, the launch of a new strategy for our metals business and the largest acquisition in our history.
Acquisition of Transtar
On September 5, 2006, the Company acquired all of the issued and outstanding capital stock of Transtar Intermediate Holdings #2, Inc. (“Transtar”), a wholly owned subsidiary of H.I.G. Transtar Inc. The results of Transtar’s operations have been included in the consolidated financial statements since that date. These results and the assets of Transtar are included in the Company’s Metals segment.
Transtar is a leading supplier of high performance aluminum alloys to the aerospace and defense industries, supporting the on-going requirements of those markets with a broad range of inventory, processing and supply chain services. As a result of the acquisition, the Company has expanded access to aerospace customers and avenues to cross-sell its other products into this high-growth market. The acquisition also provides the Company the benefits of deeper access to certain inventories and purchasing synergies, as well as providing the Company an existing platform to markets in Asia and other international markets.
The aggregate purchase price, net of cash acquired, was $175.6 million which includes the assumption of $0.7 million of foreign debt and $0.6 million of capital leases of Transtar. An escrow in the amount of $18 million funded from the purchase price was established to satisfy HIG Transtar Inc.’s indemnification obligations under the Stock Purchase Agreement. The purchase price is subject to adjustment based on a final calculation of Transtar’s working capital at the date of acquisition. See Note 2 to the consolidated financial statements for additional information relating to the acquisition of Transtar.
Recent Market and Pricing Trends
TheIn 2006, the Company’s primary markets exhibited continued strong underlying demand throughout 2005.demand. Consolidated net sales for 20052006 of $959.0$1,177.6 million were $198.0$218.6 million, or 26%22.8%, higher than 2004. Excluding2005. The acquisition of Transtar contributed $77.9 million of the impact of higher material prices,total net sales rose nearly 6%.increase. Material price increases accounted for 8.0% of the growth with volume and product mix accounting for the balance of the year-over-year sales growth. The aerospace, oil and gas, mining and construction equipment, and truck and railroadheavy equipment sectors were especially robust. Metals material pricing stabilizedincreased an average of 8.6% in 2005 as compared to rapid price escalation throughout 2004.2006. Nickel-based product pricing was particularly high, increasing 21% during 2006. The 2005overall 2006 metals supply was generally steady and reliable, with the exception of nickel steels and certain aerospace aluminum alloys, which continue to be rapidly consumed by the aerospace, and oil and gas industries.
11
Suppliers’ delivery lead times stretched in some cases to 2022 weeks by year-end 20052006 for certain nickel steels. The Company believes that its strong presence in the nickel steels marketplace niche and its relationships with primary nickel steels suppliers have the Company well-positioned to competitively service customer demand for these products. Select pricing for nickel sheet rose during 2006 and conversely, certain carbon steel prices have declined, but the overall mix of products which represented 11% of 2005 consolidated total net sales.within the Metals segment resulted in lower price volatility than in 2005.
The Company’s Plastics segment reported 6.8% sales growth in 2006. Volume increased 3.9% and material price increases accounted for the balance of the year-over-year sales growth. Demand for the Company’s plastic products comes from different markets than those within the Metals segment, and tends to be more stable and less cyclical than the Metals segment historically. Plastic material prices were at high levels as 2006 came to a close. It is difficult to determine how long they will remain at the year-end 2006 levels. The Company will continue to assess its growth initiatives for this segment and may consider further geographic expansion alternatives as it has in the last few years.
Current Business Outlook
Historically, management has used the Purchaser’s Managers Index (“PMI”) provided by the Institute of Supply Management (website is www.ism.ws) as a reasonableone data point for tracking measure of general demand trends in its customer markets. Table 1 below shows PMI trends from the first quarter of 20032004 through the finalfourth quarter of 2005.2006. Generally, speaking, an index above 50.0 indicates continuing growth in the manufacturing sector of the U.S. economy. As the data indicates, the U.S. manufacturing economy iswas still growing at a modest pace as of 20052006 year-end. The Company’s revenue, growth, net of material price increases, has improvedgrown over this same time period.
Table 1
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| YEAR | | Qtr 1 | | Qtr 2 | | Qtr 3 | | Qtr 4 | | | Qtr 1 | | Qtr 2 | | Qtr 3 | | Qtr 4 |
| | 2003 | | 49.7 | | 49.0 | | 54.1 | | 60.3 | | |
| 2004 | | 62.4 | | 62.5 | | 59.7 | | 57.4 | | | 62.4 | | 62.4 | | 59.5 | | 57.6 | |
| 2005 | | 55.7 | | 53.2 | | 56.0 | | 57.0 | | | 55.7 | | 53.2 | | 55.8 | | 57.2 | |
| 2006 | | | 55.6 | | 55.2 | | 53.8 | | 50.9 | |
A favorable 2006 year-end PMI suggests that demand for the Company’s products and services should continue at their current high levels at least in the near-term. Though the PMI does offer some insight, management typically relies on its relationships with the Company’s supplier and customer base to assess continuing demand trends. As of December 31, 2005,2006, indicators generally point to a continued healthy demand for the Company’s specialty products in 2006.
The Company’s Plastics segment reported modest underlying sales growth in 2005 and more dramatic material price increases than those experienced in the Metals segment. Driven by global increases in petroleum based products and the impact of hurricane Katrina on the supplier base, plastic material prices rose, on average, an estimated 17% during 2005. Typically, prices in this business are less volatile than those in the metals markets and are less subjective to the North American manufacturing economic cycles. However, current price levels are unusually high and may not remain at these levels throughout the next year.
Demand for the Company’s plastic products comes from different markets than those within the Metals segment, and tends to be more stable and less cyclical historically. Additionally, the Plastics segment has benefited from a sustained program of geographic expansion as four new branches have opened since late 2002.
Current Business Outlook
A favorable 2005 year-end PMI suggests that demand for the Company’s products and services should continue at their current high levels at least in the near-term.2007. To date, metals pricing, in the aggregate, for the products the Company sells remains stable. Selectstable with nickel alloy prices still on the rise. Material pricing for nickel sheet has risen during 2005in both the metal and conversely, certain carbon steel prices have declined, butplastic segments of the overall mix of products within the Metals segment resulted in lower price volatility than in 2004.
As previously mentioned, plastic material prices were at high levels as 2005 came to a close. It isCompany’s business are difficult to determine how long they will remainpredict. Nickel alloy prices are at the year-end 2005record high levels. The Company will
8
continue to assess its growth initiatives for this segmentbelieves these prices are not sustainable at these levels over the long term. In two of the areas of the U.S. economy currently experiencing significant decline, the automotive and may consider further geographic expansion alternatives as it has inresidential construction markets, the last few years.Company’s market presence is limited.
RESULTS OF OPERATIONS: YEAR-TO-YEAR COMPARISONS AND COMMENTARY
As described in this Management’s Discussion and Analysis under the caption “Recent Accounting Pronouncements” and in footnote 1 to the financial statements, the Company elected to adopt FAS 123R — “Share-Based Payment”, on a modified retrospective basis in the fourth quarter of 2005. As such, previously reported financial results for 2005 and prior years have been restated as a result of this adoption. The following commentary and comparative financial data reflect these changes.
Our discussion of comparative period results is based upon the following components of the Company’s consolidated statements of operations.
Net Sales —The Company derives its revenues from the sale and processing of metals and plastics. Pricing is established with each customer order and includes charges for the material, processing activityactivities and delivery. The pricing varies by product line and type of processing. The Company typically does not enter into any long-term fixed price arrangements with a customer without obtaining a similar agreement with its suppliers. Such arrangements are typical of customers in the aerospace and defense markets.
Cost of Material SoldMaterials—Cost of material soldmaterials consists of the costs we pay suppliers for metals, plastics and related inbound freight charges. It excludes depreciation and amortization which are included in Other operating costs and expenses discussed below. The Company accounts for inventory primarily on a LIFO (last-in-first-out)last-in-first-out (“LIFO”) basis. LIFO adjustments are calculated as of December 31 of each year. Interim estimates of the year-end LIFO charge or credit are determined based on inflationary or deflationary purchase cost trends and estimated year-end inventory levels. Interim LIFO estimates may require significant year-end adjustments. (See Note 14 ofto the consolidated financial statements)statements.)
12
Gross Material Margin—Gross material margin is defined as net sales less cost of material sold. Historically, the Company has been successful in maintaining its margin percentage in periods of increasingOther operating costs and declining material costs. If material costs increase and the Company maintains its margin percentage, it generates more material margin dollars. Conversely, if material costs decline and the Company maintains its margin percentage, we generate fewer material margin dollars.
Expensesexpenses—ExpensesOther operating costs and expenses primarily consist of (1) plantwarehouse, processing and delivery expenses, which include occupancy costs, compensation and employee benefits for warehouse personnel, processing, shipping and handling costs; (2) selling expenses, which include compensation and employee benefits for sales personnel, and(3) general and administrative expenses, which include compensation for executive officers and general management, expenses for professional services primarily attributable to accounting and legal advisory services, data communication and computer hardware and maintenance; and (3)(4) depreciation and amortization expenses, which include depreciation for all owned property and equipment, and amortization of various long-lived intangible assets.
2006 Results Compared to 2005
Consolidated results by business segment are summarized in the following table for years 2006 and 2005.
Operating Results by Segment(dollars in millions)
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | |
| | | 2006 | | 2005 | | Fav/(Unfav) | | % Change |
| | | |
| Net Sales | | | | | | | | | | | | | | | | |
| Metals | | $ | 1,062.6 | | | $ | 851.3 | | | $ | 211.3 | | | | 24.8 | % |
| Plastics | | | 115.0 | | | | 107.7 | | | | 7.3 | | | | 6.8 | |
| | | |
| Total Net Sales | | $ | 1,177.6 | | | $ | 959.0 | | | $ | 218.6 | | | | 22.8 | % |
| | | | | | | | | | | | | | | | | |
| Cost of Materials | | | | | | | | | | | | | | | | |
| Metals | | $ | 762.3 | | | $ | 603.9 | | | $ | (158.4 | ) | | | (26.2 | )% |
% of Metals Sales | | | 71.7 | % | | | 70.9 | % | | | (0.8 | )% | | | | |
| Plastics | | | 76.9 | | | | 73.3 | | | | (3.6 | ) | | | (4.9 | )% |
% of Plastics Sales | | | 66.9 | % | | | 68.1 | % | | | 1.2 | % | | | | |
| | | | | | | | | | | | | | | | | |
| | | |
| Total Cost of Materials | | $ | 839.2 | | | $ | 677.2 | | | $ | (162.0 | ) | | | (23.9 | )% |
% of Total Sales | | | 71.3 | % | | | 70.6 | % | | | (0.7 | )% | | | | |
| | | | | | | | | | | | | | | | | |
| Other Operating Costs and Expenses | | | | | | | | | | | | | | | | |
| Metals | | $ | 205.3 | | | $ | 172.0 | | | $ | (33.3 | ) | | | (19.4 | )% |
| Plastics | | | 30.8 | | | | 28.9 | | | | (1.9 | ) | | | (6.5 | ) |
| Other | | | 9.8 | | | | 9.7 | | | | (0.1 | ) | | | — | |
| | | | | | | | | | | | | | | | | |
| | | |
| Total Other Operating Costs & Expenses | | $ | 245.9 | | | $ | 210.6 | | | $ | (35.3 | ) | | | (16.8 | )% |
% of Total Sales | | | 20.9 | % | | | 22.0 | % | | | 1.1 | % | | | | |
| | | | | | | | | | | | | | | | | |
| Operating Income | | | | | | | | | | | | | | | | |
| Metals | | $ | 95.0 | | | $ | 75.3 | | | $ | 19.7 | | | | 26.2 | % |
% of Metals Sales | | | 8.9 | % | | | 8.8 | % | | | 0.1 | % | | | | |
| Plastics | | | 7.3 | | | | 5.6 | | | | 1.7 | | | | 30.4 | % |
% of Plastics Sales | | | 6.3 | % | | | 5.2 | % | | | 1.1 | % | | | | |
| Other | | | (9.8 | ) | | | (9.7 | ) | | | 0.1 | | | | 1.0 | % |
| | | | | | | | | | | | | | | | | |
| | | |
| Total Operating Income | | $ | 92.5 | | | $ | 71.2 | | | $ | 21.3 | | | | 29.9 | % |
% of Total Sales | | | 7.9 | % | | | 7.4 | % | | | 0.5 | % | | | | |
“Other” includes costs of executive, legal and finance departments which are shared by both segments of the Company.
13
Net Sales:
Consolidated 2006 net sales for the Company of $1,177.6 million increased $218.6 million, or 22.8%, versus 2005. The acquisition of Transtar contributed $77.9 million of the total sales increase. Material price increases accounted for 8.0% of the growth with volume and product mix accounting for the balance of the year-over-year sales growth.
Metals segment sales during 2006 of $1,062.6 million were 24.8% or $211.3 million higher than 2005. Material price increases accounted for 8.8% of the growth with volume and production mix accounting for the balance of the year-over-year sales growth. The aerospace, oil and gas, mining and heavy equipment sectors were especially robust.
Plastics segment sales during 2006 of $115.0 million were 6.8% or $7.3 million higher than 2005. Volume increased approximately 3.9% during 2006, while material price increases contributed to the balance of the year-over-year sales growth.
Cost of Materials:
Consolidated 2006 cost of materials (exclusive of depreciation) increased $162.0 million, or 23.9%, to $839.2 million. The acquisition of Transtar contributed $55.4 million.
Other Operating Expenses and Operating Income:
On a consolidated basis, other operating costs and expenses increased $35.3 million, or 16.8%, over 2005 due to the inclusion of $19.4 million of Transtar’s other operating expenses and in support of higher overall customer demand. However, other operating expense declined as a percent of sales from 22.0% in 2005 to 20.9% in 2006 as the Company was able to leverage its expenses over higher sales.
2006 operating income of $92.5 million was $21.3 million, or 29.9%, ahead of last year. Solid underlying demand strengthened the Company’s operating income. The Company’s 2006 operating profit margin (defined as operating income divided by net sales) increased to 7.9% from 7.4% in 2005.
Other Income and Expense, Income Taxes and Net Income:
Interest expense of $8.3 million in 2006 increased $1.0 million versus 2005 on increased borrowings necessitated by the acquisition of Transtar. (See “Liquidity and Capital Resources” discussion below).
Income tax expense increased to $33.3 million from $23.2 million in 2005. The effective tax rate was 39.6% in 2006 and 40.1% in 2005.
Equity in earnings of the Company’s joint venture, Kreher Steel, was $4.3 million in 2006, the same as 2005.
Consolidated net income applicable to common stock of $54.2 million, or $2.89 earnings per diluted share in 2006 compared favorably to $37.9 million, or $2.11 earnings per diluted share in 2005.
14
2005 Results Compared to 2004
Consolidated results by business segment are summarized in the following table for years 2005 and 2004. Impairment and other special charges are shown separately for clarification purposes.
9
Operating Results by Segment(dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | Year Ended December 31, | | | | |
| | | 2005 | | 2004 | | Fav/(Unfav) | | % Change | | 2005 | | 2004 | | Fav/(Unfav) | | % Change |
| | | | | |
| Net Sales | | |
| Metals | | $ | 851.3 | | $ | 671.2 | | $ | 180.1 | | | 26.8 | % | | $ | 851.3 | | $ | 671.2 | | $ | 180.1 | | | 26.8 | % |
| Plastics | | 107.7 | | 89.8 | | 17.9 | | 19.9 | | | 107.7 | | 89.8 | | 17.9 | | 19.9 | |
| | | | | |
| Total Net Sales | | $ | 959.0 | | $ | 761.0 | | $ | 198.0 | | 26.0 | | | $ | 959.0 | | $ | 761.0 | | $ | 198.0 | | 26.0 | |
| | | |
| Gross Material Margin | | |
| Cost of Materials | | |
| Metals | | $ | 247.3 | | $ | 188.5 | | $ | 58.8 | | | 31.2 | % | | $ | 603.9 | | $ | 482.7 | | $ | (121.2 | ) | | | (25.1 | )% |
% of Metals Sales | | | 29.1 | % | | | 28.1 | % | | | 1.0 | % | | | | 70.9 | % | | | 71.9 | % | | | 1.0 | % | |
| Plastics | | 34.5 | | 29.1 | | 5.4 | | 18.6 | | | 73.3 | | 60.7 | | | (12.6 | ) | | | (20.8 | ) |
% of Plastics Sales | | | 32.0 | % | | | 32.4 | % | | | (0.4 | )% | | | | 68.1 | % | | | 67.6 | % | | | (0.5 | )% | |
| | | |
| | | | | |
| Total Gross Material Margin | | $ | 281.8 | | $ | 217.6 | | $ | 64.2 | | | 29.5 | % | |
| Total Cost of Materials | | | $ | 677.2 | | $ | 543.4 | | $ | (133.8 | ) | | | (24.6 | )% |
% of Total Sales | | | 29.4 | % | | | 28.6 | % | | | 0.8 | % | | | | 70.6 | % | | | 71.4 | % | | | 0.8 | % | |
| | | |
| Operating Expense | | |
| Other Operating Costs and Expenses | | |
| Metals | | $ | 172.0 | | $ | 155.4 | | $ | (16.6 | ) | | | 10.7 | % | | $ | 172.0 | | $ | 155.4 | | $ | (16.6 | ) | | | 10.7 | % |
| Plastics | | 28.9 | | 23.6 | | | (5.3 | ) | | 22.5 | | | 28.9 | | 23.6 | | | (5.3 | ) | | 22.5 | |
| Other | | 9.7 | | 7.1 | | | (2.6 | ) | | 36.6 | | | 9.7 | | 7.1 | | | (2.6 | ) | | 36.6 | |
| | |
| | | | | |
| Total Operating Expense | | $ | 210.6 | | $ | 186.1 | | $ | (24.5 | ) | | | 13.2 | % | |
| Total Other Operating Costs & Expenses | | | $ | 210.6 | | $ | 186.1 | | $ | (24.5 | ) | | | 13.2 | % |
% of Total Sales | | | (22.0 | )% | | | (24.5 | )% | | | 2.5 | % | | | | 22.0 | % | | | 24.5 | % | | | 2.5 | % | |
| | | |
| Operating Income | | |
| Metals | | $ | 75.3 | | $ | 33.1 | | $ | 42.2 | | | $ | 75.3 | | $ | 33.1 | | $ | 42.2 | | | 127.5 | % |
% of Metals Sales | | | 8.8 | % | | | 4.9 | % | | | 3.9 | % | | | | 8.8 | % | | | 4.9 | % | | | 3.9 | % | |
| Plastics | | 5.6 | | 5.5 | | 0.1 | | | 5.6 | | 5.5 | | 0.1 | | | 1.8 | % |
% of Plastics Sales | | | 5.2 | % | | | 6.1 | % | | | (0.9 | )% | | | | 5.2 | % | | | 6.1 | % | | | (0.9 | )% | |
| Other | | | (9.7 | ) | | | (7.1 | ) | | | (2.6 | ) | | | | (9.7 | ) | | | (7.1 | ) | | | (2.6 | ) | | | 36.6 | % |
| | | |
| | | | | | |
| Total Operating Income | | $ | 71.2 | | $ | 31.5 | | $ | 39.7 | | | $ | 71.2 | | $ | 31.5 | | $ | 39.7 | | | 126.0 | % |
% of Total Sales | | | 7.4 | % | | | 4.1 | % | | | 3.3 | % | | | | 7.4 | % | | | 4.1 | % | | | 3.3 | % | |
“Other” includes costs of executive, legal and finance departments which are shared by both segments of the Company.
| | |
| | “Other” includes costs of executive, legal and finance departments which are shared by both operating segments of the Company. |
Net Sales:
Consolidated 2005 net sales for the Company of $959.0 million were up $198.0 million, or 26.0%, versus the prior year.2004. Volume increased 6% and material price increases accounted for the balance of the year-over-year sales growth.
Metals segment 2005 sales of $851.3 million were 26.8%, or $180.1 million, ahead of 2004. Volume increased 6% during 2005 and the balance of the sales growth was due to higher pricing. The aerospace, oil and gas, mining and construction equipment, and truck and railroad equipment sectors were especially robust.
Plastics segment 2005 sales of $107.7 million were $17.9 million, or 19.9%, higher than last year.2004. Volume increased approximately 2% during 2005 while prices rose 17%.material price increases contributed the balance of year-over-year sales growth. The business experienced some softness in its retail point-of-purchase display and shelving markets during the third-quarter of 2005, affecting its year-over-year growth comparisons. The business rebounded back to historical levels by year-end.year-end 2005.
15
Cost of Materials
Consolidated 2005 cost of materials (exclusive of depreciation) increased $133.8 million or 24.6% versus 2004.
Gross Material MarginsOther Operating Expenses and Operating Profit:Income:
On a consolidated basis, gross material margins grew $64.2 million or 29.5% to $281.8 million. Increased sales were the primary reason for this increase.
Gross material margins as a percent of sales were 29.4% in 2005 as compared to 28.6% in 2004, an increase of 0.8 margin points. Although there was a $4.0 million unfavorable LIFO (last-in,
10
first-out) charge (LIFO less FIFO inventory revaluation) versus a $2.6 million net LIFO charge in 2004, margins still rose year-over-year due to favorable product mix.
Consolidatedother operating expenses increased $24.5 million, or 13.2%, versus 2004 in support of higher overall customer demand. However, other operating expense declined as a percent of sales from 24.5% in 2004 to 22.0% in 2005, as the Company was able to leverage its sales growth.
The Company’s “Other” operating segment includes expenses related to executive, financial and legal services that benefit both operating segments. The $2.6 million increase in expense as compared to the prior year is primarily attributable to long-term management incentive programs that were initiated in 2005.
Total 2005 operating profitincome of $71.2 million was $39.7 million, or 126.0%, ahead of last year.2004. Solid underlying demand coupled with a lower, previously restructured cost base, strengthened the Company’s operating profits. The Company’s 2005 operating profit margin increased to 7.4% from 4.1% in 2004.
Other Income and Expense, Income Taxes and Net Results:Income:
Equity in earnings of the Company’s joint venture, Kreher Steel, was $4.3 million in 2005, as compared to $5.2 million in 2004. Kreher employs FIFO (first-in, first-out) accounting in valuing its inventory and cost of sales. During 2004 Kreher’s product lines experienced escalating material costs as compared to declining material costs in 2005, thus resulting in lower gross material margins.
Interest expense of $7.3 million in 2005 declined $1.6 million versus the prior year on lower overall borrowings and reduced interest rates, stemming from the Company’s debt refinancing in the second half of 2005 (See Notes 8 and 9 to the consolidated financial statements).2005. As part of the refinancing of its long-term notes in the fourth quarter of 2005, the Company recorded a $4.9 million pre-tax charge related to the early termination of its former note agreements.
Income tax expense increased to $23.2 million in 2005 from $11.3 million in 2004 due to higher taxable income.
Equity in earnings of the Company’s joint venture, Kreher Steel, was $4.3 million in 2005, as compared to $5.2 million in 2004. During 2004, Kreher’s product lines experienced escalating material costs as compared to declining material costs in 2005.
Consolidated net income applicable to common stock of $37.9 million, or $2.11 earnings per diluted share in 2005 compared favorably to $14.5 million, or $0.82 per diluted share, in 2004.
2004 Results Compared to 2003
The following financial comparisons include certain significant changes in the Company’s structure or business that are considered to be important to the reader’s general understanding when viewing results of operations for the years presented.
Beginning in late 2000, management initiated a major restructuring program which included a review of certain under-performing business units and an assessment of the Company’s overall cost structure. Specific actions taken by management in 2003 resulted in the Company incurring restructuring related charges in its reported results. The restructuring better postured the Company to participate in the 2004 and 2005 economic recovery by shedding business units that had in prior years either produced operating losses, consumed disproportionate amounts of cash, or both, and were not a strategic fit with the Company’s core business.
The Company also incurred additional non-recurring charges associated with equipment lease buyout provisions for assets included in the sale of a non-strategic business unit and for the negotiated early property lease buyout and related write-off of leasehold improvements of a vacated facility.
Total restructuring related charges for 2003 were $11.5 million on a pre-tax basis. Further details on these charges can be found in Note 7 to the consolidated financial statements.
Consolidated results by business segment are summarized in the following table for years 2004 and 2003. Impairment and other special charges are shown separately for clarification purposes.
11
Operating Results by Segment(dollars in millions)
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | |
| | | 2004 | | 2003 | | Fav/(Unfav) | | % Change |
| | | |
| Net Sales | | | | | | | | | | | | | | | | |
| Metals | | $ | 671.2 | | | $ | 475.3 | | | $ | 195.9 | | | | 41.2 | % |
| Plastics | | | 89.8 | | | | 67.7 | | | | 22.1 | | | | 32.6 | |
| | | |
| Total Net Sales | | $ | 761.0 | | | $ | 543.0 | | | $ | 218.0 | | | | 40.1 | |
| | | | | | | | | | | | | | | | | |
| Gross Material Margin | | | | | | | | | | | | | | | | |
| Metals | | $ | 188.5 | | | $ | 135.2 | | | $ | 53.3 | | | | 39.4 | % |
% of Metals Sales | | | 28.1 | % | | | 28.4 | % | | | (0.4 | )% | | | | |
| Metals Special Charges | | | — | | | | (1.6 | ) | | | 1.6 | | | | | |
| Plastics | | | 29.1 | | | | 23.4 | | | | 5.7 | | | | 24.4 | |
% of Plastics Sales | | | 32.4 | % | | | 34.6 | % | | | (2.2 | )% | | | | |
| | | | | | | | | | | | | | | | | |
| | | |
| Total Gross Material Margin | | $ | 217.6 | | | $ | 157.0 | | | $ | 60.6 | | | | 38.6 | % |
% of Total Sales | | | 28.6 | % | | | 28.9 | % | | | (0.3 | )% | | | | |
| | | | | | | | | | | | | | | | | |
| Operating Expense | | | | | | | | | | | | | | | | |
| Metals | | $ | 155.4 | | | $ | 141.0 | | | $ | (14.4 | ) | | | 10.2 | % |
| Metals Impairment | | | — | | | | 6.5 | | | | 6.5 | | | | | |
| Plastics | | | 23.6 | | | | 20.6 | | | | (3.0 | ) | | | 14.6 | |
| Other | | | 7.1 | | | | 4.7 | | | | (2.4 | ) | | | 51.1 | |
| | | | | | | | | | | | | | | | | |
| | | |
| Total Operating Expense | | $ | 186.1 | | | $ | 172.8 | | | $ | (13.3 | ) | | | 7.7 | % |
% of Total Sales | | | (24.5 | )% | | | (31.8 | )% | | | 7.4 | % | | | | |
| | | | | | | | | | | | | | | | | |
| Operating Income (Loss) | | | | | | | | | | | | | | | | |
| Metals | | $ | 33.1 | | | $ | (5.8 | ) | | $ | 38.9 | | | | | |
% of Metals Sales | | | 4.9 | % | | | (1.2 | )% | | | 6.2 | % | | | | |
| Metals Special Charges and Impairment | | | — | | | | (8.1 | ) | | | 8.1 | | | | | |
| Plastics | | | 5.5 | | | | 2.8 | | | | 2.7 | | | | | |
% of Plastics Sales | | | 6.1 | % | | | 4.1 | % | | | 2.0 | % | | | | |
| Other | | | (7.1 | ) | | | (4.7 | ) | | | (2.4 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | |
| Total Operating Income (Loss) | | $ | 31.5 | | | $ | (15.8 | ) | | $ | 47.3 | | | | | |
% of Total Sales | | | 4.1 | % | | | (2.9 | )% | | | 7.0 | % | | | | |
| | |
| | “Other” includes costs of executive, legal and finance departments which are shared by both operating segments of the Company. |
Net Sales:
Consolidated net sales for the Company in 2004 of $761.0 million were up $218.0 million, or 40.1%, versus 2003. Improved market conditions in the manufacturing sector of the U.S. economy and shortages in raw materials used in metal production fueled sales growth in terms of both price and real volume. Metals segment sales of $671.2 million in 2004 were up $195.9 million, or 41.2%, versus 2003. Management estimates that the impact of 2004 material price escalation accounted for approximately two-thirds of the sales increase. The Company’s wholly-owned Mexican subsidiary added $14.6 million of sales in 2004. The balance of the year-over-year sales growth in this segment was due to increased volume driven by healthier market conditions. Plastics segment sales of $89.8 million increased $22.1 million, or 32.6%, versus 2003. Roughly 3% of this increase was due to material price inflation with the balance of growth resulting from planned geographic expansion the Company initiated in 2003.
Gross Material Margins and Operating Profit (Loss):
On a consolidated basis, gross material margins increased $60.6 million or 38.6% to a level of $217.6 million in 2004. Increased volume and material cost and margin pass-through accounted for this improvement versus 2003. Within its Metals segment, the Company recorded $1.6 million of
12
impairment related charges in 2003. See Note 7 to the consolidated financial statements for more details on the nature of these charges. Included in the 2004 margin were charges totaling $5.2 million resulting from company-wide physical inventories conducted in the third and fourth quarter. The Mexican operation contributed $3.2 million of margin in 2004. Total gross material margins within the Metals segment increased by $54.9 million, or 41.0%, including these factors. The Plastics segment increased gross material margins in 2004 by $5.7 million, or 24.4%. Margin as a percent of sales declined during the year in this segment largely due to product and customer mix. Included in the 2004 margin for the Plastics segment are $0.5 million of charges associated with an annual physical inventory conducted in the fourth quarter.
In 2003, the Company incurred a $15.8 million operating loss on a consolidated basis, including $8.1 million of impairment and other special charges associated with management’s decision to exit certain business units and dispose of certain capital assets. No impairment or special charges were recorded in 2004. The Company recorded a $2.6 million unfavorable net LIFO (last-in, first-out) charge in 2004, compared to a $2.4 million charge in 2003.
Consolidated operating expenses increased $13.3 million or 7.7% in 2004 in support of volume growth. Operating expense as a percent of sales declined from 31.8% (excluding impairment charges) in 2003 to 24.5% in 2004. More importantly, the incremental year-over-year increase in operating expense as a percent of incremental sales growth was 7.4%, reflecting the Company’s ability to support significant sales growth with a nominal increase in variable expense. Metals segment operating expense increased $14.4 million (excluding $6.5 million of impairment charges recorded in 2003) or 7.4% of their 41.2% sales increase. Operating expenses in the Plastics segment increased $3.0 million or 13.6% of their 32.6% growth in sales.
The Company’s “Other” operating segment includes expenses related to executive, legal and financial services that benefited both segments. This expense increased to $7.1 million in 2004 from $4.7 million in 2003. Most of the increase was attributable to management incentives and initial year Sarbanes-Oxley compliance costs.
Consolidated operating profit earned in 2004 was $31.5 million compared to an operating loss of $15.8 million one year ago.
Other Income and Expense, and Net Results:
The Company’s joint venture, Kreher Steel, experienced similar favorable market dynamics as the Company’s own Metals segment throughout 2004. Equity in earnings in 2004 associated with the Company’s 50% interest in this joint venture were $5.2 million. In 2003, the Company recorded a $3.5 million impairment charge associated with certain joint venture investments which management elected to sell or exit (Note 7 to the consolidated financial statements for more details). Equity earnings of joint ventures in 2003, excluding the impairment charge, were $0.1 million.
Interest expense decreased $0.7 million to $9.0 million in 2004. This reflected lower long-term debt levels. Due to lower average amounts sold under its Financing Agreement in 2004, the Company recorded a $1.0 million discount on receivables sold versus $1.2 million in 2003.
Consolidated net income from continuing operations in 2004 was $15.4 million compared to a loss of $19.9 million in 2003. In the fourth quarter of 2003, the Company recorded an additional $0.2 million loss (net of taxes) on the disposal of its United Kingdom subsidiary (sold in May 2002) associated with an outstanding customer product liability claim. This loss is shown in Discontinued Operations in the Company’s comparative Statement of Operations. Preferred dividends in 2004 and 2003 of $1.0 million each year are related to the Company’s November 2002 private placement of cumulative convertible preferred stock with its largest shareholder.
The Company reported net income of $14.5 million, or $0.82 per diluted share in 2004 versus a net loss of $21.0 million or $1.33 per diluted share in 2003.
YEAR-END 2005 LIQUIDITY AND CASH POSITION
Liquidity and Capital Resources
The Company’s primary sources of liquidity include cash generated from earnings and its use of available borrowing capacity to fund working capital needs and growth initiatives. The Company’s 2005 operating results coupled with its debt refinancing have dramatically improved its financial position and liquidity.
13
Net cash from operating activities in 20052006 was $57.9$29.8 million, largely driven by strong earnings and ongoing working capital management. In July 2005,earnings; however, increased inventory levels to support the Company replaced its former receivable purchase facilitygrowth of the business along with an $82 million revolving line of credit (“Revolver”). This transaction triggered a 150 basis point interest rate reduction on the Company’s long-term notes existing at that date. Available Revolver capacity is primarily used to fund working capital needs. In November of 2005 the Company completed a planned refinancing of its long-term debt through the issuance of $75 million of ten-year senior secured notes. The Company’s 6.26% Senior Secured Notes are due in scheduled installments through November 17, 2015 (the “Notes”). Interest on the Notes accrues at the rate of 6.26% annually, payable semi-annually beginning on May 15, 2006. The proceeds were used to retire all of its former long-term notes. This refinancing enabled the Company to reduce its annual debt servicehigher payments for income taxes reduced net cash outlays, by extending maturities on the debt and achieving a fixed lower interest rate. (See Notes 8 and 9from operating activities when compared to the consolidated financial statements.)
Total long-term debt declined $21.3$57.9 million during 2005 and year-endin cash increased $34.3 million. The debt-to-capital ratio at December 31, 2005 was 30.8% versus 43.7% at the end of 2004. As of December 31, 2005 the Company had no outstanding borrowings under its Revolver and had availability of $76.0 million.generated in 2005.
In 20052006 the Company continued its aggressive programconcerted efforts to manage its investment in inventory. The following chart depicts the improvements in inventory turns, as measured by average days’ sales in inventory (“DSI”) since 2003.2004.
| | | | | | | | | | | | | |
| | | FY | | FY | | FY |
| | | 2005 | | 2004 | | 2003 |
| | | |
| Average DSI | | | 119.3 | | | | 119.2 | | | | 153.1 | |
| |
| | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 |
| | | |
| Average DSI | | | 116.7 | | | | 119.3 | | | | 120.3 | |
2004 inventory performance was favorably impactedAs a result of the acquisition of Transtar, accounts receivable increased $35.2 million, inventories increased $60.6 million, accounts payable increased $20.5 million and long-term deferred tax liabilities increased $28.7 million.
In September 2006, the Company entered into a $210 million amended senior credit facility with its lending syndicate. This facility replaced the Company’s $82.0 million revolving credit facility entered into in July, 2005. The amended senior credit facility provides for (i) a $170 million revolving loan (the “U.S. Revolver”) to be drawn on by shortagesthe Company from time to time, (ii) a $30 million term loan (the “U.S. Term Loan” and with the U.S. Revolver, the “U.S. Facility”) and (iii) a Cdn. $11.1 million revolving loan (approximately $9.9 million in metals supply acrossU.S. dollars) (the “Canadian Facility”) to be drawn on by the industry. 2005 DSI reflects sustainable improvementCompany’s Canadian subsidiary from time to time (collectively the “Amended Senior Credit Facility”). The revolving loans and term loans mature in inventory turnover.2011.
The Company used the proceeds from the $30 million U.S. Term Loan and $117 million of the amount available under the U.S. Revolver along with approximately $30 million of cash on hand to finance the acquisition of Transtar. The year-over-year reduction in cash balances is primarily attributable to the use of cash on hand to fund a portion of the acquisition price.
16
Available revolving credit capacity is primarily used to fund working capital needs. As of December 31, 2006, the Company had outstanding borrowings of $108.0 million under its U.S. Revolver and had availability of $54.7 million. There were no outstanding borrowings under the Canadian Facility.
As of December 31, 2005,2006, the Company remained in compliance with the covenants of its credit agreements, which require it to maintain certain funded debt-to-capital ratios,and working capital-to-debt ratios, and a minimum book value of equity, as defined withinin the agreement.Company’s credit agreements. A summary of covenant compliance is shown below.
| | | | | | | | | |
| | | | | | Actual |
| | | Required | | 12/31/0506 |
| | | |
| Debt-to-Capital Ratio (a) | | | < 0.55 | | 0.26 |
| 0.43 | |
| Working Capital-to-Debt Ratio | | | >1.00 | | 2.70 |
| 1.43 | |
| Book Value of Equity (a) | | $123.9 Million171.2 million | | $175.5 Million237.2 million |
| | |
| (a) | | In accordance with the Amended Senior Credit Facility, the Company is permitted to add back to Stockholders’ Equity the $21.3 million pension amount included in Accumulated Other Comprehensive Income for loan covenant compliance purposes. See the Consolidated Statement of Stockholders’ Equity and Note 13 to the consolidated financial statements for detailed information regarding the pension adjustment. |
As of December 31, 2006, the Company had $12.0 million in outstanding trade acceptances with varying maturity dates ranging up to 120 days. The weighted average interest rate was 6.88%. A trade acceptance is a form of debt instrument having a definite maturity and obligation to pay and which has been accepted by an acknowledgement by the company upon whom it is drawn. As of December 31, 2006, the Company had $111.3 million of short-term debt which includes the $108 million revolver and excludes the $12.0 million in trade acceptances. See Note 9 to the consolidated financial statements for more information.
In 2006, the Company reinstituted a dividend on its common stock. When combined with the dividend paid on the Company’s preferred stock, the Company paid $5.0 million in dividends in 2006 versus $1.0 million, on the preferred stock only, in 2005.
Management believes the Company will be able to generate sufficient cash from operations and planned working capital improvements (principally from reduced inventories) to fund its ongoing capital expenditure programs, fund future dividend payments and meet its debt obligations.
Capital Expenditures
Capital expenditures for 20052006 were $8.7$12.9 million as compared to $5.3$8.7 million in 2004.2005. During 2005,2006, the Company embarked on a multi-year program to replace certain of its business technology and support systems. Approximately $0.7 million of 2005 capital expenditures wereincluded spending associated with this project. Management estimates that total spending on this technology improvement will be in the $4 million to $6 million range, to be spent overCompany’s new Birmingham, Alabama facility ($3.3 million) and the three-year period from 2005 through 2008. The balance of 2005 capital expenditures included normalCompany’s ongoing business system replacement initiative ($2.3 million), along with typical equipment replacement and upgrading of machinery and equipment.upgrades.
1417
Contractual Obligations and Other Commitments:
At December 31, 2005,2006, the Company’s contractual obligations, including estimated payments by period, were as follows:(Dollarsdollars in Thousands)thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less | | One to | | More | | Less | | One to | | More |
| | | Than One | | Three | | Three to | | Than Five | | Than One | | Three | | Three to | | Than Five |
| Payments Due In | | Total | | Year | | Years | | Five Years | | Years | | Total | | Year | | Years | | Five Years | | Years |
| | Long-Term Debt Obligations | | $ | 80,060 | | $ | 6,233 | | $ | 13,411 | | $ | 17,580 | | $ | 42,836 | | | $ | 101,383 | | $ | 12,055 | | $ | 28,802 | | $ | 25,305 | | $ | 35,221 | |
| Interest Payments on Debt Obligations (a) | | 29,224 | | 5,008 | | 12,733 | | 5,813 | | 5,670 | | | 30,708 | | 6,818 | | 10,915 | | 6,851 | | 6,124 | |
| Capital Lease Obligations | | 1,548 | | 534 | | 913 | | 101 | | — | | | 1,502 | | 779 | | 666 | | 56 | | 1 | |
| Operating Lease Obligations | | 56,265 | | 11,258 | | 20,091 | | 14,278 | | 10,638 | | | 67,795 | | 15,006 | | 25,071 | | 16,311 | | 11,407 | |
| Purchase Obligations (b) | | 226,231 | | 217,834 | | 8,397 | | — | | — | | | 226,415 | | 218,018 | | 8,397 | | — | | — | |
| Other (c) | | 5,858 | | 5,858 | | — | | — | | — | | | 6,319 | | 6,319 | | — | | — | | — | |
| | | | | |
| Total | | $ | 399,186 | | $ | 246,725 | | $ | 55,545 | | $ | 37,772 | | $ | 59,144 | | | $ | 434,122 | | $ | 258,995 | | $ | 73,851 | | $ | 48,523 | | $ | 52,753 | |
| | | | | |
| | |
| (a) | | Interest payments on debt obligations represent interest on all companyCompany debt atoutstanding as of December 31, 2005.2006. The interest payment amounts related to the variable rate component of the company’sCompany’s debt assume that interest will be paid at the rates prevailing at December 31, 2005.2006. Future interest rates may change, and therefore, actual interest payments wouldcould differ from those disclosed in the table above. |
| |
| (b) | | Purchase obligations consist of raw material purchases made in the normal course of business. |
| |
| (c) | | The other category is comprised of deferred revenues that represent commitments to deliver products. |
The above table does not include $14.4$16.3 million of other non-current liabilities recorded on the balance sheet,Consolidated Balance Sheets, as summarized in Notes 34 and 45 to the consolidated financial statements. These non-current liabilities consist of liabilities related to the Company’s non-funded supplemental pension plan and postretirement benefit plans for which payment periods cannot be determined. Non-current liabilities also include the deferred gain on the sale of assets, which are principally the sale-leaseback transactions disclosed in Note 34 to the consolidated financial statements. The cash outflows associated with these transactions are included in the operating lease obligations above.
The Company has a number of long-term contracts to purchase certain quantities of material with certain suppliers. In each case of such a long-term obligation, the Company has an irrevocable purchase agreement from its customer for the same amount of material over the same time period.
Pension Funding
The Company’s funding policy on its defined benefit pension plan is to satisfy the minimum funding requirements of ERISA. During 2005, the Company contributed $1.0 million to the Hourly Employees Pension Plan.Employee Retirement Income Security Act (“ERISA”). Future funding requirements are dependent upon various factors outside the Company’s control including, but not limited to, fund asset performance and changes in regulatory or accounting requirements. Based upon factors known and considered as of December 31, 2005,2006, the Company does not anticipate any further cash contributions to be made to the pension plans in 2006.2007.
Off-Balance Sheet Arrangements
With the exception of letters of credit and sales/leasebacksales-leaseback financing on certain equipment used in the operation of the business, it is not the Company’s general practice to use off-balance sheet arrangements, such as third-party special-purpose entities or guarantees to third parties.
Obligations of the Company associated with its leased equipment are disclosed within this filing under the “Contractual Obligations and Other Commitments” section above.
See Note 12 to the consolidated financial statements for more details on the Company’s outstanding letters of credit.
1518
Critical Accounting Policies:Policies
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted accounting principals, which necessarilyin the United States of America, and include amounts that are based on management’s estimates, judgments and assumptions.assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. The following is a description of somethe Company’s accounting policies that management believes are the most important to understanding the Company’s financial results:
Inventory–Over ninety percent of the more significant policies:
Inventory— Substantially allCompany’s inventories are valued using the last-in first-out (LIFO)LIFO method. Under this method, the current value of materialmaterials sold is recorded as costCost of material soldMaterials rather than the actual cost in the order in which it was purchased. This means that older costs are included in inventory, which may be higher or lower than current replacement costs. This method of valuation is subject to year-to-year fluctuations in cost of material sold, which is influenced by the inflation or deflation existing within the metals or plastics industry.industries. The use of LIFO for inventory valuation was chosen to better match replacement cost of inventory with the current pricing used to bill customers.
Retirement Plans—– The Company values retirement plan assets and liabilities based on assumptions and valuations established by management following consultation with itsthe Company’s independent actuary. Future valuations are subject to market changes, which are not in the control of the Company and could differ materially from the amounts currently reported. Note 45 to the consolidated financial statements disclose the assumptions used by management.
Insurance Plans —Goodwill and Other Intangible Assets Impairment –The Company is self-insuredSFAS No. 142, “Goodwill and Other Intangible Assets”, establishes accounting and reporting standards for a portion of worker’s compensationgoodwill and automobile insurance. Self-insurance amounts are capped for individual claims, and, in the aggregate, for each policy year by an insurance company. Self-insurance reserves are based on unpaid, known claims (including related administrative fees assessed by the insurance company for claims processing) and a reserve for incurred but not reported claims based on the Company’s historical claim experience and development.
Revenue Recognition —Revenue from product sales is largely recognized upon shipment whereupon title passes and the Company has no further obligations to the customer. The Company has entered into consignment inventory agreements with a few select customers whereby revenueother intangible assets. Under these standards, goodwill is not recorded until the customer has consumed product from the consigned inventory and title has passed. Revenue derived from consigned inventories at customer locations for 2005 was $11.9 million (or 1.2% of sales) comparedamortized, but rather is subject to $9.5 million (or 1.2% of 2004 sales). Inventory on consignment at customers as of December 31, 2005 was $1.5 million, or 1.2% of consolidated net inventory as reported on the Company’s consolidated balance sheets. Provisions for discounts and rebates to customers, and returns and other adjustments are recorded in the same period the related sales are recorded. Shipping and handling expenses of $29.1 million, $24.4 million and $20.6 million for 2005, 2004 and 2003, respectively, were recorded as operating expense in the period incurred.
Goodwill Impairment —an annual impairment test. The carrying value of the Company’s goodwill is evaluated annually during the first quarter of each fiscal year or when certain triggering events (e.g. the potential sale of an entity) occur which require a more current valuation. The valuation is based on the comparison of an entity’s discounted cash flow (equity valuation) to its carrying value. If the carrying value exceeds the equity valuation, the goodwill is impaired appropriately.deemed impaired. The equity valuation is based on historical data and management assumptionsestimates of future cash flow. Since the assumptionsestimates are forward looking, actual results could differ materially from those used in the valuation process.
Income taxes—The Company accountsCompany’s recorded intangible assets were substantially acquired as part of the Transtar acquisition and consist primarily of customer relationships. The initial values of the intangible assets were based on a discounted cash flow valuation using assumptions made by management as to future revenues from select customers, the level and pace of attrition in such revenues over time and assumed operating income amounts generated from such revenues. These intangible assets are amortized over their useful lives as estimated by management, which are generally 11 years for income taxes usingcustomer relationships. Furthermore, when certain conditions or certain triggering events occur, a separate test of impairment, similar to the impairment test for goodwill is performed and if the intangible asset and liability method. Deferred income taxes reflect the net tax effect, using enacted tax rates of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The Company records valuation allowances againstis deemed impaired, such asset will be written down to its deferred tax assets when it is more likely than not that the amounts will not be realized. Income tax expense includes provisions for amounts that are currently payable, plus changes in deferred tax assets and liabilities.fair value.
Stock-Based Compensation —The Company offers stock-based compensation to executive and other key employees, as well as its directors. Stock-based compensation expense is generally recorded usingover the vesting period based on the grant date fair value of the stock award. For stock option grants, the Company determines the grant date fair value of the award withutilizing a Black ScholesBlack-Scholes valuation model usingbased on assumptions forof the risk-
16
freerisk-free interest rate, expected term of the option, volatility and expected dividend yield. See Note 10 to the consolidated financial statements for a discussion of the specific assumptions usedmade by management. TheStock-based compensation expense for the Company’s long-term performanceincentive plan generally calculatesis recorded using the fair value by reference tobased on the grant date market price of the Company’s common stock and instock. In recording stockstock-based compensation expense for the long-term incentive plan, management also must estimate the probable number of shares which will ultimately vest. The actual number of shares that will vest may differ from management’s estimate.
Recent Accounting Pronouncements:
A description of recent other accounting pronouncements is included in Note 1 “Notes to Consolidated Financial Statements”the consolidated financial statements under the caption “New”Significant Accounting Standards”Policies”.
19
ITEM 7a —Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to various interest rate, commodity price, and metal priceforeign exchange rate risks that arise in the normal course of business.
Interest Rate Risk — The Company finances its operations with fixed and variable rate borrowings. Market risk arises from changes in variable interest rates. Under its U.S. Revolver and Canadian Facility, the Company’s interest rate on borrowings is subject to changes in the LIBOR and Prime interest rate market fluctuations. As of December 31, 2005, the Company had no outstanding borrowings under the Revolver. (See Note 8 to consolidated financial statements for more detailsBased on the Company’s variable interest rate.) All of the Company’s long-termrate debt as ofinstruments at December 31, 2005 is on a fixed2006, if interest rate.rates were to increase hypothetically by 25 basis points, 2006 interest expense would have increased by approximately $0.2 million in 2006.
Commodity Price Risk — The Company’s raw material costs are comprised primarily of engineered metals and plastics. Market risk arises from changes in the price of steel, other metals and plastics. Although average selling prices generally increase or decrease as material costs increase or decrease, the impact of a change in the purchase price of materials is more immediately reflected in the Company’s cost of goods soldmaterials than in its selling prices.
17
Foreign Exchange Rate Exposure — The Company conducts operations in foreign countries, including Canada, Mexico, France and the United Kingdom. However, changes in the value of the U.S. dollar as compared to foreign currencies would not have a material impact on the Company’s reported earnings.
ITEM 8 —Financial Statements and Supplementary Data
Consolidated Statements of Operations
| | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (Dollars in thousands, except per share data) | | 2005 | | 2004 | | 2003 |
| |
| Net sales | | $ | 958,978 | | | $ | 760,997 | | | $ | 543,031 | |
| Cost of material sold | | | 677,186 | | | | 543,426 | | | | 384,459 | |
| Special charges (Note 7) | | | — | | | | — | | | | 1,624 | |
| | | |
| Gross material margin | | | 281,792 | | | | 217,571 | | | | 156,948 | |
| | | | | | | | | | | | | |
| Plant and delivery expense | | | 108,427 | | | | 95,229 | | | | 87,055 | |
| Sales, general, and administrative expense | | | 92,848 | | | | 82,142 | | | | 70,354 | |
| Depreciation and amortization expense | | | 9,340 | | | | 8,751 | | | | 8,839 | |
| Impairment and other operating expenses (Note 7) | | | — | | | | — | | | | 6,456 | |
| | | |
| Total operating expense | | | 210,615 | | | | 186,122 | | | | 172,704 | |
| | | |
| Operating income (loss) | | | 71,177 | | | | 31,449 | | | | (15,756 | ) |
| Interest expense, net (Note 9) | | | (7,348 | ) | | | (8,968 | ) | | | (9,709 | ) |
| Discount on sale of accounts receivable (Note 8) | | | (1,127 | ) | | | (969 | ) | | | (1,157 | ) |
| Loss on extinguishment of debt (Note 9) | | | (4,904 | ) | | | — | | | | — | |
| | | |
| Income (loss) from continuing operations before income taxes and equity in earnings of joint ventures | | | 57,798 | | | | 21,512 | | | | (26,622 | ) |
| | | | | | | | | | | | | |
| Income taxes (Note 6) | | | (23,191 | ) | | | (11,294 | ) | | | 10,046 | |
| | | |
| | | | | | | | | | | | | |
| Income (loss) from continuing operations before equity in earnings of joint ventures | | | 34,607 | | | | 10,218 | | | | (16,576 | ) |
| | | | | | | | | | | | | |
| Equity in earnings of joint ventures | | | 4,302 | | | | 5,199 | | | | 137 | |
| Impairment to joint venture investment and advances (Note 7) | | | — | | | | — | | | | (3,453 | ) |
| | | |
| Income (loss) from continuing operations | | | 38,909 | | | | 15,417 | | | | (19,892 | ) |
| | | | | | | | | | | | | |
| Discontinued operations (Note 7): | | | | | | | | | | | | |
| Loss on disposal of subsidiary, net of income tax benefit of ($115) | | | — | | | | — | | | | (172 | ) |
| | | |
| | | | | | | | | | | | | |
| Net income (loss) | | $ | 38,909 | | | $ | 15,417 | | | $ | (20,064 | ) |
| Preferred dividends | | | (961 | ) | | | (957 | ) | | | (961 | ) |
| | | |
| Net income (loss) applicable to common stock | | $ | 37,948 | | | $ | 14,460 | | | $ | (21,025 | ) |
| | | |
| | | | | | | | | | | | | |
| Basic earnings (loss) per share: | | | | | | | | | | | | |
| Continuing operations | | $ | 2.37 | | | $ | 0.92 | | | $ | (1.32 | ) |
| Discontinued operations | | | — | | | | — | | | | (0.01 | ) |
| | | |
| | | $ | 2.37 | | | $ | 0.92 | | | $ | (1.33 | ) |
| | | |
| | | | | | | | | | | | | |
| Diluted earnings (loss) per share: | | | | | | | | | | | | |
| Continuing operations | | $ | 2.11 | | | $ | 0.82 | | | $ | (1.32 | ) |
| Discontinued operations | | | — | | | | — | | | | (0.01 | ) |
| | | |
| | | $ | 2.11 | | | $ | 0.82 | | | $ | (1.33 | ) |
| | | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
18
Consolidated Balance Sheets
| | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2005 | | 2004 |
| |
Assets | | | | | | | | |
| Current assets | | | | | | | | |
| Cash and cash equivalents (Note 1) | | $ | 37,392 | | | $ | 3,106 | |
| Accounts receivable, less allowances of $1,763 in 2005 and $1,760 in 2004 (Note 8) | | | 107,064 | | | | 80,323 | |
| Inventories (principally on last-in first-out basis) (latest cost higher by $104,036 in 2005 and $92,500 in 2004 (Note 1) | | | 119,306 | | | | 135,588 | |
| Other current assets | | | 6,351 | | | | 8,489 | |
| | | |
| Total current assets | | | 270,113 | | | | 227,506 | |
| Investment in joint venture (Note 5) | | | 10,850 | | | | 8,463 | |
| Goodwill and intangible assets (Note 1) | | | 32,222 | | | | 32,201 | |
| Prepaid pension cost (Note 4) | | | 41,946 | | | | 42,262 | |
| Other assets | | | 4,182 | | | | 7,586 | |
| Property, plant and equipment, at cost (Note 1) | | | | | | | | |
| Land | | | 4,772 | | | | 4,771 | |
| Building | | | 45,890 | | | | 45,514 | |
| Machinery and equipment | | | 127,048 | | | | 124,641 | |
| | | |
| | | | 177,710 | | | | 174,926 | |
| Less — accumulated depreciation | | | (113,288 | ) | | | (109,928 | ) |
| | | |
| | | | 64,422 | | | | 64,998 | |
| | | |
| Total assets | | $ | 423,735 | | | $ | 383,016 | |
| | | |
| | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | $ | 103,246 | | | $ | 93,342 | |
| Accrued payroll and employee benefits | | | 12,241 | | | | 11,246 | |
| Accrued liabilities | | | 9,294 | | | | 8,345 | |
| Current and deferred income taxes (Note 6) | | | 7,052 | | | | 3,653 | |
| Current portion of long-term debt (Note 9) | | | 6,233 | | | | 11,607 | |
| | | |
| Total current liabilities | | | 138,066 | | | | 128,193 | |
| Long-term debt, less current portion (Note 9) | | | 73,827 | | | | 89,771 | |
| Deferred income taxes (Note 6) | | | 21,903 | | | | 19,668 | |
| Deferred gain on sale of assets (Note 3) | | | 5,967 | | | | 6,465 | |
| Pension and postretirement benefit obligations (Note 4) | | | 8,467 | | | | 6,874 | |
| Minority interest | | | — | | | | 1,644 | |
| Commitments and contingencies (Notes 3 and 12) | | | | | | | | |
| Stockholders’ equity (Notes 10 and 11) | | | | | | | | |
| Preferred stock, $0.01 par value — 10,000,000 shares authorized 12,000 shares issued and outstanding | | | 11,239 | | | | 11,239 | |
| Common stock, $0.01 par value — authorized 30,000,000 shares; issued and outstanding 16,605,714 in 2005 and 15,806,366 in 2004 | | | 166 | | | | 159 | |
| Additional paid-in capital | | | 60,916 | | | | 45,052 | |
| Retained earnings | | | 110,530 | | | | 72,582 | |
| Accumulated other comprehensive income | | | 2,370 | | | | 1,616 | |
| Other — deferred compensation | | | — | | | | (2 | ) |
| Treasury stock, at cost — 546,065 shares in 2005 and 62,065 shares in 2004 | | | (9,716 | ) | | | (245 | ) |
| | | |
| Total stockholders’ equity | | | 175,505 | | | | 130,401 | |
| | | |
| Total liabilities and stockholders’ equity | | $ | 423,735 | | | $ | 383,016 | |
| | | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
19
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (Dollars in thousands) | | 2005 | | 2004 | | 2003 |
| |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net income (loss) | | $ | 38,909 | | | $ | 15,417 | | | $ | (20,064 | ) |
| Loss from disposal of discontinued operations | | | — | | | | — | | | | 172 | |
| Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 9,340 | | | | 8,751 | | | | 8,839 | |
| Amortization of deferred gain | | | (498 | ) | | | (839 | ) | | | (593 | ) |
| Loss on sale of facilities/equipment | | | 73 | | | | 701 | | | | 376 | |
| Equity in earnings from joint ventures | | | (4,302 | ) | | | (5,199 | ) | | | (137 | ) |
| Deferred tax provision | | | (2,046 | ) | | | 7,072 | | | | (6,020 | ) |
| Stock compensation expense | | | 4,174 | | | | 1,460 | | | | 2,015 | |
| Increase in minority interest | | | — | | | | 188 | | | | 104 | |
| Excess tax benefits from stock-based payment arrangements | | | (793 | ) | | | — | | | | — | |
| Asset and joint venture impairment | | | — | | | | — | | | | 11,333 | |
| Increase (decrease) from changes in: | | | | | | | | | | | | |
| Accounts receivable | | | (26,217 | ) | | | (24,126 | ) | | | (18,827 | ) |
| Inventories | | | 16,742 | | | | (15,668 | ) | | | 14,328 | |
| Other current assets | | | 2,186 | | | | (350 | ) | | | 9,930 | |
| Other assets | | | (398 | ) | | | (133 | ) | | | (3,181 | ) |
| Prepaid pension costs | | | 316 | | | | (187 | ) | | | (1,716 | ) |
| Accounts payable | | | 9,702 | | | | 24,351 | | | | 2,543 | |
| Accrued payroll and employee benefits | | | 2,319 | | | | 4,363 | | | | 708 | |
| Income tax payable | | | 7,594 | | | | (1,377 | ) | | | (716 | ) |
| Accrued liabilities | | | 506 | | | | (1,053 | ) | | | (758 | ) |
| Postretirement benefit obligations and other liabilities | | | 271 | | | | 249 | | | | 606 | |
| | | |
| Net cash from operating activities | | | 57,878 | | | | 13,621 | | | | (1,059 | ) |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Investments and acquisitions | | | (236 | ) | | | (1,744 | ) | | | — | |
| Dividends from joint ventures | | | 1,915 | | | | 2,228 | | | | (289 | ) |
| Proceeds from sale of facilities/equipment | | | 33 | | | | — | | | | 14,002 | |
| Capital expenditures | | | (8,685 | ) | | | (5,318 | ) | | | (5,145 | ) |
| Collection of note receivable | | | 2,465 | | | | — | | | | — | |
| | | |
| Net cash from investing activities | | | (4,508 | ) | | | (4,834 | ) | | | 8,568 | |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from issuance of long-term debt | | | 75,000 | | | | — | | | | — | |
| Repayment of long-term debt | | | (96,271 | ) | | | (7,452 | ) | | | (5,182 | ) |
| Preferred stock dividend | | | (961 | ) | | | (957 | ) | | | (961 | ) |
| Exercise of stock options | | | 2,227 | | | | — | | | | — | |
| Excess tax benefits from stock-based payment arrangements | | | 793 | | | | — | | | | — | |
| | | |
| Net cash from financing activities | | | (19,212 | ) | | | (8,409 | ) | | | (6,143 | ) |
| | | | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | 128 | | | | 273 | | | | 171 | |
| | | | | | | | | | | | | |
| Net increase in cash and cash equivalents | | | 34,286 | | | | 651 | | | | 1,537 | |
| Cash and cash equivalents — beginning of year | | | 3,106 | | | | 2,455 | | | | 918 | |
| | | |
| Cash and cash equivalents — end of year | | $ | 37,392 | | | $ | 3,106 | | | $ | 2,455 | |
| | | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (Dollars in thousands, except per share data) | | 2006 | | 2005 | | 2004 |
| |
| Net sales | | $ | 1,177,600 | | | $ | 958,978 | | | $ | 760,997 | |
| | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | |
| Cost of materials (exclusive of depreciation) | | | 839,234 | | | | 677,186 | | | | 543,426 | |
| Warehouse, processing and delivery expense | | | 123,204 | | | | 108,427 | | | | 95,229 | |
| Sales, general, and administrative expense | | | 109,407 | | | | 92,848 | | | | 82,142 | |
| Depreciation and amortization expense | | | 13,290 | | | | 9,340 | | | | 8,751 | |
| | | |
| Operating income | | | 92,465 | | | | 71,177 | | | | 31,449 | |
| Interest expense, net (Note 9) | | | (8,302 | ) | | | (7,348 | ) | | | (8,968 | ) |
| Discount on sale of accounts receivable (Note 9) | | | — | | | | (1,127 | ) | | | (969 | ) |
| Loss on extinguishment of debt (Note 9) | | | — | | | | (4,904 | ) | | | —- | |
| | | |
| Income before income taxes and equity earnings of joint venture | | | 84,163 | | | | 57,798 | | | | 21,512 | |
| | | | | | | | | | | | | |
| Income taxes (Note 7) | | | (33,330 | ) | | | (23,191 | ) | | | (11,294 | ) |
| | | |
| | | | | | | | | | | | | |
| Net income before equity in earnings of joint venture | | | 50,833 | | | | 34,607 | | | | 10,218 | |
| | | | | | | | | | | | | |
| Equity in earnings of joint venture (Note 6) | | | 4,286 | | | | 4,302 | | | | 5,199 | |
| | | |
| Net income | | | 55,119 | | | | 38,909 | | | | 15,417 | |
| | | | | | | | | | | | | |
| Preferred stock dividends | | | (963 | ) | | | (961 | ) | | | (957 | ) |
| | | |
| Net income applicable to common stock | | $ | 54,156 | | | $ | 37,948 | | | $ | 14,460 | |
| | | |
| | | | | | | | | | | | | |
| Basic earnings per share | | $ | 2.95 | | | $ | 2.37 | | | $ | 0.92 | |
| | | |
| | | | | | | | | | | | | |
| Diluted earnings per share | | $ | 2.89 | | | $ | 2.11 | | | $ | 0.82 | |
| | | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
20
Supplemental Disclosures of
Consolidated Cash Flows InformationBalance Sheets
| | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (Dollars in thousands) | | 2005 | | 2004 | | 2003 |
| |
| Supplemental disclosures of cash flows information | | | | | | | | | | | | |
| Cash paid (received) during the year for— | | | | | | | | | | | | |
| Interest | | $ | 8,365 | | | $ | 8,910 | | | $ | 9,740 | |
| Income taxes | | $ | 16,860 | | | $ | 6,331 | | | $ | (12,653 | ) |
| | | | | | | | | |
| | | December 31, |
| (Dollars in thousands, except share and par value data) | | 2006 | | 2005 |
| |
Assets | | | | | | | | |
| Current assets | | | | | | | | |
| Cash and cash equivalents (Note 1) | | $ | 9,526 | | | $ | 37,392 | |
| Accounts receivable, less allowances of $3,112 in 2006 and $1,763 in 2005 | | | 160,999 | | | | 107,064 | |
| Inventories (principally on last-in, first-out basis) (latest cost higher by $128,404 in 2006 and $104,036 in 2005) (Note 1) | | | 202,394 | | | | 119,306 | |
| Other current assets | | | 18,743 | | | | 6,351 | |
| | | |
| Total current assets | | | 391,662 | | | | 270,113 | |
| Investment in joint venture (Note 6) | | | 13,577 | | | | 10,850 | |
| Goodwill (Note 8) | | | 101,783 | | | | 32,222 | |
| Intangible assets (Note 8) | | | 66,169 | | | | 70 | |
| Prepaid pension cost (Note 5) | | | 5,681 | | | | 41,946 | |
| Other assets | | | 5,850 | | | | 4,112 | |
| Property, plant and equipment, at cost (Note 1) | | | | | | | | |
| Land | | | 5,221 | | | | 4,772 | |
| Building | | | 49,017 | | | | 45,890 | |
| Machinery and equipment | | | 141,090 | | | | 127,048 | |
| | | |
| | | | 195,328 | | | | 177,710 | |
| Less – accumulated depreciation | | | (124,930 | ) | | | (113,288 | ) |
| | | |
| | | | 70,398 | | | | 64,422 | |
| | | |
| Total assets | | $ | 655,120 | | | $ | 423,735 | |
| | | |
| | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | $ | 117,561 | | | $ | 103,246 | |
| Accrued payroll and employee benefits (Note 5) | | | 15,168 | | | | 12,241 | |
| Accrued liabilities | | | 14,984 | | | | 9,294 | |
| Income taxes payable | | | 931 | | | | 5,834 | |
| Deferred income taxes-current (Note 7) | | | 16,339 | | | | 1,218 | |
| Current portion of long-term debt (Note 9) | | | 12,834 | | | | 6,233 | |
| Short-term debt (Note 9) | | | 123,261 | | | | — | |
| | | |
| Total current liabilities | | | 301,078 | | | | 138,066 | |
| Long-term debt, less current portion (Note 9) | | | 90,051 | | | | 73,827 | |
| Deferred income taxes (Note 7) | | | 31,782 | | | | 21,903 | |
| Deferred gain on sale of assets (Note 4) | | | 5,666 | | | | 5,967 | |
| Pension and postretirement benefit obligations (Note 5) | | | 10,636 | | | | 8,467 | |
| Commitments and contingencies (Notes 4 and 12) | | | — | | | | — | |
| Stockholders’ equity (Notes 10 and 11) | | | | | | | | |
| Preferred stock, $0.01 par value - 10,000,000 shares authorized; 12,000 shares issued and outstanding | | | 11,239 | | | | 11,239 | |
| Common stock, $0.01 par value - 30,000,000 shares authorized; 17,085,091 and 16,605,714 shares issued and outstanding in 2006 and 2005, respectively | | | 170 | | | | 166 | |
| Additional paid-in capital | | | 69,775 | | | | 60,916 | |
| Retained earnings | | | 160,625 | | | | 110,530 | |
| Accumulated other comprehensive income (loss) (Note 13) | | | (18,504 | ) | | | 2,370 | |
| Deferred unearned compensation | | | (1,392 | ) | | | — | |
| Treasury stock, at cost – 362,114 shares in 2006 and 546,065 shares in 2005 | | | (6,006 | ) | | | (9,716 | ) |
| | | |
| Total stockholders’ equity | | | 215,907 | | | | 175,505 | |
| | | |
| Total liabilities and stockholders’ equity | | $ | 655,120 | | | $ | 423,735 | |
| | | |
Consolidated Statements of Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | | | | | | | Add’l | | | | | | Other- | | Other | | |
| | | Preferred | | Common | | Treasury | | Paid-in | | Retained | | Deferred | | Comprehensive | | |
| (Dollars in thousands) | | Stock | | Stock | | Stock | | Capital | | Earnings | | Compensation | | Income | | Total |
| |
| Balance at January 1, 2003 — as previously reported | | $ | 11,239 | | | $ | 158 | | | $ | (230 | ) | | $ | 35,017 | | | $ | 85,490 | | | $ | (195 | ) | | $ | (555 | ) | | $ | 130,924 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative effect on prior years of applying FAS123R retrospectively | | | | | | | | | | | | | | | 6,335 | | | | (6,343 | ) | | | | | | | | | | | (8 | ) |
| Balance at January 1, 2003 — as adjusted | | $ | 11,239 | | | $ | 158 | | | $ | (230 | ) | | $ | 41,352 | | | $ | 79,147 | | | $ | (195 | ) | | $ | (555 | ) | | $ | 130,916 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | | | | | (20,064 | ) | | | | | | | | | | | (20,064 | ) |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,691 | | | | 1,691 | |
| Pension liability adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | (94 | ) | | | (94 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (18,467 | ) |
| Preferred Dividends | | | | | | | | | | | | | | | | | | | (961 | ) | | | | | | | | | | | (961 | ) |
| Other | | | | | | | 1 | | | | (15 | ) | | | 2,015 | | | | | | | | 165 | | | | | | | | 2,166 | |
| |
| Balance at December 31, 2003 | | $ | 11,239 | | | $ | 159 | | | $ | (245 | ) | | $ | 43,367 | | | $ | 58,122 | | | $ | (30 | ) | | $ | 1,042 | | | $ | 113,654 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | | 15,417 | | | | | | | | | | | | 15,417 | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,009 | | | | 1,009 | |
| Pension liability adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | (435 | ) | | | (435 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,991 | |
| Preferred Dividends | | | | | | | | | | | | | | | | | | | (957 | ) | | | | | | | | | | | (957 | ) |
| Exercise of stock options and other | | | | | | | | | | | | | | | 1,685 | | | | | | | | 28 | | | | | | | | 1,713 | |
| |
| Balance at December 31, 2004 | | $ | 11,239 | | | $ | 159 | | | $ | (245 | ) | | $ | 45,052 | | | $ | 72,582 | | | $ | (2 | ) | | $ | 1,616 | | | $ | 130,401 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | | 38,909 | | | | | | | | | | | | 38,909 | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,151 | | | | 1,151 | |
| Pension liability adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | (397 | ) | | | (397 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 39,663 | |
| Preferred Dividends | | | | | | | | | | | | | | | | | | | (961 | ) | | | | | | | | | | | (961 | ) |
| Long-term incentive plan | | | | | | | | | | | | | | | 2,143 | | | | | | | | | | | | | | | | 2,143 | |
| Exercise of stock options and other | | | | | | | 7 | | | | (9,471 | ) | | | 13,721 | | | | | | | | 2 | | | | | | | | 4,259 | |
| |
| Balance at December 31, 2005 | | $ | 11,239 | | | $ | 166 | | | $ | (9,716 | ) | | $ | 60,916 | | | $ | 110,530 | | | $ | — | | | $ | 2,370 | | | $ | 175,505 | |
| |
The accompanying notes to consolidated financial statements are an integral part of these statements.
21
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (Dollars in thousands) | | 2006 | | 2005 | | 2004 |
| |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | $ | 55,119 | | | $ | 38,909 | | | $ | 15,417 | |
| Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 13,290 | | | | 9,340 | | | | 8,751 | |
| Amortization of deferred gain | | | (760 | ) | | | (498 | ) | | | (839 | ) |
| Loss on sale of facilities/equipment | | | 94 | | | | 73 | | | | 701 | |
| Equity in earnings from joint venture | | | (4,286 | ) | | | (4,302 | ) | | | (5,199 | ) |
| Deferred tax provision | | | 4,537 | | | | (2,046 | ) | | | 7,072 | |
| Share-based compensation expense | | | 4,485 | | | | 4,174 | | | | 1,460 | |
| Increase in minority interest | | | — | | | | — | | | | 188 | |
| Excess tax benefits from stock-based payment arrangements | | | (1,186 | ) | | | (793 | ) | | | — | |
| Increase (decrease) from changes in: | | | | | | | | | | | | |
| Accounts receivable | | | (19,678 | ) | | | (26,217 | ) | | | (24,126 | ) |
| Inventories | | | (22,521 | ) | | | 16,742 | | | | (15,668 | ) |
| Other current assets | | | (2,570 | ) | | | 2,186 | | | | (350 | ) |
| Other assets | | | 722 | | | | (398 | ) | | | (133 | ) |
| Prepaid pension | | | 1,920 | | | | 316 | | | | (187 | ) |
| Accounts payable | | | 7,882 | | | | 9,702 | | | | 24,351 | |
| Accrued payroll and employee benefits | | | (1,350 | ) | | | 2,319 | | | | 4,363 | |
| Income tax payable | | | (10,090 | ) | | | 7,594 | | | | (1,377 | ) |
| Accrued liabilities | | | 2,044 | | | | 506 | | | | (1,053 | ) |
| Postretirement benefit obligations and other liabilities | | | 2,165 | | | | 271 | | | | 249 | |
| | | |
| Net cash from operating activities | | | 29,817 | | | | 57,878 | | | | 13,621 | |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Investments and acquisitions, net of cash acquired | | | (175,583 | ) | | | (236 | ) | | | (1,744 | ) |
| Dividends from joint ventures | | | 1,623 | | | | 1,915 | | | | 2,228 | |
| Proceeds from sale of facilities/equipment | | | 124 | | | | 33 | | | | — | |
| Capital expenditures | | | (12,935 | ) | | | (8,685 | ) | | | (5,318 | ) |
| Collection of note receivable | | | — | | | | 2,465 | | | | — | |
| | | |
| Net cash from investing activities | | | (186,771 | ) | | | (4,508 | ) | | | (4,834 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Short-term debt | | | 110,919 | | | | — | | | | — | |
| Proceeds from issuance of long-term debt | | | 30,000 | | | | 75,000 | | | | — | |
| Repayment of long-term debt | | | (7,832 | ) | | | (96,271 | ) | | | (7,452 | ) |
| Payment of debt issuance fees | | | (3,156 | ) | | | — | | | | — | |
| Preferred stock dividends paid | | | (963 | ) | | | (961 | ) | | | (957 | ) |
| Common stock dividends paid | | | (4,061 | ) | | | — | | | | — | |
| Exercise of stock options | | | 2,840 | | | | 2,227 | | | | — | |
| Excess tax benefits from stock-based payment arrangements | | | 1,186 | | | | 793 | | | | — | |
| | | |
| Net cash from financing activities | | | 128,933 | | | | (19,212 | ) | | | (8,409 | ) |
| | | | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | 155 | | | | 128 | | | | 273 | |
| Net (decrease) increase in cash and cash equivalents | | | (27,866 | ) | | | 34,286 | | | | 651 | |
| Cash and cash equivalents — beginning of year | | | 37,392 | | | | 3,106 | | | | 2,455 | |
| | | |
| Cash and cash equivalents — end of year | | $ | 9,526 | | | $ | 37,392 | | | $ | 3,106 | |
| | | |
See Note 1 to the consolidated financial statements for supplemental cash flow disclosures.
The accompanying notes to consolidated financial statements are an integral part of these statements.
22
Consolidated Statement of Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | | | | | | | | | | | | | | | Additional | | | | | | Unearned | | Other | | |
| | | Common | | Treasury | | Preferred | | Common | | Treasury | | Paid-in | | Retained | | Deferred | | Comprehensive | | |
| (Dollars and shares in thousands) | | Shares | | Shares | | Stock | | Stock | | Stock | | Capital | | Earnings | | Compensation | | Income | | Total |
| |
| Balance at January 1, 2004 | | | 15,788 | | | | (57 | ) | | $ | 11,239 | | | $ | 159 | | | $ | (245 | ) | | $ | 43,367 | | | $ | 58,122 | | | $ | (30 | ) | | $ | 1,042 | | | $ | 113,654 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,417 | | | | | | | | | | | | 15,417 | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,009 | | | | 1,009 | |
| Minimum pension liability, net of tax benefit of $278 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (435 | ) | | | (435 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,991 | |
| Preferred stock dividend | | | | | | | | | | | | | | | | | | | | | | | | | | | (957 | ) | | | | | | | | | | | (957 | ) |
| Exercise of stock options and other | | | 18 | | | | (5 | ) | | | | | | | | | | | | | | | 1,685 | | | | | | | | 28 | | | | | | | | 1,713 | |
| |
| Balance at December 31, 2004 | | | 15,806 | | | | (62 | ) | | $ | 11,239 | | | $ | 159 | | | | ($245 | ) | | $ | 45,052 | | | $ | 72,582 | | | | ($2 | ) | | $ | 1,616 | | | $ | 130,401 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 38,909 | | | | | | | | | | | | 38,909 | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,151 | | | | 1,151 | |
| Minimum pension liability, net of tax benefit of $254 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (397 | ) | | | (397 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 39,663 | |
| Preferred stock dividend | | | | | | | | | | | | | | | | | | | | | | | | | | | (961 | ) | | | | | | | | | | | (961 | ) |
| Long-term incentive plan | | | | | | | | | | | | | | | | | | | | | | | 2,143 | | | | | | | | | | | | | | | | 2,143 | |
| Exercise of stock options and other | | | 800 | | | | (484 | ) | | | | | | | 7 | | | | (9,471 | ) | | | 13,721 | | | | | | | | 2 | | | | | | | | 4,259 | |
| |
| Balance at December 31, 2005 | | | 16,606 | | | | (546 | ) | | $ | 11,239 | | | $ | 166 | | | | ($9,716 | ) | | $ | 60,916 | | | $ | 110,530 | | | $ | 0 | | | $ | 2,370 | | | $ | 175,505 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | 55,119 | | | | | | | | | | | | 55,119 | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 66 | | | | 66 | |
| Minimum pension liability, net of tax expense of $206 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 322 | | | | 322 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 55,507 | |
| Adjustment to initially apply SFAS No. 158, net of tax benefit of $13,611 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (21,262 | ) | | | (21,262 | ) |
| Preferred stock dividend | | | | | | | | | | | | | | | | | | | | | | | | | | | (963 | ) | | | | | | | | | | | (963 | ) |
| Common stock dividend | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,061 | ) | | | | | | | | | | | (4,061 | ) |
| Long-term incentive plan | | | | | | | | | | | | | | | | | | | | | | | 3,209 | | | | | | | | | | | | | | | | 3,209 | |
| Exercise of stock options and other | | | 479 | | | | 184 | | | | | | | | 4 | | | | 3,710 | | | | 5,650 | | | | | | | | (1,392 | ) | | | | | | | 7,972 | |
| |
| Balance at December 31, 2006 | | | 17,085 | | | | (362 | ) | | $ | 11,239 | | | $ | 170 | | | | ($6,006 | ) | | $ | 69,775 | | | $ | 160,625 | | | | ($1,392 | ) | | | ($18,504 | ) | | $ | 215,907 | |
| |
The accompanying notes to consolidated financial statements are an integral part of these statements.
23
A. M. Castle & Co.
Notes to Consolidated Financial Statements
December 31, 20052006
(1) Principal accounting policiesSignificant Accounting Policies
Nature of Operationsoperations—A.M. Castle & Co. and subsidiaries (the “Company”) distribute specialty metals and plastics to customers globally from operations in North America.America, France and the United Kingdom. The Company provides a broad range of product inventories as well as value-added processing services to a wide array of customers, principally within the producer durable equipment sector of the economy.
Basis of presentation—The consolidated financial statements include the accounts of A. M. Castle & Co. and its subsidiaries over which the Company exhibits a controlling interest. The equity method of accounting is used for the Company’s remaining 50% owned joint venture.venture, Kreher Steel Company, LLC. All inter-company accounts and transactions have been eliminated.
Use of estimates—The preparation of the consolidated financial statements have been prepared in accordanceconformity with accounting principles generally accepted accounting principles in the United States of America which necessarily include amounts based onrequires management to make estimates and assumptions by management.judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those amounts.estimates. The principal areas of estimation reflected in the consolidated financial statements are sales returns and allowances, inventory, goodwill and intangible assets, income taxes, contingencies and litigation, and defined benefit retirement plans.
Revenue Recognitionrecognition—Revenue from product sales is largely recognized upon shipment whereupon title passes and the Company has no further obligations to the customer. The Company has entered into consignment inventory agreements with a few select customers whereby revenue is not recorded until the customer has consumed product from the consigned inventory and title has passed. Revenue derived from consigned inventories at customer locations for 20052006 was $11.9$19.6 million (or 1.2%1.7% of sales) compared to $9.5$11.9 million in 2005 (or 1.2% of 20042005 sales). and $9.5 million or 1.2% of sales in 2004. Inventory on consignment at customers as of December 31, 20052006 was $4.4 million, or 2.2% of consolidated net inventory and $1.5 million or 1.2% as of consolidated net inventoryDecember 31, 2005 as reported on the Company’s consolidated balance sheets. Provisions for discounts and rebates to customers, and returns and other adjustments are recorded in the same period the related sales are recorded. Shipping and handling expenses of $29.1 million, $24.4 million and $20.6 million for 2005, 2004 and 2003, respectively, were recorded as operating expense in the period incurred.
Cost of Material Soldmaterials—Cost of material soldmaterials consists of the costs we paythe Company pays for metals, plastics and related inbound freight charges. It excludes depreciation and amortization which are included in Other operating expenses. The Company accounts for inventory on a last-in, first-out (“LIFO”) basis and LIFO (last-in, first-out) basis.adjustments are recorded to cost of materials. LIFO adjustments are calculated as of December 31 of each year. Interim estimates of the year-end charge or credit are determined based on inflationary or deflationary purchase cost trends and estimated year-end inventory levels. Interim LIFO estimates may require significant year-end adjustments. See Note 14 to the consolidated financial statements for further details of such adjustments.
ExpensesOther operating expenses—ExpensesOther operating expenses primarily consist of (1) plantwarehousing, processing and delivery expenses, which include occupancy costs, compensation and employee benefits for warehouse personnel, processing, shipping and handling costs; (2) selling expenses, which include compensation and employee benefits for sales personnel, and(3) general and administrative expenses, which include compensation for executive officers and general management, expenses for professional services primarily attributable to accounting and legal advisory services, data communication and computer hardware and maintenance; and (3)(4) depreciation and amortization expenses, which include depreciation for all owned property and equipment and amortization of various long-lived intangible assets.
24
Cash and cash equivalents—Short-term investments that have an original maturity, at the time of purchase, of 90 days or less are considered cash and cash equivalents.
22
Statement of cash flows—The Company had non-cash financing activities for the years ended December 31, 2006, 2005 and 2004, which included the receipt of shares of the Company’s common stock tendered in lieu of cash by employees exercising stock options. The tendered shares had a value of less than $0.1 million in 2006 (1,620 shares), $9.4 million in 2005 (509,218 shares) and $0.1 million in 2004 (5,657 shares), and were recorded as treasury stock. In 2006, the Company also contributed shares of treasury stock to its profit sharing plan totaling $2.7 million and assumed debt as part of the acquisition discussed in Note 2.
Supplemental Disclosures of Consolidated Cash Flow Information—
| | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (Dollars in thousands) | | 2006 | | 2005 | | 2004 |
| |
| Cash paid during the year for— | | | | | | | | | | | | |
| Interest | | $ | 9,041 | | | $ | 8,365 | | | $ | 8,910 | |
| Income taxes | | $ | 38,871 | | | $ | 16,860 | | | $ | 6,331 | |
Inventories—Over ninety percent of the Company’s inventories are stated at the lower of last-in, first-out (LIFO)LIFO cost or market. The Company values its LIFO increments using the costs of its latest purchases during the years reported. In 2005 and 2003 certain inventory quantity reductions caused a liquidation of LIFO inventory values. The liquidationsliquidation increased pre-tax income by $2.8 million in 20052005.
Insurance plans—The Company is self-insured for a portion of its worker’s compensation and reduced pre-tax lossautomobile insurance liabilities. Self-insurance amounts are capped for individual claims and in the aggregate, for each policy year by $1.5 million in 2003.an insurance company. Self-insurance reserves are based on unpaid, known claims (including related administrative fees assessed by the insurance company for claims processing) and a reserve for incurred but not reported claims based on the Company’s historical claim experience and development.
Property, plant and equipment—Property, plant and equipment are stated at cost and include assets held under capitalizedcapital leases. Major renewals and betterments are capitalized, while maintenance and repairs that do not substantially improve or extend the useful lives of the respective assets are expensed currently. When propertiesitems are disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income.
The Company provides for depreciation of plant and equipment by charging against income amounts sufficient to amortize the cost of properties over their estimated useful lives (buildings and building improvements-12improvements — 12 to 40 years; machinery and equipment —– 5 to 20 years). For assets classified as machinery and equipment, lives used for calculating depreciation expense are from 10 to 20 years for manufacturing equipment, 10 years for furniture and fixtures, and 5 years for vehicles and office equipment. Leasehold improvements are depreciated over the shorter of their useful lifelives or the remaining term of the lease. Depreciation is providedrecorded using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. Depreciation expense for 2006, 2005 and 2004 was $11.1 million, $9.3 million and $8.8 million, respectively.
Long-Lived AssetsLong-lived assets—The Company’s long-lived assets and identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
25
Goodwill and intangible assets—Goodwill is not amortized, but rather is subject to an annual impairment test, which can be more frequent when certain triggering events occur. The Company performs an annual impairment test on goodwill during the first quarter of each fiscal year. Intangible assets are amortized over their useful lives as estimated by management, which are generally 11 years for customer relationships and 3 years for non-compete agreements. When conditions or certain triggering events occur, a separate test of impairment, similar to the impairment test for goodwill is performed and if the intangible asset is deemed impaired, such intangible asset is written down to its fair value.
Income taxes—The Company accounts for income taxes using the asset and liability method. Deferred income taxes reflect the net tax effect, using enacted tax rates of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The Company records valuation allowances against its deferred tax assets when it is more likely than not that the amounts will not be realized. Income tax expense includes provisions for amounts that are currently payable, plusand changes in deferred tax assets and liabilities.
Foreign currency translation—For all non-U.S. operations, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using year-end exchange rates, and income and expenses are translated using the average exchange rates for the reporting period. TranslationIn accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”, translation adjustments are deferred in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Gains or losses resulting from foreign currency transactions were not material in 2006, 2005 2004 or 2003.2004.
Statement of Cash Flows Earnings per share—The Company had non-cash financing activities for the years ended December 31, 2005 and 2004, which included the receipt of shares ofCompany’s preferred stock participates in dividends paid on the Company’s common stock tendered in lieu of cash by employees exercising stock options. The tendered shares had value of $9.4 million in 2005 (509,218 shares),on an “if converted” basis. In accordance with Emerging Issues Task Force Issue No. 03-6, “Participating Securities and $0.1 million in 2004 (5,657 shares), and were recorded as treasury stock.
the Two-Class Method under FASB Statement No. 128, Earnings per Share”, basic earnings per share —Earningsis computed by applying the two-class method to compute earnings per share. The two-class method is an earnings allocation method under which earnings per share is calculated for each class of common stock and participating security considering both dividends declared and participation rights in undistributed earnings as if all such earnings had been distributed during the period. Diluted earnings per share areis computed by dividing net income (loss) by the weighted average number of shares of common stock (basic) plus common stock equivalents (diluted) outstanding during the year.equivalents. Common stock equivalents consist of stock options, restricted stock awards and convertible preferred stock shares, andwhich have been included in the calculation of weighted average shares outstanding using the treasury stock method. In accordance with Statement of Financial
23
Accounting Standards (“FAS”)SFAS No. 128, “Earnings per share”Share”, the following table is a reconciliation of the basic and fully diluted earnings per share calculations for the periods reported.(dollars2006, 2005 and shares in thousands)2004:
| | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| | | |
| Income (loss) from continuing operations | | $ | 38,909 | | | $ | 15,417 | | | $ | (19,892 | ) |
| Loss from discontinued operations | | | — | | | | — | | | | (172 | ) |
| | | |
| Net income (loss) | | | 38,909 | | | | 15,417 | | | | (20,064 | ) |
| Preferred dividends | | | (961 | ) | | | (957 | ) | | | (961 | ) |
| | | |
| Net income (loss) applicable to common stock | | $ | 37,948 | | | $ | 14,460 | | | $ | (21,025 | ) |
| | | |
| | | | | | | | | | | | | |
| Weighted average common shares outstanding | | | 16,033 | | | | 15,795 | | | | 15,780 | |
| Dilutive effect of outstanding employee and directors’ common stock options and restricted stock | | | 583 | | | | 1,253 | | | | 1,263 | |
| Dilutive effect of preferred stock | | | 1,794 | | | | 1,794 | | | | 1,794 | |
| | | |
| Diluted common shares outstanding | | | 18,420 | | | | 18,842 | | | | 18,837 | |
| | | |
| | | | | | | | | | | | | |
| Basic earnings (loss) per share: | | | | | | | | | | | | |
| Continuing operations | | $ | 2.37 | * | | $ | 0.92 | * | | $ | (1.32) | * |
| Discontinued operations | | | — | | | | — | | | | (0.01 | ) |
| | | |
| Net income (loss) per share | | $ | 2.37 | | | $ | 0.92 | | | $ | (1.33 | ) |
| | | |
| | | | | | | | | | | | | |
| Diluted earnings (loss) per share: | | | | | | | | | | | | |
| Continuing operations | | $ | 2.11 | | | $ | 0.82 | | | $ | (1.32 | ) |
| Discontinued operations | | | — | | | | — | | | | (0.01 | ) |
| | | |
| Net income (loss) per share | | $ | 2.11 | | | $ | 0.82 | | | $ | (1.33 | ) |
| | | |
| | | | | | | | | | | | | |
| Outstanding employees’ and directors’ common stock options and restricted and preferred stock shares having no dilutive effect | | | 53 | | | | 956 | | | | 1,576 | |
| | | |
26
| | |
* | | Income (loss) from continuing operations less preferred dividend |
Goodwill—The Company performs an annual impairment test on Goodwill and other intangible assets during the first quarter of each fiscal year. There was no impairment of goodwill for the years ended December 31, 2005, 2004 and 2003.
The changes in carrying amounts of goodwill were as follows:
| | | | | | | | | | | | | |
| | | Metals | | Plastics | | |
| | | Segment | | Segment | | Total |
| | | |
| Balance as of December 31, 2003 | | $ | 18,670 | | | $ | 12,973 | | | $ | 31,643 | |
| Purchased | | | 510 | | | | — | | | | 510 | |
| Currency Valuation | | | 48 | | | | — | | | | 48 | |
| | | |
| Balance as of December 31, 2004 | | | 19,228 | | | $ | 12,973 | | | | 32,201 | |
| | | |
| Purchased | | | — | | | | — | | | | — | |
| Currency Valuation | | | 21 | | | | — | | | | 21 | |
| | | |
| Balance as of December 31, 2005 | | $ | 19,249 | | | $ | 12,973 | | | $ | 32,222 | |
| | | |
| | | | | | | | | | | | | |
| (dollars and shares in thousands, | | | | | | |
| except per share data) | | 2006 | | 2005 | | 2004 |
| |
| Numerator: | | | | | | | | | | | | |
| Net income | | $ | 55,119 | | | $ | 38,909 | | | $ | 15,417 | |
| Preferred stock dividends paid | | | (963 | ) | | | (961 | ) | | | (957 | ) |
| | | |
| Undistributed earnings | | $ | 54,156 | | | $ | 37,948 | | | $ | 14,460 | |
| | | |
| | | | | | | | | | | | | |
| Undistributed earnings attributable to: | | | | | | | | | | | | |
| Common stockholders | | $ | 49,831 | | | $ | 37,948 | | | $ | 14,460 | |
| Preferred stockholders, as if converted | | | 4,325 | | | | — | | | | — | |
| | | |
| Total undistributed earnings | | $ | 54,156 | | | $ | 37,948 | | | $ | 14,460 | |
| | | |
| | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | |
| Denominator for basic earnings per share: | | | | | | | | | | | | |
| Weighted average common shares outstanding | | | 16,907 | | | | 16,033 | | | | 15,795 | |
| | | | | | | | | | | | | |
| Effect of dilutive securities: | | | | | | | | | | | | |
| Outstanding employee and directors’ common stock options and restricted stock | | | 360 | | | | 593 | | | | 1,253 | |
| Convertible preferred stock | | | 1,794 | | | | 1,794 | | | | 1,794 | |
| | | |
| | | | | | | | | | | | | |
| Denominator for diluted earnings per share | | | 19,061 | | | | 18,420 | | | | 18,842 | |
| | | |
| | | | | | | | | | | | | |
| Basic earnings per share | | $ | 2.95 | | | $ | 2.37 | | | $ | 0.92 | |
| | | |
| | | | | | | | | | | | | |
| Diluted earnings per share | | $ | 2.89 | | | $ | 2.11 | | | $ | 0.82 | |
| | | |
| Outstanding employees and directors common stock options and restricted and convertible preferred stock shares having no dilutive effect | | | 20 | | | | 53 | | | | 956 | |
Concentrations—The Company serves a wide range of industrial companies within the producer durable equipment sector of the economy from locations throughout the United States, Canada, Mexico, France and Canada.the United Kingdom. Its customer base includes many Fortune 500 companies as well as thousands of medium and smaller sized firms
24
spread across the entire spectrum of metals using industries. The Company’s customer base is well diversified with no single customer accounting for more than 3% of total 2006 net sales. Approximately 90% of the Company’s business is conducted in the United States with the remainder of the sales being madegenerated by the Company’s operations in Canada, Mexico, France and Mexico.the United Kingdom.
ReclassificationsShare-based compensation—The Company records share-based compensation expense ratably over the award vesting period based on the grant date fair value of share-based compensation awards.
Certain amountsNew Accounting Standard Adopted — In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, which was an amendment of SFAS No. 87, 88, 106 and 132(R). Among other items, SFAS No. 158 requires recognition of the overfunded or underfunded status of an entity’s defined benefit postretirement plan as an asset or liability in the prior years’ consolidated financial statements, have been reclassified to conform torequires recognition of the 2005 presentation. Income tax expense (benefit) [$2,046funded status of defined benefit postretirement plans in 2004other comprehensive income. The Company adopted SFAS No. 158 effective December 31, 2006 and ($1,305) in 2003] previously netted against Equity in Earningsthe incremental effect of Joint Ventures and Impairment to Joint Venture Investment and Advances in theapplying it on individual line items on our consolidated statements of operations have been reclassified to include such amounts within the income tax provision. The Company’s liability for its supplemental pension planbalance sheet as of December 31, 2004 ($3,969)2006 is as presentedfollows (dollars in the consolidated balance sheets has been reclassified from Accrued Payroll and Employee Benefits to Pension and Postretirement Benefit Obligations. Additionally, minor grouping reclassifications have been made in the statements of cash flows which did not affect the total of cash flows from operating, investing or financing activity for 2004 or 2003. The reclassified amounts are not material to the presentation of the consolidated financial statements.thousands):
27
| | | | | | | | | | | | | |
| | | Before | | | | | | | After | |
| | | Application of | | | | | | | Application of | |
| | | SFAS No. 158 | | | Adjustments | | | SFAS No. 158 | |
| | | |
| Prepaid pension costs | | $ | 38,126 | | | $ | (32,445 | ) | | $ | 5,681 | |
| Total assets | | | 687,565 | | | | (32,445 | ) | | | 655,120 | |
| Pension and postretirement benefit obligations | | | 8,208 | | | | 2,428 | | | | 10,636 | |
| Deferred income taxes, current and non-current | | | 61,732 | | | | (13,611 | ) | | | 48,121 | |
| Accumulated other comprehensive loss | | | 2,758 | | | | (21,262 | ) | | | (18,504 | ) |
| Total stockholders’ equity | | | 237,169 | | | | (21,262 | ) | | | 215,907 | |
| Total liabilities and stockholders’ equity | | | 687,565 | | | | (32,445 | ) | | | 655,120 | |
New Accounting Standards—In December 2004 the Financial Accounting Standards Board (FASB) issued a revised Statement of Financial Accounting Standards (FAS) No. 123R, “Share-Based Payment”. FAS 123R requires that the fair value of stock options be recorded in the results of operations beginning no later than January 1, 2006. The Company adopted FAS 123R effective October 1, 2005, using the modified retrospective method of adoption. See Note 105 to the consolidated financial statements for a discussionadditional disclosure related to the adoption of SFAS No. 158.
New Accounting Standards – Issued Not Yet Adopted:
In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurement” and in February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 157 was issued to eliminate the diversity in practice that exists due to the different definitions of fair value and the limited guidance in applying these definitions. SFAS No. 157 encourages entities to combine fair value information disclosed under SFAS No. 157 with other accounting pronouncements, including SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, where applicable. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does not expect the adoption of these statements to materially affect its consolidated financial results of operations, cash flows or its financial position.
In July 2006, the FASB issued Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109”. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement principles for financial statements of tax positions taken or expected to be taken on a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. Management is currently evaluating the requirements of FIN No. 48 and has not yet determined the impact of adopting this standard on the consolidated financial statements of adoption of this new standard.statements.
(2) Acquisitions
On September 5, 2006, the Company acquired all of the issued and outstanding capital stock of Transtar Intermediate Holdings #2, Inc. (“Transtar”), a wholly owned subsidiary of H.I.G. Transtar Inc. The results of Transtar’s operations have been included in the consolidated financial statements since that date. These results and the assets of Transtar are included in the Company’s Metals segment.
Transtar is a leading supplier of high performance aluminum alloys to the aerospace and defense industries, supporting the on-going requirements of those markets with a broad range of inventory, processing and supply chain services. As a result of the
28
acquisition, the Company has expanded access to aerospace customers and avenues to cross-sell its other products into this high-growth market. The acquisition also provides the Company the benefits of deeper access to certain inventories and purchasing synergies, as well as providing the Company an existing platform to markets in Asia and other international markets.
The aggregate purchase price, net of cash acquired, was $175.6 million which includes the assumption of $0.7 million of foreign debt and $0.6 million of capital lease obligations of Transtar. An escrow in the amount of $18 million funded from the purchase price was established to satisfy H.I.G. Transtar Inc.’s indemnification obligations under the stock purchase agreement. The purchase price was funded by new debt financing and existing cash balances.
The following table summarizes the preliminary allocation of the purchase price based on the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition. The purchase price remains subject to adjustment based on a final calculation of Transtar’s working capital at the date of acquisition. The Company has obtained third-party valuations of certain intangible assets and the allocation of the purchase price is as follows:
| | | | | |
| Purchase Price Allocation | |
| (dollars in thousands) | | | | |
| Current assets | | $ | 99,746 | |
| PP & E, net | | | 4,274 | |
| Intangible assets | | | 68,324 | |
| Goodwill | | | 69,564 | |
| Other long-term assets | | | 300 | |
| | | | |
| Total assets | | | 242,208 | |
| | | | | |
| Current liabilities | | | 34,460 | |
| Long-term liabilities | | | 29,453 | |
| | | | |
| Total liabilities | | | 63,913 | |
| | | | |
| | | | | |
| Net assets | | $ | 178,295 | |
| | | | |
The acquired intangible assets have a weighted average useful life of approximately 10.8 years and include $66.8 million for the acquired customer relationships with a useful life of 11 years and $1.5 million of non-compete agreements with a useful life of 3 years. Since this was an acquisition of stock, the goodwill and intangible assets will not be deductible for tax purposes.
The following unaudited pro-forma information presents a summary of the Company’s consolidated results of operations as if the acquisition had taken place as of the beginning of each of the current and preceding fiscal years.
| | | | | | | | | |
| For the years ended December 31, | | | | |
| (dollars in millions, except per share data) | | 2006 | | 2005 |
| |
| Net sales | | $ | 1,346 | | | $ | 1,183 | |
| Net income | | $ | 67 | | | $ | 37 | |
| Net income per diluted common share | | $ | 3.52 | | | $ | 2.03 | |
These pro-forma results of operations have been presented for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the dates indicated, or which may result in the future.
29
(3) Segment Reporting
The Company distributes and performs processing on both metals and plastics. Although the distribution processes are similar, different customer markets, supplier bases and types of products exist. Additionally, our Chief Executive Officer, the Company’s chief operating decision-maker, reviews and manages these two businesses separately. As such, these businesses are considered reportable segments according to Statement on Financial Accounting Standards (SFAS)SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” and are reported accordingly.
In its metals segment, Castle’sthe Company’s market strategy focuses on highly engineered specialty grades and alloys of metals as well as specialized processing services geared to meet very tight specifications. Core products include carbon, alloynickel alloys, aluminum, stainless steels and stainless steels; nickel alloys; and aluminum.carbon. Inventories of these products assume many forms such as plate, sheet, round bar, hexagon, square and flat bars; plates; tubing; and sheettubing and coil. Depending on the size of the facility and the nature of the markets it serves, service centers are equipped as needed with bar saws, plate saws, oxygen and plasma arc flame cutting machinery, water-jet cutting, stress relieving and annealing furnaces, surface grinding equipment and sheet shearing equipment. This segment also performs various specialized fabrications for its customers through pre-qualified subcontractors.subcontractors, and the Company’s H-A Industries division, that thermally processes, turns, polishes and straightens alloy and carbon bar.
In theThe plastics segment stocks and distributes a wide variety of plastics in forms that include plate, rod, tube, clear sheet, tape, gaskets and fittings. Processing activities within this segment include cut to length, cut to shape, bending and forming according to customer specifications.
The accounting policies of all segments are as described in Note 1 to the summary of significant accounting policies.consolidated financial statements. Management evaluates the performance of its business segments based on operating income.
The Company operates locations in the United States, Canada, Mexico, France and Mexico.the United Kingdom. No activity from any individual country outside the United States is material;material, and therefore, foreign activity is reported on an aggregate basis. Net sales are attributed to countries based on the location of the Company’s subsidiary that is selling direct to the customer. Company-wide geographic data for the years ended December 31, 2006, 2005 2004 and 2003,2004, are as follows:
| | | | | | | | | | | | | |
| (Dollars in thousands) | | 2006 | | 2005 | | 2004 |
| |
| Net sales | | | | | | | | | | | | |
| United States | | $ | 1,069,885 | | | $ | 871,725 | | | $ | 689,859 | |
| All other countries | | | 107,715 | | | | 87,253 | | | | 71,138 | |
| | | |
| Total | | $ | 1,177,600 | | | $ | 958,978 | | | $ | 760,997 | |
| | | |
| | | | | | | | | | | | | |
| Long-lived assets | | | | | | | | | | | | |
| United States | | $ | 65,283 | | | $ | 59,546 | | | $ | 59,573 | |
| All other countries | | | 5,115 | | | | 4,876 | | | | 5,425 | |
| | | |
| Total | | $ | 70,398 | | | $ | 64,422 | | | $ | 64,998 | |
| | | |
2530
| | | | | | | | | | | | | |
| (Dollars in thousands) | | 2005 | | 2004 | | 2003 |
| |
| Net sales | | | | | | | | | | | | |
| United States | | $ | 871,725 | | | $ | 689,859 | | | $ | 503,097 | |
| All other countries | | | 87,253 | | | | 71,138 | | | | 39,934 | |
| | | |
| Total | | $ | 958,978 | | | $ | 760,997 | | | $ | 543,031 | |
| | | |
| | | | | | | | | | | | | |
| Long-lived assets | | | | | | | | | | | | |
| United States | | $ | 59,546 | | | $ | 59,573 | | | $ | 63,266 | |
| All other countries | | | 4,876 | | | | 5,425 | | | | 5,895 | |
| | | |
| Total | | $ | 64,422 | | | $ | 64,998 | | | $ | 69,161 | |
The following is the segmentSegment information for the years ended December 31, 2006, 2005 and 2004 and 2003:is as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Gross | | Other | | Operating | | | | | | | | Operating | | Capital | | |
| | | Net | | Material | | Operating | | Income | | Total | | Capital | | | | Net | | Income | | Total | | Expen- | | Depre- |
| | | | Sales | | (Loss) | | Assets | | ditures | | ciation |
| | | | |
| 2006 | | |
| Metals segment | | | $ | 1,062.6 | | $ | 95.0 | | $ | 593.7 | | $ | 11.8 | | $ | 12.2 | |
| Plastics segment | | | 115.0 | | 7.3 | | 47.8 | | 1.1 | | 1.1 | |
| Other | | | — | | | (9.8 | ) | | 13.6 | | — | | — | |
| | | | |
| Consolidated | | | $ | 1,177.6 | | $ | 92.5 | | $ | 655.1 | | $ | 12.9 | | $ | 13.3 | |
| | | Sales | | Margin | | Expense | | (Loss) | | Assets | | Expenditures | | Depreciation | | |
| | | | |
| 2005 | | |
| Metals segment | | $ | 851,246 | | $ | 247,331 | | $ | 172,007 | | $ | 75,324 | | $ | 362,822 | | $ | 7,124 | | $ | 8,302 | | | $ | 851.3 | | $ | 75.3 | | $ | 362.8 | | $ | 7.1 | | $ | 8.3 | |
| Plastics segment | | 107,732 | | 34,461 | | 28,906 | | 5,555 | | 49,775 | | 1,561 | | 1,038 | | | 107.7 | | 5.6 | | 49.8 | | 1.6 | | 1.0 | |
| Other | | — | | — | | 9,702 | | | (9,702 | ) | | 11,138 | | — | | — | | | — | | | (9.7 | ) | | 11.1 | | — | | — | |
| | | | | |
| Consolidated | | $ | 958,978 | | $ | 281,792 | | $ | 210,615 | | $ | 71,177 | | $ | 423,735 | | $ | 8,685 | | $ | 9,340 | | | $ | 959.0 | | $ | 71.2 | | $ | 423.7 | | $ | 8.7 | | $ | 9.3 | |
| | | | | |
| | | |
| 2004 | | |
| Metals segment | | $ | 671,161 | | $ | 188,422 | | $ | 155,370 | | $ | 33,052 | | $ | 330,095 | | $ | 4,114 | | $ | 7,782 | | | $ | 671.2 | | $ | 33.1 | | $ | 330.1 | | $ | 4.1 | | $ | 7.8 | |
| Plastics segment | | 89,836 | | 29,149 | | 23,603 | | 5,546 | | 44,289 | | 1,204 | | 969 | | | 89.8 | | 5.5 | | 44.3 | | 1.2 | | 1.0 | |
| Other | | — | | — | | 7,149 | | | (7,149 | ) | | 8,632 | | — | | — | | | — | | | (7.1 | ) | | 8.6 | | — | | — | |
| | | | | |
| Consolidated | | $ | 760,997 | | $ | 217,571 | | $ | 186,122 | | $ | 31,449 | | $ | 383,016 | | $ | 5,318 | | $ | 8,751 | | | $ | 761.0 | | $ | 31.5 | | $ | 383.0 | | $ | 5.3 | | $ | 8.8 | |
| | | | | |
| | | |
| 2003 | | |
| Metals segment | | $ | 475,302 | | $ | 133,512 | | $ | 147,548 | | $ | (14,036 | ) | | $ | 301,400 | | $ | 4,170 | | $ | 7,789 | | |
| Plastics segment | | 67,729 | | 23,436 | | 20,587 | | 2,849 | | 31,388 | | 975 | | 1,050 | | |
| Other | | — | | — | | 4,569 | | | (4,569 | ) | | 6,152 | | — | | — | | |
| | | | |
| Consolidated | | $ | 543,031 | | $ | 156,948 | | $ | 172,704 | | $ | (15,756 | ) | | $ | 338,940 | | $ | 5,145 | | $ | 8,839 | | |
| | | | |
“Other” —– Operating loss includes the costs of executive, legal and finance departments, which are shared by both the metals and plastics segments. The “Other” segment’s total assets consist of the Company’s income tax receivable and its investment in joint ventures.venture.
(3)(4) Lease Agreements
The Company has operating and capital leases covering certain warehouse facilities, equipment, automobiles and trucks, with lapse of time as the basis for all rental payments, plusand with a mileage factor included in the truck rentals.leases.
Future minimum rental payments under operating and capital leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2005,2006, are as follows(dollars in thousands):
26
| | | | | | | | | | | | | | | | | |
| Year ending December 31, | | Capital | | Operating | | Capital | | Operating |
| | 2006 | | $ | 534 | | $ | 11,258 | | |
| 2007 | | 534 | | 10,554 | | | $ | 779 | | $ | 15,006 | |
| 2008 | | 379 | | 9,537 | | | 586 | | 14,279 | |
| 2009 | | 101 | | 7,346 | | | 80 | | 10,792 | |
| 2010 | | — | | 6,932 | | | 30 | | 8,300 | |
| 2011 | | | 26 | | 8,011 | |
| Later years | | — | | 10,638 | | | 1 | | 11,407 | |
| | | | | |
| Total minimum payments required | | $ | 1,548 | | $ | 56,265 | | |
| Total future minimum rental payments | | | $ | 1,502 | | $ | 67,795 | |
| | | | | |
Total rental payments charged to expense were $13.1 million in 2006, $10.4 million in 2005 and $12.8 million in 2004 and $15.6 million in 2003.2004.
In July 2003, the Company sold its Los Angeles land and building for $10.5 million. Under the agreement, the Company has a ten-year lease for 59% of the property and a short-term lease that expired in May 2004 for 41% of the space which is no longer available for use.property. In October 2003, the Company also sold its Kansas City land and building for $3.4 million and is leasing back approximately 68% of the property from the purchaser for ten years. These transactions are being accounted for as operating leases. The two transactions generated a total net gain of $8.5 million, which has been deferred and is being amortized to income ratably over the term of the leases. At December 31, 20052006 and 2004,2005, the remaining deferred gain of $6.5
31
$5.7 million and $7.4$6.0 million, respectively, is shown asincluded in “Deferred gain on sale of assets” with the current portion $0.9 million and $0.9 million, respectively, included in “Accrued liabilities” in the Consolidated Balance Sheets.consolidated balance sheets. The leases require the Company to pay customary operating and repair expenses and contain renewal options. The total rental expense for these leases for 2006 and 2005 was $1.4 million and 2004 was $1.3 million.million, respectively.
(4) Retirement, Profit Sharing(5) Pension and IncentivePostretirement Plans
Substantially all employees who meet certain requirements of age, length of service and hours worked per year are covered by Company-sponsored retirementpension plans. These retirementpension plans are defined benefit, noncontributory plans. Benefits paid to retirees are based upon age at retirement, years of credited service and average earnings.
The Company also has a Supplemental Pension Plan, which is a non-qualified, unfunded plan. During 2005, the Company’s projected benefit obligation increased primarily due to actuarial losses resulting from the following changes in the actuarial assumptions: (a) use of an updated actuarial mortality table; (b) a change in the discount rate; and (c) a change in the expected average retirement age.
During 2005, the The Company contributed $1.0 million to the Hourly Employees Pension Plan, and $0.4 million to the supplemental pension plan. Contributions of $0.3 million were made in 2004 and 2003.uses a December 31 measurement date for its plans.
The assets of the Company-sponsored plans are maintained in a single trust account. The majority of the trust assets are invested in common stock mutual funds, insurance contracts, real estate funds and corporate bonds. The Company’s funding policy is to satisfy the minimum funding requirements of Employee Retirement Income Security Act of 1974, commonly called ERISA.
Components of net periodic pension benefit cost for 2006, 2005 2004 and 20032004 are as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | 2006 | | 2005 | | 2004 |
| | | | | |
| Service cost | | $ | 2,744 | | $ | 2,377 | | $ | 2,040 | | | $ | 3,485 | | $ | 2,744 | | $ | 2,377 | |
| Interest cost | | 6,193 | | 5,792 | | 5,813 | | | 7,011 | | 6,193 | | 5,792 | |
| Expected return on assets | | | (9,577 | ) | | | (9,587 | ) | | | (9,769 | ) | | | (9,696 | ) | | | (9,577 | ) | | | (9,587 | ) |
| Amortization of prior service cost | | 63 | | 68 | | 67 | | | 58 | | 63 | | 68 | |
| Amortization of actuarial loss (gain) | | 2,459 | | 1,465 | | 204 | | |
| Amortization of actuarial loss | | | 3,756 | | 2,459 | | 1,465 | |
| | | | | |
| Net periodic cost (benefit) | | $ | 1,882 | | $ | 115 | | $ | (1,645 | ) | |
| Net periodic pension benefit cost | | | $ | 4,614 | | $ | 1,882 | | $ | 115 | |
| | | | | |
27
The expected 2007 amortization of pension prior service cost and actuarial loss is less than $0.1 million and $3.2 million, respectively.
Status of the plans at December 31, 20052006 and 20042005 are as follows(dollars in thousands):
| | | | | | | | | |
| | | 2005 | | 2004 |
| | | |
| Change in projected benefit obligation: | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 110,327 | | | $ | 99,008 | |
| Service cost | | | 2,744 | | | | 2,377 | |
| Interest cost | | | 6,193 | | | | 5,792 | |
| Benefit payments | | | (5,330 | ) | | | (5,110 | ) |
| Actuarial loss | | | 16,317 | | | | 8,260 | |
| | | |
| Projected benefit obligation at end of year | | $ | 130,251 | | | $ | 110,327 | |
| | | |
| | | | | | | | | |
| Change in plan assets: | | | | | | | | |
| Fair value of assets at beginning of year | | $ | 103,831 | | | $ | 92,182 | |
| Actual return (loss) on assets | | | 18,636 | | | | 16,418 | |
| Employer contributions | | | 1,372 | | | | 341 | |
| Benefit payments | | | (5,330 | ) | | | (5,110 | ) |
| | | |
| Fair value of plan assets at year-end | | $ | 118,509 | | | $ | 103,831 | |
| | | |
| | | | | | | | | |
| Reconciliation of funded status: | | | | | | | | |
| Funded status | | $ | (11,741 | ) | | $ | (6,496 | ) |
| Unrecognized prior service cost | | | 533 | | | | 596 | |
| Unrecognized actuarial loss | | | 49,727 | | | | 44,929 | |
| | | |
| Net amount recognized | | $ | 38,519 | | | $ | 39,029 | |
| | | | | | | | | |
| Amounts recognized in balance sheet consist of: | | | | | | | | |
| Prepaid benefit cost | | $ | 41,946 | | | $ | 42,262 | |
| Accrued benefit liability | | | (5,292 | ) | | | (3,969 | ) |
| Intangible assets | | | — | | | | — | |
| Accumulated comprehensive income | | | 1,865 | | | | 736 | |
| | | |
| Net amount recognized | | $ | 38,519 | | | $ | 39,029 | |
| | | |
| | | | | | | | | |
| Accumulated benefit obligations (all plans) | | $ | (112,841 | ) | | $ | (97,084 | ) |
| | | | | | | | | |
| | | 2006 | | | 2005 | |
| | | |
| Change in projected benefit obligation: | | | | | | | | |
| Projected benefit obligation at beginning of year | | $ | 130,251 | | | $ | 110,327 | |
| Service cost | | | 3,485 | | | | 2,744 | |
| Interest cost | | | 7,011 | | | | 6,193 | |
| Benefit payments | | | (5,444 | ) | | | (5,330 | ) |
| Actuarial (gain) loss | | | (3,278 | ) | | | 16,317 | |
| | | |
| Projected benefit obligation at end of year | | $ | 132,025 | | | $ | 130,251 | |
| | | |
| | | | | | | | | |
| Change in plan assets: | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 118,509 | | | $ | 103,831 | |
| Actual return on assets | | | 16,940 | | | | 18,636 | |
| Employer contributions | | | 372 | | | | 1,372 | |
| Benefit payments | | | (5,444 | ) | | | (5,330 | ) |
| | | |
| Fair value of plan assets at end of year | | $ | 130,377 | | | $ | 118,509 | |
| | | |
| | | | | | | | | |
| Funded status | | $ | (1,648 | ) | | $ | (11,741 | ) |
| | | | | | | | | |
| Unrecognized actuarial loss | | | | | | | 49,727 | |
| Unrecognized prior service cost | | | | | | | 533 | |
| | | |
| Net (liability) prepaid | | $ | (1,648 | ) | | $ | 38,519 | |
| | | |
32
| | | | | | | | | |
| | | 2006 | | | 2005 | |
| | | |
| Amounts recognized in the consolidated balance sheets consist of: | | | | | | | | |
| Prepaid pension cost | | $ | 5,681 | | | $ | 41,946 | |
| Accrued liabilities | | | (369 | ) | | | — | |
| Pension and postretirement benefit obligations | | | (6,960 | ) | | | (5,292 | ) |
| Accumulated other comprehensive income (loss) | | | — | | | | 1,865 | |
| | | |
| Net amount recognized | | $ | (1,648 | ) | | $ | 38,519 | |
| | | |
| | | | | | | | | |
| Pre-tax components of accumulated other comprehensive income (loss): | | | | | | | | |
| Unrecognized actuarial loss | | $ | (35,449 | ) |
| Unrecognized prior service cost | | | (475 | ) |
| | | |
| Total at year-end | | $ | (35,924 | ) |
| | | |
| | | | | | | | | |
| Accumulated benefit obligations | | $ | 115,889 | | | $ | 112,841 | |
The Company’s Supplemental Pension Plan included in the disclosure table is a non-qualified unfunded plan. Accordingly, theFor plans with an accumulated benefit obligation for thisin excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of $5,293 in 2005plan assets was $6.7 million, $5.2 million and $3,969 in 2004 is recorded as a minimum pension liability.$0.0 million, respectively, at December 31, 2006, and $6.8 million, $5.3 million and $0.0 million, respectively, at December 31, 2005.
The assumptions used to measure the projected benefit obligations future salary increases, and to compute the expected long-term return on assets for the Company’s defined benefit pension plans are as follows:
| | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2006 | | 2005 | |
| | | | | |
| Discount rate | | | 5.50 | % | | | 5.75 | % | | | 5.75 | % | | | 5.50 | % |
| Projected annual salary increases | | 4.00 | | 4.00 | | | 4.00 | | 4.00 | |
| Expected long-term rate of return on plan assets | | 8.75 | | 9.00 | | | 8.75 | | 8.75 | |
| Measurement date | | 12/31/05 | | 12/31/04 | | | 12/31/06 | | 12/31/05 | |
28
The assumptions used to determine net periodic pension benefit costs are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | 2006 | | 2005 | | 2004 | |
| | | | | |
| Discount rate | | | 5.75 | % | | | 6.00 | % | | | 6.75 | % | | | 5.50 | % | | | 5.75 | % | | | 6.00 | % |
| Expected long-term rate of return on plan assets | | 9.00 | | 9.00 | | 9.00 | | | 8.75 | | 9.00 | | 9.00 | |
| Projected annual salary increases | | 4.00 | | 4.00 | | 4.75 | | | 4.00 | | 4.00 | | 4.00 | |
| Measurement date | | 12/31/04 | | 12/31/03 | | 12/31/02 | | | 12/31/05 | | 12/31/04 | | 12/31/03 | |
The assumption on expected long-term rate of return on plan assets for all years was based on a building block approach. The expected long-term rate of inflation and risk premiums for the various asset categories isare based on the current investment environment. General historical market returns are used in the development of the long-term expected inflation rates and risk premiums. The target allocations of assets are used to develop a composite rate of return assumption.
33
The Company’s pension plan weighted average asset allocations at December 31, 20052006 and 2004,2005, by asset category, are as follows:
| | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2006 | | 2005 | |
| | | | | |
| Equity securities | | | 67.1 | % | | | 69.4 | % | | | 69.8 | % | | | 67.1 | % |
| Company stock | | 11.6 | | 15.4 | | | | 6.0 | % | | | 11.6 | % |
| Debt securities | | 6.5 | | 8.4 | | | | 6.5 | % | | | 6.5 | % |
| Real estate | | 6.7 | | 5.9 | | | | 5.4 | % | | | 6.7 | % |
| Other | | 8.1 | | 0.9 | | | | 12.3 | % | | | 8.1 | % |
| | | | | |
| | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | | | |
The Company’s pension plan funds are managed in accordance with investment policies recommended by its investment advisor and approved by the Board.Board of Directors. The overall target portfolio allocation is 75% equities; 15% fixed income; and 10% real estate. Non-readily marketable investments comprise approximately 10% and 11% as of December 31, 2006 and 2005, respectively. Within the equity allocation, the style distribution is 30% value; 30% growth; 15% small cap growth; 15% international; and 10% company stock. With the exception of real estate and the Company stock, the investments are made in mutual funds. These funds’ conformance with style profiles and performance is monitored regularly by the Company’s pensioninvestment advisor. Adjustments are typically made in the subsequent quarters when investment allocations deviate from target by 5% or more. The investment advisor makes quarterly reports to management and the Human Resource Committee of the Board of Directors.
The estimated future pension benefit payments are:are(dollars in thousands):
| | | | | | | | | |
| (dollars in thousands) | | Estimated Future Benefit Payments | |
| | |
| 2006 | | $ | 3,881 | | |
| 2007 | | 3,925 | | | $ | 5,892 | |
| 2008 | | 4,059 | | | 6,033 | |
| 2009 | | 4,239 | | | 6,273 | |
| 2010 | | 4,434 | | | 6,608 | |
| 2011 — 2015 | | 26,765 | | |
| | |
| 2011 | | | 6,854 | |
| 2012 — 2016 | | | | 41,337 | |
The Company has profit sharing plans for the benefit of salaried and other eligible employees (including officers). The Company’s profit sharing plans include features under Section 401401(k) of the Internal Revenue Code. The plans include a provision whereby the Company partially matches employee contributions up to a maximum of 6% of the employees’ salary. The plans also include a supplemental contribution feature whereby a Company contribution would be made to all eligible employees upon achievement of specific return on investment goals as defined by the plan.
The Company also has a management incentive plan for the benefit of its officers and key employees, which is not a retirement plan. Incentives are paid to line managers based on performance
29
against objectives offor their respective operating units. Incentives are paid to corporate officers on the basis of total Company performance against objectives. Amounts accrued and charged to incomeexpensed under each plan are included as part of accrued payroll and employee benefits at each respective year-end. The amounts charged to incomeexpensed are summarized below(dollars in thousands):
| | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| | | |
| Profit Sharing and 401(K) | | $ | 4,077 | | | $ | 788 | | | $ | 414 | |
| | | |
| | | | | | | | | | | | | |
| Management Incentive | | $ | 4,261 | | | $ | 3,722 | | | $ | 691 | |
| | | |
| | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 |
| | | |
| Profit sharing and 401(k) | | $ | 3,977 | | | $ | 4,077 | | | $ | 788 | |
| | | |
| Management incentive | | $ | 4,226 | | | $ | 4,261 | | | $ | 3,722 | |
| | | |
The Company also provides declining value life insurance to its retirees and a maximum of three years of medical coverage to qualified individuals who retire between the ages of 62 and 65. The Company does not fund these benefits in advance.advance, and uses a December 31 measurement date.
34
Components of net periodic postretirement benefit costs for 2006, 2005 and 2004 and 2003were as follows(dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | 2006 | | 2005 | | 2004 |
| | | | | |
| Service cost | | $ | 138 | | $ | 116 | | $ | 100 | | | $ | 186 | | $ | 138 | | $ | 116 | |
| Interest cost | | 179 | | 152 | | 154 | | | 213 | | 179 | | 152 | |
| Amortization of prior service cost | | 47 | | 47 | | 42 | | | 47 | | 47 | | 47 | |
| Amortization of actuarial loss (gain) | | — | | | (9 | ) | | | (31 | ) | | 27 | | — | | | (9 | ) |
| | | | | |
| Net periodic benefit cost | | $ | 364 | | $ | 306 | | $ | 265 | | |
| Net periodic postretirement benefit cost | | | $ | 473 | | $ | 364 | | $ | 306 | |
| | | | | |
The expected 2007 amortization of postretirement prior service cost and actuarial gain are each less than $0.1 million.
The status of the postretirement benefit plans at December 31, 20052006 and 20042005 were as follows (dollars in thousands):
| | | | | | | | | |
| | | 2005 | | 2004 |
| | | |
| Change in projected benefit obligations: | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 3,201 | | | $ | 2,635 | |
| Service cost | | | 138 | | | | 116 | |
| Interest cost | | | 179 | | | | 152 | |
| Benefit payments | | | (90 | ) | | | (95 | ) |
| Actuarial loss (gains) | | | 500 | | | | 393 | |
| | | |
| Benefit obligation at end of year | | $ | 3,928 | | | $ | 3,201 | |
| | | |
| | | | | | | | | |
| Reconciliation of funded status: | | | | | | | | |
| Funded status | | $ | (3,928 | ) | | $ | (3,201 | ) |
| Unrecognized prior service cost | | | 219 | | | | 266 | |
| Unrecognized actuarial gain | | | 515 | | | | 15 | |
| | | |
| Accrued benefit liabilities | | $ | (3,194 | ) | | $ | (2,920 | ) |
| | | |
| | | | | | | | | |
| Change in projected benefit obligations | | $ | 727 | | | $ | 566 | |
| | | |
| | | | | | | | | | | | | |
| | | 2006 | | 2005 | | | | |
| | | |
| Change in accumulated postretirement benefit obligations: | | | | | | | | | | | | |
| Accumulated postretirement benefit obligation at beginning of year | | $ | 3,928 | | | $ | 3,201 | | | | | |
| Service cost | | | 186 | | | | 138 | | | | | |
| Interest cost | | | 213 | | | | 179 | | | | | |
| Benefit payments | | | (86 | ) | | | (90 | ) | | | | |
| Actuarial loss (gains) | | | (374 | ) | | | 500 | | | | | |
| | | |
| Accumulated postretirement benefit obligation at end of year | | $ | 3,867 | | | $ | 3,928 | | | | | |
| | | |
| | | | | | | | | | | | | |
| Unrecognized prior service cost | | | | | | $ | (219 | ) | | | | |
| Unrecognized actuarial (gain) loss | | | | | | | (515 | ) | | | | |
| | | |
| Net liability | | $ | 3,867 | | | $ | 3,194 | | | | | |
| | | |
| | | | | | | | | | | | | |
| Amounts recognized in the consolidated balance sheets consist of: | | | | | | | | | | | | |
| Accrued liabilities | | $ | 190 | | | $ | — | | | | | |
| Pension and postretirement benefit obligations | | | 3,677 | | | | 3,194 | | | | | |
| | | |
| Net amount recognized | | $ | 3,867 | | | $ | 3,194 | | | | | |
| | | |
| | | | | | | | | | | | | |
| Pre-tax components of accumulated other comprehensive income (loss): | | | | |
| Unrecognized actuarial loss | | $ | (115 | ) |
| Unrecognized prior service cost | | | (171 | ) |
| | | |
| Total at year-end | | $ | (286 | ) |
| | | |
Future benefit costs were estimated assuming medical costs would increase at a 5.75%5.50% annual rate for 2005.2006. A 1% increase in the health care cost trend rate assumptions would have increased the accumulated post retirementpostretirement benefit obligation at December 31, 20052006 by $279,000$0.3 million with no significant effect on the annual periodic postretirement benefit expense.cost. A 1% decrease in the health care cost trend rate assumptions would have decreased the accumulated postretirement benefit obligation at December 31, 20052006 by $248,000$0.2 million with no significant effect on the annual periodic postretirement benefit expense.cost. The weighted average discount rate used in determining the accumulated post retirementpostretirement benefit obligation was 5.75% in 2006 and 5.50% in 2005,2005. The weighted average discount rate used in determining net periodic postretirement benefit costs were 5.5% in 2006, 5.75% in 20042005 and 6.00%6.0% in 2003.2004.
3035
(5)(6) Joint VenturesVenture
Effective January 1, 2004 the Company purchased the remainingKreher Steel Co. is a 50% owned joint venture partner’s interest in Castle de Mexico, S.A. de C.V. for $1.6 million. Castle de Mexicoof the Company. It is a distribution company, which targets a wide range of businesses within the durable goods sector throughout Mexico. The results of this entity, now a wholly owned subsidiary, have been consolidated in the Company’s financial statements as of the effective date of the acquisition.
On March 31, 2004 Total Plastics Inc. (TPI) purchased the remaining 40% interest in its Paramont Machine Company subsidiary for $0.4 million. Paramont performs precision machining of plastic parts for a variety of end use industries. Beginning on March 31, 2004 the results of the entity were reported as a wholly owned subsidiary.
On September 30, 2005, TPI, purchased the remaining 10% interest of its joint venture partner in its Advanced Fabricating Technology, LLC (“Aftech”) for $0.2 million. Aftech provides die-cut plastic parts and components which it sells to a variety of industries.
Since March 31, 2001, the Company has held a 50% joint venture interest in Kreher Steel Co., a MidwestMidwestern U.S. metals distributor of bulk quantities of alloy, SBQspecial bar quality and stainless steel bars.
The following information summarizes the Company’s participation in the joint venturesventure (dollars in millions):
| | | | | | | | | | | | | |
| For the Years Ended December 31, | | 2005 | | 2004 | | 2003 |
| |
| Equity in earnings of joint ventures | | $ | 4.3 | | | $ | 5.2 | | | $ | 0.1 | |
| Investment in joint ventures | | | 10.8 | | | | 8.5 | | | | 5.5 | |
| Advances due from joint ventures | | | — | | | | — | | | | 1.7 | |
| Sales to joint ventures | | | 0.3 | | | | 0.2 | | | | 1.2 | |
| Purchases from joint ventures | | | 0.2 | | | | 0.6 | | | | 0.7 | |
| | | | | | | | | | | | | |
| For the Years Ended December 31, | | 2006 | | 2005 | | 2004 |
| | | |
| Equity in earnings of joint venture | | $ | 4.3 | | | $ | 4.3 | | | $ | 5.2 | |
| Investment in joint venture | | | 13.6 | | | | 10.8 | | | | 8.5 | |
| Sales to joint venture | | | 0.6 | | | | 0.3 | | | | 0.2 | |
| Purchases from joint venture | | | 0.1 | | | | 0.2 | | | | 0.6 | |
Summarized financial data for these ventures combinedthis joint venture is as follows (dollars in millions):
| | | | | | | | | | | | | | |
| | | Combined | | | | | | | | | | | | |
| For the Years Ended December 31, | | 2005 | | 2004 | | 2003 | | 2006 | | 2005 | | 2004 |
| | | | |
| Revenues | | $ | 130.9 | | $ | 133.1 | | $ | 105.0 | | | $ | 131.0 | | $ | 130.9 | | $ | 133.1 | |
| Gross material margin | | 23.8 | | 26.3 | | 16.1 | | |
| Net income | | 8.6 | | 10.7 | | 0.3 | | | 8.6 | | 8.6 | | 10.7 | |
| Current assets | | 40.0 | | 52.3 | | 40.9 | | | 41.4 | | 40.0 | | 52.3 | |
| Non-current assets | | 8.4 | | 8.9 | | 11.7 | | | 12.7 | | 9.9 | | 10.4 | |
| Current liabilities | | 25.9 | | 42.9 | | 41.0 | | | 22.9 | | 25.9 | | 42.9 | |
| Non-current liabilities | | 1.7 | | 2.2 | | 3.4 | | | 3.6 | | 1.7 | | 2.2 | |
| Members’ equity | | 20.8 | | 16.2 | | 8.2 | | | 27.6 | | 22.3 | | 17.7 | |
| Capital expenditures | | 14.1 | | 13.5 | | 12.9 | | | 1.1 | | 0.8 | | 0.6 | |
| Depreciation | | 6.1 | | 5.2 | | 4.2 | | | 1.0 | | 1.0 | | 1.0 | |
31
(6)(7) Income taxesTaxes
Significant components of the Company’s deferred tax liabilities and assets as of December 31, 20052006 and 20042005 are as follows(dollars in thousands):
| | | | | | | | | |
| | | 2005 | | 2004 |
| | | |
| Deferred tax liabilities: | | | | | | | | |
| Depreciation | | $ | 9,151 | | | $ | 10,141 | |
| Inventory | | | 4,952 | | | | 9,743 | |
| Pension | | | 14,366 | | | | 15,472 | |
| Other, net | | | 636 | | | | — | |
| | | |
| Total deferred liabilities | | | 29,105 | | | | 35,356 | |
| | | | | | | | | |
| Deferred tax assets: | | | | | | | | |
| Postretirement benefits | | | 1,288 | | | | 1,197 | |
| Net operating loss (NOL) carryforward | | | — | | | | 3,018 | |
| Deferred gain | | | 3,469 | | | | 3,758 | |
| Impairment and special charges | | | 1,227 | | | | 1,231 | |
| | | | | | | | | |
| Other, net | | | — | | | | 262 | |
| | | |
| Total deferred tax assets | | | 5,984 | | | | 9,466 | |
| | | |
| Net deferred tax liabilities | | $ | 23,121 | | | $ | 25,890 | |
| | | |
Income tax expense (benefit) comprises:
| | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| | | |
| Federal — current | | $ | 23,652 | | | $ | 961 | | | $ | (3,556 | ) |
| — deferred | | | (4,639 | ) | | | 5,975 | | | | (6,239 | ) |
| State — current | | | 242 | | | | 1,002 | | | | (790 | ) |
| — deferred | | | 2,144 | | | | 797 | | | | 199 | |
| Foreign — current | | | 1,343 | | | | 2,259 | | | | 320 | |
| — deferred | | | 449 | | | | 300 | | | | 20 | |
| | | |
| | | $ | 23,191 | | | $ | 11,294 | | | $ | (10,046 | ) |
| | | |
A reconciliation between the statutory income tax amount and the effective amounts at which taxes were actually (benefited) provided is as follows(in thousands):
| | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| | | |
| Federal income tax (benefit) at statutory rates | | $ | 20,229 | | | $ | 7,529 | | | $ | (9,318 | ) |
| State income taxes, net of Federal income tax benefits | | | 1,551 | | | | 937 | | | | (1,159 | ) |
| Federal and State income tax (benefit) on joint ventures | | | 1,687 | | | | 2,046 | | | | (1,305 | ) |
| Other | | | (276 | ) | | | 782 | | | | 1,736 | |
| | | |
| Income tax expense (benefit) | | $ | 23,191 | | | $ | 11,294 | | | $ | (10,046 | ) |
| | | |
(7) Asset Impairment and Special Charges
After a review that began in late 2000, of certain of its under-performing operations within its Metals segment, the Company acted on a major restructuring program during the second quarter of 2003. The restructuring anticipated the sale or liquidation of several under-performing and cash consuming business units, which were not strategic to the Company’s long-term strategy and were reporting operating losses and/or consuming cash. The restructuring included the closure of KSI, LLC a chrome bar plating| | | | | | | | | |
| | | 2006 | | 2005 |
| | | |
| Deferred tax liabilities: | | | | | | | | |
| Depreciation | | $ | 7,950 | | | $ | 9,151 | |
| Inventory | | | 20,623 | | | | 4,952 | |
| Pension | | | — | | | | 14,366 | |
| Intangibles and goodwill | | | 29,739 | | | | 2,800 | |
| Other, net | | | — | | | | (2,164 | ) |
| | | |
| Total deferred tax liabilities | | $ | 58,312 | | | $ | 29,105 | |
| | | | | | | | | |
| Deferred tax assets: | | | | | | | | |
| Postretirement benefits | | $ | 1,431 | | | $ | 1,288 | |
| Deferred compensation | | | 2,320 | | | | — | |
| Deferred gain | | | 3,108 | | | | 3,469 | |
| Impairment and special charges | | | 1,218 | | | | 1,227 | |
| Pension | | | 755 | | | | — | |
| Other, net | | | 1,359 | | | | — | |
| | | |
| Total deferred tax assets | | $ | 10,191 | | | $ | 5,984 | |
| | | |
| Net deferred tax liabilities | | $ | 48,121 | | | $ | 23,121 | |
| | | |
3236
operation; the liquidation or sale of the Company’s 50% interestIncome tax expense (benefit) comprises (dollars in Laser Precision, a joint venture which produces laser cut parts; the sale of the operating assets of Keystone Honing Company, a subsidiary which processes and sells honed tubes; the disposal of selected pieces of equipment which interfere with more efficient use of the Company’s distribution facilities, and the sale of the Company’s 50% interest in Energy Alloys, a joint venture which distributes tubular goods to the oil and gas field industries.thousands):
The combined impairment and special charges recorded during 2003 included $1.6 million of inventories to be sold or liquidated in connection with the disposition of certain businesses; the impairment of long-lived assets of $4.5 million based on their anticipated sale price or appraisal value; the accrual of $1.1 million of contract termination costs under operating leases associated with the sale of the businesses’ non-inventory assets, a $3.5 million impairment on the investment in the two joint ventures, and $0.8 million of other restructuring related costs.| | | | | | | | | | | | | | | | | |
| | | | | | | 2006 | | 2005 | | 2004 |
| | | | | | | |
| Federal | | - | | current | | $ | 21,701 | | | $ | 23,652 | | | $ | 961 | |
| | | - | | deferred | | | 4,443 | | | | (4,639 | ) | | | 5,975 | |
| State | | - | | current | | | 3,914 | | | | 242 | | | | 1,002 | |
| | | - | | deferred | | | (123 | ) | | | 2,144 | | | | 797 | |
| Foreign | | - | | current | | | 3,178 | | | | 1,343 | | | | 2,259 | |
| | | - | | deferred | | | 217 | | | | 449 | | | | 300 | |
| | | | | | | |
| | | | | | | $ | 33,330 | | | $ | 23,191 | | | $ | 11,294 | |
| | | | | | | |
The following table summarizesreconciles our income tax expense at the restructure reserve activity U.S. federal income tax rate of 35% to income tax expense as recorded(dollars in millions)thousands):
| | | | | | | | | | | | | |
| | | 12/31/2003 | | 2004 | | 12/31/2004 |
| | | Balance | | Charges | | Balance |
| | | |
| Lease and other contract transition costs | | $ | 0.3 | | | $ | (0.3 | ) | | $ | — | |
| Environmental clean-up costs | | | 0.8 | | | | (0.8 | ) | | | — | |
| Legal fees on asset sales/divestiture | | | 0.1 | | | | (0.1 | ) | | | — | |
| | | |
| Total | | $ | 1.2 | | | $ | (1.2 | ) | | | — | |
| | | |
| | | | | | | | | | | | | |
| | | 2006 | | | 2005 | | | 2004 | |
| | | |
| Federal income tax at statutory rates | | $ | 29,456 | | | $ | 20,229 | | | $ | 7,529 | |
| State income taxes, net of Federal income tax benefits | | | 2,412 | | | | 1,551 | | | | 937 | |
| Federal and State income tax on joint ventures | | | 1,672 | | | | 1,687 | | | | 2,046 | |
| Other | | | (210 | ) | | | (276 | ) | | | 782 | |
| | | |
| Income tax expense | | $ | 33,330 | | | $ | 23,191 | | | $ | 11,294 | |
| | | |
| Effective income tax expense rate | | | 39.6 | % | | | 40.1 | % | | | 52.5 | % |
| | | |
The following table provides our income (loss) before income taxes and equity in income of joint venture generated by our U.S. and non-U.S. operations(dollars in thousands):
| | | | | | | | | | | | | |
| | | 2006 | | | 2005 | | | 2004 | |
| | | |
| U.S | | $ | 74,226 | | | $ | 51,236 | | | $ | 14,986 | |
| Non-U.S. | | | 9,937 | | | | 6,562 | | | | 6,526 | |
| | | |
| | | $ | 84,163 | | | $ | 57,798 | | | $ | 21,512 | |
| | | |
(8) Goodwill and Intangible Assets
The changes in carrying amounts of goodwill were as follows (dollars in thousands):
| | | | | | | | | | | | | |
| | | Metals | | Plastics | | |
| | | Segment | | Segment | | Total |
| | | |
| Balance as of January 1, 2005 | | $ | 19,228 | | | $ | 12,973 | | | $ | 32,201 | |
| Currency valuation | | | 21 | | | | — | | | | 21 | |
| | | |
| Balance as of December 31, 2005 | | $ | 19,249 | | | $ | 12,973 | | | $ | 32,222 | |
| | | |
| Transtar acquisition (see Note 2) | | | 69,564 | | | | — | | | | 69,564 | |
| Currency valuation | | | (3 | ) | | | — | | | | (3 | ) |
| | | |
| Balance as of December 31, 2006 | | $ | 88,810 | | | $ | 12,973 | | | $ | 101,783 | |
| | | |
There was no further activity on these reserves beyond 2004.
KSI, LLC
In the second quarter of 2003, the decision was made to cease operations and begin the liquidation. As a result of this decision an impairment of $3.1 million was recorded on long-livedgoodwill or other intangible assets in 2003; $0.6 million was accrued for contract termination costs under operating leases; $0.4 million was accrued for environmental shutdown and clean up costs ofduring the existing building; $0.8 million of special charges were incurred to reduce inventory to anticipated liquidation value and $0.4 million was incurred for early termination of funded debt which was secured by the entity’s assets.
As ofyears ended December 31, 2004 all operating assets2006, 2005 and inventory on-site have been liquidated. Environmental remediation efforts are complete and total expenses paid to date were $3.2 million. All remediation and clean-up costs are covered under existing insurance policies net of a $0.3 million deductible. In 2004, $1.8 million of insurance proceeds were received and in 2005 $0.8 million of insurance proceeds were received. The Company has reached a tentative agreement for the sale of the building once state regulatory approval is attained on the environmental clean-up. The Company anticipates the sale to occur in 2007.
Keystone Honing Company
This wholly owned subsidiary was sold on July 31, 2003. As a result of the sale, an impairment charge of $0.8 million was recorded on long-lived assets and goodwill and a special charge of $0.8 million was recorded to reduce inventory to its net realizable value.
Energy Alloys, a Joint Venture
Under the Company’s joint venture agreement, Energy Alloys LP, the Company had the right under the buy-sell agreement to either purchase or sell its’ interest for a specific dollar value. The Company exercised this provision on January 28, 2003. The two parties entered into negotiations, which resulted in an agreement under which the joint venture partner would purchase the Company’s interest for $4.4 million. On July 23, 2003 the Company received $1.5 million in cash and a $2.9 million promissory note for its interest in the joint venture. An impairment charge of $0.2 million was recorded in 2003 based on the loss on the sale primarily due to professional service fees associated with this transaction. In 2005, the Company recorded interest earned of $0.1 million for this note. In July 2005, the note was repaid.2004.
3337
Laser Precision, a Joint Venture
On The following summarizes the components of intangible assets at December 31, 2003 the Company received a commitment letter2006 (dollars in thousands):
| | | | | | | | | |
| | | Gross Carrying | | | Accumulated | |
| Amortized Intangible Assets | | Amount | | | Amortization | |
| | | |
| Customer Relationships | | $ | 66,851 | | | $ | 2,061 | |
| Non-Compete Agreements | | | 1,557 | | | | 178 | |
| | | |
| Total | | $ | 68,408 | | | $ | 2,239 | |
| | | |
The weighted-average amortization period is 10.8 years, 11 years for the sale of the joint venture. An impairment of $3.3 million was recognized based upon the Company’s expected sales price. On January 1, 2004 the operating assets of Laser Precision were sold to an unrelated third-party.
Long-Lived Asset Impairmentcustomer contracts and Lease Termination Costs
Selected long-lived assets and non-cancelable leases were either impaired or accruals were made3 years for contract termination costs totaling $1.1 million. In 2003, the decision was made to dispose of the owned assets and cease use of the leased assets in order to facilitate plant consolidations and to maximize plant utilization.
(8) Revolving Line of Credit and Former Accounts Receivable Securitization
Revolver
On July, 29, 2005 the Company replaced the Accounts Receivable Securitization facility with a $82.0 million five year secured revolving credit agreement (the “Revolver”) with a syndicate of U.S. banks.
The Revolver consists of (i) a $75.0 million revolving loan ( the ” U.S. Facility” ) and (ii) a $7.0 million revolving loan ( the “Canadian Facility”) to be drawn by the borrower from time to time. The Canadian Facility can be drawn in U.S. dollars and/or Canadian dollars. Available proceeds under the Revolver may be used for general corporate purposes.
The U.S. Facility is guaranteed by the material domestic subsidiaries of the Company and is secured by substantiallynon-compete agreements. Substantially all of the Company’s intangible assets of the Company and its domestic subsidiaries. The obligations of the Company rank pari passu in right of payment with the Company’s long-term notes. The U.S. Facility provides for a swing line subfacility in an aggregate amount up to $5.0 million and for a letter of credit subfacility providing for the issuance of letters of credit up to $10.0 million. Depending on the type of borrowing selected by the Company, the applicable interest rate for loans under the U.S. Facility is calculated as a per annum rate equal to (i) LIBOR plus a variable margin or (ii) the greater of the U.S. prime rate or the federal funds effective rate plus 0.5%. The margin on LIBOR loans may fall or rise as set forth on a grid depending on the Company’s debt-to-capital ratio as calculated on a quarterly basis. As of December 31, 2005 the Company had no outstanding borrowings under the U.S. Facility.
The Canadian Facility is guaranteed by the Company and is secured by substantially all of the assets of the Canadian subsidiary. The Canadian Facility provides for a letter of credit subfacility providing for the issuance of letters of credit in an aggregate amount of up to Cdn. $2.0 million. Depending on the type of borrowing selected by the Canadian subsidiary, the applicable interest rate for loans under the Canadian Facility is calculated as a per annum rate equal to (i) for loans drawn in U.S. dollars, the rate is the same as the U.S. Facility and (ii) for loans drawn in Canadian dollars, the applicable CDOR rate for banker’s acceptances of the applicable face value and tenor or the greater of (a) the Canadian prime rate or (b) the one-month CDOR rate plus 0.5%. As of December 31, 2005 there were no outstanding borrowings under the Canadian Facility.
The Revolver is an asset-based loan with a borrowing base that fluctuates primarily with the Company’s and Canadian subsidiary’s receivable and inventory levels. The covenants contained in the Revolver, including financial covenants, match those set forth in the Company’s long-term note agreements. These covenants limit certain matters, including the incurrence of liens, the sale of assets, and mergers and consolidations, and include a maximum debt-to-working capital ratio, a maximum debt-to-total capital ratio and a minimum net worth provision. The Company was in compliance with all debt covenants at December 31, 2005. The Revolver, similar to the Company’s other senior indebtedness, includes a provision to release liens on the assets of the Company and all of its subsidiaries should the Company achieve an investment grade credit rating.
The Company used proceeds available under the U.S. Facility to repay in full and terminate its accounts receivable securitization facility. In connection with the Canadian Facility, the Canadian subsidiary repaid in full and terminated its former revolving credit agreement with a Canadian bank. With the termination of the Accounts Receivable Securitization facility, financial statement filings by the
34
Company for periods after July 2005 contain all trade receivables of the Company and its subsidiaries, and borrowings under the Revolver will be classified as debt.
Former Accounts Receivable Securitization
From December 2002 through July 29, 2005, the Company utilized a special purpose, fully consolidated, bankruptcy remote company (Castle SPFD, LLC) for the sole purpose of buying receivables from the parent Company and selected subsidiaries, and selling an undivided interest in a base of receivables to a finance company. Castle SPFD, LLC retained an undivided interest in the pool of accounts receivable, and bad debt losses were allocated first to this retained interest. Funding under the facility was limited to the lesser of a calculated funding base or $60 million. The amount sold to the finance company at December 31, 2004 and 2003 were $16.5 million and $13.0 million, respectively.
The sale of accounts receivable was reflected as a reduction of “accounts receivable, net” in the Consolidated Balance Sheets and the proceeds received are included in “net cash provided from operating activities” in the Consolidated Statements of Cash Flowsacquired as part of the overall change in accounts receivable. Sales proceeds fromacquisition of Transtar on September 5, 2006.
For the receivables were less thanyear ended December 31, 2006, the face amountaggregate amortization expense was $2.2 million.
The following is a summary of the accounts receivable sold by an amount equal to a discount on sales as determined byestimated aggregate amortization expense for each of the financing company. These costs were charged to “discount on sale of accounts receivable”next five years (dollars in the Consolidated Statements of Operations. The discount rate at December 31, 2004 ranged from 5.16% to 5.25%.thousands):
| | | | | |
| 2007 | | $ | 6,604 | |
| 2008 | | | 6,604 | |
| 2009 | | | 6,441 | |
| 2010 | | | 6,081 | |
| 2011 | | | 6,070 | |
(9) Long-Term Debt
Long-termShort-term and long-term debt consisted of the following at December 31, 20052006 and 20042005(dollars in thousands):
| | | | | | | | | |
| | | 2005 | | 2004 |
| | | |
| Revolving credit agreement (a) | | $ | — | | | $ | 7,086 | |
| 6.26% insurance company loan due in scheduled installments from 2006 through 2015 | | | 75,000 | | | | — | |
| 8.49% insurance company term loan, due in equal installments from 2004 through 2008 | | | — | | | | 16,000 | |
| Industrial development revenue bonds at a 6.22% weighted average rate, due in 2009 (b) | | | 3,600 | | | | 3,600 | |
| 9.54% insurance company loan due in equal installments from 2005 through 2009 | | | — | | | | 25,000 | |
| 8.55% rate insurance company loan due in varying installments from 2001 through 2012 | | | — | | | | 47,500 | |
| Other | | | 1,460 | | | | 2,192 | |
| | | |
| Total | | | 80,060 | | | | 101,378 | |
| Less-current portion | | | (6,233 | ) | | | (11,607 | ) |
| | | |
| Total long-term portion | | $ | 73,827 | | | $ | 89,771 | |
| | | |
(a) The Company had a revolving credit agreement with a Canadian bank. Funding under the facility was limited to the lesser of a funding base or $8.3 million.
The Canadian credit facility was a five-year revolver and could be extended annually for an additional year, by mutual agreement.
Interest rate options for the foreign revolving facility were based on the Bank’s London Interbank Offer Rate (LIBOR) or Prime rates. The weighted average rate was 2.4%. A commitment fee of 0.5% of the unused portion of the commitment was also required. This facility was terminated on July 29, 2005 as discussed in Note (8).
(b) The industrial revenue bond is based on an adjustable rate bond structure and is backed by a letter of credit.| | | | | | | | | |
| | | 2006 | | | 2005 | |
| | | |
| SHORT-TERM DEBT | | | | | | | | |
| U.S. Revolver (a) | | $ | 108,000 | | | $ | — | |
| Mexico | | | 1,863 | | | | — | |
| Transtar | | | 1,383 | | | | — | |
| Trade acceptances (c) | | | 12,015 | | | | — | |
| | | |
| Total short-term debt | | | 123,261 | | | | — | |
| | | | | | | | | |
| LONG-TERM DEBT | | | | | | | | |
| U.S. Term Loan due in scheduled installments from 2006 through 2011 at a 7.25% weighted average rate (a) | | | 28,500 | | | | — | |
| 6.76% (6.26% prior to December 2006) insurance company loan due, in scheduled installments from 2006 through 2015 (b) | | | 69,283 | | | | 75,000 | |
| | | | | | | | | |
| Industrial development revenue bonds at a 4.55% weighted average rate, due in varying amounts through 2009 (d) | | | 3,600 | | | | 3,600 | |
| Other, primarily capital leases | | | 1,502 | | | | 1,460 | |
| | | |
| Total long-term debt | | | 102,885 | | | | 80,060 | |
| Less-current portion | | | (12,834 | ) | | | (6,233 | ) |
| | | |
| Total long-term portion | | | 90,051 | | | | 73,827 | |
| | | | | | | | | |
| TOTAL SHORT-TERM AND LONG-TERM DEBT | | $ | 226,146 | | | $ | 80,060 | |
| | | |
3538
Long-Term Debt Refinancing
On November 17, 2005 the Company entered into a ten year Note Agreement with an insurance company and its affiliate pursuant to which the Company issued and sold $75 million aggregate principal amount of the Company’s 6.26% Senior Secured Notes due in scheduled installments through November 17, 2015 (the “Notes”). Interest on the Notes accrues at the rate of 6.26% annually, payable semi-annually beginning on May 15, 2006. The interest rate on the Notes will increase by 0.5% per annum beginning on December 1, 2006 unless and until the Company’s senior debt obligations are no longer secured or the Company achieves an investment grade credit rating on its senior indebtedness.
The Company’s annual debt service requirements under the Notes, including annual interest payments, will equal approximately $10.0 to $10.3 million per year. The Notes may not be prepaid without a premium.
| | |
| (a) | | On September 5, 2006 the Company and its Canadian subsidiary entered into a $210.0 million five-year secured Amended and Restated Credit Agreement (the “Amended Senior Credit Facility”) with its lending syndicate. The Amended Senior Credit Facility amended the Company’s and the Canadian Subsidiary’s outstanding senior credit facility that had originally been entered into in July 2005 (the “2005 Revolver”). |
|
| | The Amended Senior Credit Facility provides for (i) a $170.0 million revolving loan (the ”U.S. Revolver”) to be drawn on by the Company from time to time, (ii) a $30.0 million term loan ( the “U.S. Term Loan” and with the U.S. Revolver, the “U.S. Facility”), and (iii) a Cdn. $11.1 million revolving loan (approximately $9.9 million in U.S. dollars), (the “Canadian Revolver”) to be drawn on by the Company’s Canadian subsidiary from time to time. The Canadian Revolver can be drawn in either U.S. dollars or Canadian dollars. The revolving loans and term loan will mature in 2011. |
|
| | The U.S. Facility is guaranteed by the material domestic subsidiaries of the Company and is secured by substantially all of the assets of the Company and its domestic subsidiaries. The obligations of the Company rank pari passu in right of payment with the Company’s long-term notes. The U.S. Facility provides for a swing line sub-facility in an aggregate amount up to $15.0 million and for a letter of credit sub-facility providing for the issuance of letters of credit up to $15.0 million. Depending on the type of borrowing selected by the Company, the applicable interest rate for loans under the U.S. Facility is calculated as a per annum rate equal to (i) LIBOR plus a variable margin or (ii) “Base Rate”, which is the greater of the U.S. prime rate or the federal funds effective rate plus 0.5%, plus a variable margin. The margin on LIBOR and Base Rate loans may fall or rise as set forth on a grid depending on the Company’s debt-to-capital ratio as calculated on a quarterly basis. As of December 31, 2006 the Company’s weighted average interest rate was 7.19%. |
|
| | The Canadian Revolver is guaranteed by the Company and is secured by substantially all of the assets of the Canadian subsidiary. The Canadian Revolver provides for a letter of credit sub-facility providing for the issuance of letters of credit in an aggregate amount of up to Cdn. $2.0 million. Depending on the type of borrowing selected by the Canadian subsidiary, the applicable interest rate for loans under the Canadian Revolver is calculated as a per annum rate equal to (i) for loans drawn in U.S. dollars, the rate plus a variable margin is the same as the U.S. Facility and (ii) for loans drawn in Canadian dollars, the applicable CDOR rate for banker’s acceptances of the applicable face value and tenor or the greater of (a) the Canadian prime rate or (b) the one-month CDOR rate plus 0.5%. The margin on the loans drawn under the Canadian Revolver may fall or rise as set forth on a grid depending on the Company’s debt-to-total capital ratio as calculated on a quarterly basis. As of December 31, 2006 there were no outstanding borrowings under the Canadian Revolver. |
|
| | The U.S. Facility and the Canadian Revolver are each an asset-based loan with a borrowing base that fluctuates primarily with the Company’s and the Canadian subsidiary’s receivable and inventory levels. The covenants contained in the Amended Senior Credit Facility, including financial covenants, match those set forth in the Company’s long-term note agreements. These covenants limit certain matters, including the incurrence of liens, the sale of assets, and mergers and consolidations, and include a maximum debt-to-working capital ratio, a maximum debt-to-total capital ratio and a minimum net worth provision. There is also a provision to release liens on the assets of the Company and all of its subsidiaries should the Company achieve an investment grade credit rating. The Company was in compliance with all debt covenants at December 31, 2006. |
|
| | The Company used the proceeds from the $30.0 million U.S. Term Loan and drew $117.0 million of the amount available under the U.S. Revolver along with cash on hand to finance the acquisition of Transtar (see Note 2 to the consolidated financial statements). |
|
| | In conjunction with the aforementioned acquisition, the Company assumed $0.7 million of foreign short-term bank debt and $0.6 million of capital lease obligations. As of December 31, 2006 the Company had $3.3 million outstanding in foreign debt. |
39
The Notes are senior secured obligations of the Company and are pari passu in right of payment with the Company’s other senior secured obligations, including its revolving credit facility. The notes are secured, on an equal and ratable basis with the Company’s obligations under the revolving credit facility, by first priority liens on all of the Company’s and its material U.S. subsidiaries’ material assets and a pledge of all of the Company’s equity interests in certain of its subsidiaries. The Note Agreement, like the other senior secured indebtedness, including its revolving credit facility, includes a provision to release liens on the assets of the Company and all of its subsidiaries should the Company achieve an investment grade credit rating on its senior indebtedness. The Notes are guaranteed by all of the Company’s material U.S. subsidiaries.
The covenants and events of default contained in the Note Agreement, including the financial covenants, are substantially the same as those contained in the Revolver. The primary financial covenants include a maximum debt-to-working capital ratio, a maximum debt-to-total capital ratio and a minimum net worth provision. In addition, other covenants include restrictions or limitations with respect to the incurrence of liens, the sale of assets, and mergers and consolidations. The events of default include the failure to pay principal or interest on the Notes when due, failure to comply with covenants and other agreements contained in the Note Agreement, defaults under other material debt instruments of the Company or its subsidiaries, certain judgments against the Company or its subsidiaries or events of bankruptcy involving the Company or its subsidiaries, the failure of the guarantees or security documents to be in full force and effect or a default under those agreements, or the Company’s entry into a receivables securitization facility. Upon the occurrence of an event of default, the Company’s obligations under the Notes may be accelerated. The Company was in compliance with all debt covenants at December 31, 2005.
The Company used the proceeds of the Notes, together with cash on hand, to prepay in full all of its obligations under its former long-term senior secured notes.
| | |
| | In 2005, the Company used proceeds available under the U.S. Revolver to repay in full and terminate its former accounts receivable securitization facility, and the Canadian Revolver to repay in full the Canadian subsidiary’s then existing revolving credit agreement with a Canadian bank. |
|
| (b) | | On November 17, 2005, the Company entered into a ten year note agreement with an insurance company and its affiliate pursuant to which the Company issued and sold $75 million aggregate principal amount of the Company’s 6.26% senior secured notes due in scheduled installments through November 17, 2015 (the “Notes”). Interest on the Notes accrued at the rate of 6.26% annually, payable semi-annually beginning on May 15, 2006. Per the agreement, the interest rate on the Notes increased by 0.5% per annum to 6.76% on December 1, 2006. This rate will remain in effect until the Company achieves an investment grade credit rating on its senior indebtedness, at which time the interest rate on the Notes reverts back to 6.26%. |
|
| | The Company’s annual debt service requirements under the Notes, including annual interest payments, will equal approximately $10.2 to $10.7 million per year. The Notes may not be prepaid without a premium. |
|
| | The Notes are senior secured obligations of the Company and are pari passu in right of payment with the Company’s other senior secured obligations, including the Amended Senior Credit Facility. The notes are secured, on an equal and ratable basis with the Company’s obligations under the Amended Senior Credit Facility, by first priority liens on all of the Company’s and its material U.S. subsidiaries’ material assets and a pledge of all of the Company’s equity interests in certain of its subsidiaries. The Notes are guaranteed by all of the Company’s material U.S. subsidiaries. |
|
| | The covenants and events of default contained in the note agreement, including the financial covenants, are substantially the same as those contained in the Amended Senior Credit Facility. The events of default include the failure to pay principal or interest on the Notes when due, failure to comply with covenants and other agreements contained in the note agreement, defaults under other material debt instruments of the Company or its subsidiaries, certain judgments against the Company or its subsidiaries or events of bankruptcy involving the Company or its subsidiaries, the failure of the guarantees or security documents to be in full force and effect or a default under those agreements, or the Company’s entry into a receivables securitization facility. Upon the occurrence of an event of default, the Company’s obligations under the Notes may be accelerated. |
|
| | The Company used the proceeds of the Notes, together with cash on hand, to prepay in full all of its obligations under its former long-term senior secured notes. |
|
| c) | | At December 31, 2006, the Company had $12.0 million in outstanding Trade Acceptances with varying maturity dates ranging up to 120 days. The weighted average interest rate was 6.88%. |
|
| d) | | The industrial revenue bonds are based on an adjustable rate bond structure and are backed by a letter of credit. |
Aggregate annual principal payments required on the Company’s long-term debt which primarily consists of its $75 million notes and Industrial Development Revenue Bonds are as follows(dollars in thousands):
| | | | | | | | |
| Year ending December 31, | | |
| | 2006 | | $ | 6,233 | | |
| 2007 | | 6,570 | | | $ | 12,834 | |
| 2008 | | 6,841 | | | 12,998 | |
| 2009 | | 10,390 | | | 16,470 | |
| 2010 | | 7,190 | | | 13,220 | |
| 2011 and beyond | | 42,836 | | |
| 2011 | | | 12,140 | |
| 2012 and beyond | | | 35,223 | |
| | | | | | | |
| Total debt | | $ | 80,060 | | | $ | 102,885 | |
| | | | | | | |
Net interest expense reported on the accompanying Consolidated Statementsconsolidated statements of Operationsoperations was reduced by interest income from investment of excess cash balances of $1.1 million in 2006, $0.3 million in 2005 and $0.2 million in 2004 and $0.1 million in 2003.2004.
40
The fair value of the Company’s fixed rate debt as of December 31, 2005,2006, including current maturities, was estimated to be $75.2$68.8 million compared to a carrying value of $75$69.3 million.
36
(10) Common Stock/Stock OptionsShare-based Compensation
Effective October 1, 2005, the Company adopted FAS No. 123R, “Share-Based Payment,” as its method to account for stock-based compensation. The Company applied this new accounting standard following the modified retrospective method of adoption and, accordingly, restated all prior periods to reflect its financial statements as if FAS 123R had been in effect since January 1, 1995. Note 14 to the consolidated financial statements reflects the impact of adopting FAS 123R on the Company’s quarterly results for 2004 and the first three quarters of 2005 versus the amounts reported in previous SEC filings, which reflected the Company’s prior accounting method. Previously, the Company applied the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25 in accounting for its stock-based compensation plans.
Had FAS 123R not been adopted in 2005 on the modified retrospective basis of adoption, net income (loss) and net income (loss) per share (diluted) as reported would have been approximately $28.3 million ($1.54 per share), $16.9 million ($1.01 per share) and $(18.0 million) ($(1.20) per share) for the years ended December 31, 2005, 2004 and 2003, respectively. In 2005, cash flows from operating activities would have been approximately $0.8 million higher and cash flows from financing activities would have been approximately $0.8 million lower. Fourth quarter 2005 net loss and loss per share (diluted) would have been $(7.1 million) and $(0.43) per share. The stock compensation expense which would have been recorded in the fourth quarter 2005 under the Company’s prior accounting policies (APB No. 25) is attributable to the impact of fourth quarter 2005 stock option exercises using cashless methods, and the resultant accounting for all outstanding stock options using variable plan accounting as prescribed in APB No. 25.
The Company maintains long-term stock incentive and stock option plans for the benefit of officers, directors and key management employees. The 1995 Directors Stock Option Plan authorizes the issuance of up to 187,500 shares; the 1996 Restricted Stock and Stock Option Plan authorizes 937,500 shares; the 2000 Restricted Stock and Stock Option Plan authorizes 1,200,000 shares and the 2004 Restricted Stock, Stock Option and Equity Compensation Plan authorizes 1,350,000 shares for use under these plans (collectively, the Plans)“Plans”). The Company accounts for its share-based compensation programs by recognizing compensation expense for the fair value of the share awards granted ratably over their vesting period in accordance with FASSFAS No. 123R. The compensation cost that has been charged against income for the Plans was $1.2 million, $1.4 million and $1.6 million for 2006, 2005 and $1.7 million for 2005, 2004, and 2003, respectively. The total income tax benefit recognized in the consolidated statements of operations for share-based compensation arrangements was $0.5 million, $0.4 million and $0.5 million for 2006, 2005 and 2004, respectively, with no tax benefit being recognized in 2003.respectively.
The Company also has a Director’s Deferred Compensation Plan for directors who are not officers of the Company. Under this plan, directors have the option to defer payment of their retainer and meeting fees into either a stock equivalent unit account or an interest account. Disbursement of the interest account and the stock equivalent unit account can be made only upon a director’s resignation, retirement or death, and is generally made in cash, but the stock equivalent unit account disbursement may be made in common shares at the director’s option. Fees deferred into the stock equivalent unit account are a form of share-based payment and represent a liability award which is remeasuredre-measured at fair value at each reporting date. As of December 31, 2005,2006, an aggregate 21,30022,115 common share equivalent units are included in the director accounts. Compensation expense related to the fair value remeasurementre-measurement associated with this plan, was approximately $0.1 million at December 31, 2006 and $0.6 million in each of the years ended December 31, 2005 and 2004, and $0.3 million for the year ended December 31, 2003.2004.
In 2005, the Company established the 2005 Performance Stock Equity Plan (the Performance Plan)“Performance Plan”) pursuant to the terms of the Company’s 2004 Restricted Stock, Stock Option and Equity Compensation Plan, which is a shareholder-approved plan. In 2005, the Company granted selected executives and other key employees stock awards, the shares for which will be distributed in 2008 contingent upon meeting company-wide performance goals over the 2005-2007 performance period. The performance goals are three-year cumulative net income and average return on total capital for the same three year period. Final award vesting and distribution will be determined by the Company’s actual performance versus the target goals, with partial awards for performance less than the target goal, but in excess of minimum goals; and award distributions twice the target if the maximum goals are met or
37
exceeded. Individuals to whom performance shares have been granted generally must be employed by the Company at the end of the performance period (December 31, 2007) or theythe award will forfeit their award,be forfeited, unless theirthe termination of employment was due to death, disability or retirement. The number of stock awards granted in 20052006 was 379,700,47,750, and the number of shares which could potentially be awarded under the Performance Plan for these awards cannot exceed 759,400.95,500. In 2005, 5,0002006, 73,569 stock awards granted under the Performance Plan were forfeited. The fair value of the stock awards granted in 2005 under the Performance Plan was $11.75 and was established on the date of Board of Director’s approval of the 2005 stock award grants, using the market price of the Company’s common stock on that date. Compensation cost recognized during 2006 and 2005 related to the Performance Plan was $3.2 million and $2.1 million, respectively, and assumes performance goals will be achieved. At December 31, 2005,2006, the total unrecognized compensation cost related to non-vested Performance Plan awards granted is $6.5$3.2 million which is expected to be recognized ratably over the next two years.in 2007. If the performance goals are not met, no compensation cost would be recognized and any previously recognized compensation cost would be reversed.
The Company historically issued annual stock option grants to selected executives and other key employees and non-employee directors under the Plans. The Company has also issued restricted stock awards in certain circumstances. No stock option grants have been made to executives or other key employees since 2003. The option grants inIn 2004 and 2005, option grants were made only to non-employee directors. Commencing in 2006, restricted stock will beis granted to all non-employee directors in lieu of stock options. In 2002, restricted stock awards of 16,000 shares were granted. It is the Company’s intention to use the Performance Plan as its long term incentive compensation method for executives and other key employees, rather than annual stock option grants, although stock option grants may be made in the future in certain circumstances when deemed appropriate by management and the Board of Directors.
The Company’s stock options have been granted with an exercise price equal to the market price of the Company’s stock on the date of the grant and have a contractual life of 10 years. Options and restricted stock grants generally vest in threeone to five years for executive and employee option grants and one year for options and restricted stock grants granted to directors. The
41
Company generally issues new shares upon share option exercise. A summary of the stock option and restricted stock (non-performance based) activity under the Company’s stock optionshare-based compensation plans is shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted Average | | | | Weighted Average | | |
| | | Exercise | | | | Exercise | | |
| | | Shares | | Price | | Price Range | | Shares | | Price | | Price Range |
| | | | | |
| December 31, 2002 | | 1,784,035 | | $ | 10.71 | | $ | 6.39 — $23.88 | | |
| Granted | | 397,500 | | 5.20 | | 4.79 — 5.21 | | |
| Forfeitures | | | (105,582 | ) | | 9.94 | | 6.39 — 20.25 | | |
| | | | |
| December 31, 2003 | | 2,075,953 | | $ | 9.73 | | $ | 4.79 — $23.88 | | |
| Outstanding at January 1, 2004 | | | 2,075,953 | | $ | 9.73 | | $ | 4.79 — 23.88 | |
| Granted | | 52,500 | | 8.52 | | 8.52 | | | 52,500 | | $ | 8.52 | | $ | 8.52 | |
| Forfeitures | | | (223,130 | ) | | 14.43 | | 5.21 — 23.12 | | | | (223,130 | ) | | $ | 14.43 | | $ | 5.21 — 23.12 | |
| Exercised | | | (21,637 | ) | | 5.23 | | 5.21 — 7.02 | | | | (21,637 | ) | | $ | 5.23 | | $ | 5.21 — 7.02 | |
| | | | | |
| December 31, 2004 | | 1,883,686 | | $ | 9.10 | | $ | 4.79 — $28.25 | | |
| Outstanding at December 31, 2004 | | | 1,883,686 | | $ | 9.10 | | $ | 4.79 — 28.25 | |
| Granted | | 67,500 | | 14.50 | | 14.27 — 15.49 | | | 67,500 | | $ | 14.50 | | $ | 14.27 — 15.49 | |
| Forfeitures | | | (20,443 | ) | | 11.82 | | 6.39 — 15.08 | | | | (20,443 | ) | | $ | 11.82 | | $ | 6.39 — 15.08 | |
| Exercised | | | (1,281,679 | ) | | 8.97 | | 5.21 — 24.10 | | | | (1,281,679 | ) | | $ | 8.97 | | $ | 5.21 — 24.10 | |
| | | | | |
| December 31, 2005 | | 649,064 | | $ | 9.79 | | $ | 5.21 — $28.25 | | |
| Outstanding at December 31, 2005 | | | 649,064 | | $ | 9.79 | | $ | 5.21 — 28.25 | |
| Granted (1) | | | 81,684 | | $ | 6.95 | | $ | 0.00 — 28.40 | |
| Forfeitures | | | | (4,000 | ) | | $ | 28.25 | | $ | 28.25 | |
| Exercised | | | | (295,426 | ) | | $ | 9.73 | | $ | 6.39 — 11.00 | |
| | | | | |
| Outstanding at December 31, 2006 | | | 431,322 | | $ | 9.12 | | $ | 5.21 — 28.40 | |
| | | | |
| Vested or expected to vest as of December 31, 2006 | | | 431,322 | | $ | 9.12 | | $ | 5.21 — 28.40 | |
| | | | |
| | |
| (1) | | Shares granted during 2006 include 20,000 stock options at a Black-Scholes value of $16.93, 10,000 shares of restricted stock at a grant date fair value of $28.40, 37,500 shares of restricted stock at a grant date fair value of $28.34, and 14,184 shares of restricted stock at a grant date fair value of $28.20. |
As of December 31, 2005, 455,0642006, all of the 649,064 options outstanding were exercisable and had a weighted average contractual life of 5.86.0 years with a weighted average exercise price of $10.37. The remaining 194,000 shares were not exercisable and had a weighted average contractual life of 8.42 years, with a weighted average exercise price of $8.44.$10.79. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004, was $6.6 million, $11.5 million, and $0.1 million, respectively. At year-endThe total intrinsic value of shares outstanding at December 31, 2003 there was no intrinsic value.2006 is $7.0 million.
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The fair value of the non-performance based restricted stock awards andis established as the stock market price on the date of grant. The fair value of stock options granted has beenis estimated using the Black ScholesBlack-Scholes option-pricing model with the following assumptions:
Assumptions
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 | | 2006 | | 2005 | | 2004 | |
| | | | | |
| Risk free interest rate | | | 4.06–4.20 | % | | | 4.71 | % | | | 4.34 | % | | | 4.72% | | | | 4.06–4.20% | | | | 4.71% | |
| Expected dividend yield | | N/A | | N/A | | N/A | | | | 0.85% | | | N/A | | N/A | |
| Expected option term | | 10 Yrs | | 10 Yrs | | 10 Yrs | | | 10 Yrs | | 10 Yrs | | 10 Yrs | |
| Expected volatility | | | 50 | % | | | 50 | % | | | 50 | % | | | 50% | | | | 50% | | | | 50% | |
| The estimated weighted average fair value on the date granted based on the above assumptions | | $ | 9.45 | | $ | 5.67 | | $ | 3.22 | | | | $16.93 | | | $9.45 | | | $5.67 | |
As of December 31, 2005,2006, there was $0.6 million of totalno unrecognized compensation cost related to non-vested stock-option compensation arrangements granted under the Plans. That cost is expected to be recognized in 2006, the final year of vesting. The total fair value of shares vested during the years ended December 31, 2006, 2005 2004, and 2003,2004 was $1.4 million, $1.6$1.4 million and $1.7$1.6 million, respectively.
A summary of the Company’s non-vested shares as of December 31, 20052006 and changes during the year ended December 31, 2005,2006, is presented below:
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| | | | | | | | | |
| | | | | | | Weighted-Average |
| | | Actual | | Grant Date |
| Non-vested Shares | | Shares | | Fair Value |
| |
| Non-vested at January 1, 2005 | | | 474,637 | | | $ | 5.72 | |
| Granted | | | 67,500 | | | | 9.45 | |
| Vested | | | (340,745 | ) | | | 3.99 | |
| Forfeited | | | (7,392 | ) | | | 2.21 | |
| | | |
| Non-vested at December 31, 2005 | | | 194,000 | | | $ | 5.39 | |
| | | |
| | | | | | | | | |
| | | | | | | Weighted-Average |
| | | Actual | | Grant Date |
| Non-vested Shares | | Shares | | Fair Value |
| |
| Non-vested at January 1, 2006 | | | 194,000 | | | $ | 5.39 | |
| Granted (a) | | | 81,684 | | | $ | 24.40 | |
| Less vested shares | | | 214,000 | | | $ | 6.47 | |
| | | |
| Non-vested at December 31, 2006 | | | 61,684 | | | $ | 26.82 | |
| | | |
| | |
| (a) | | Includes 61,684 shares of restricted stock |
(11) Preferred Stock
In November 2002, the Company’s largest stockholder purchased through a private placement $12.0 million of eight-percent cumulative convertible preferred stock. The initial conversion price of the preferred stock is $6.69 per share. At the time of the purchase, the shareholder, on an as-converted basis, would increaseincreased its holdings and voting power in the Company by approximately 5%. The terms of the preferred stock include: the participation in any dividends on the common stock, subject to a minimum eight-percent dividend; voting rights on an as-converted basis;basis and customary anti-dilution and preemptive rights.
Beginning November 12, 2007, the Company can require the conversion of the preferred stock into the applicable number of shares of the Company’s common stock whenever the market price of the common stock equals or exceeds 200% of the conversion price ($13.38).of $6.69 or $13.38 per share.
(12)(12) Commitments and Contingent Liabilities
AtAs of December 31, 20052006 the Company had $2.2$5.3 million of irrevocable letters of credit outstanding, to comply$1.7 million of which is for compliance with the insurance reserve requirements of its workers’ compensation insurance carrier. The Letterremaining $3.6 million is in support of Credit is obtained under a provision in the new revolving credit facility.
In addition, in “Accrued liabilities” onoutstanding industrial revenue bonds (see Note 9 to the Consolidated Balance Sheets the reserve for workers compensation was $1.7 million and $1.4 million at year-end 2005 and 2004, respectively.consolidated financial statements).
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(13) Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss) as reported in the consolidated balance sheets as of December 31, 2006 and 2005 was comprised of the following (dollars in thousands):
| | | | | | | | | |
| | | 2006 | | 2005 |
| | | |
| Foreign currency translation gains | | $ | 3,569 | | | $ | 3,503 | |
| Minimum pension liability adjustments, net of tax | | | — | | | | (1,133 | ) |
| Unrecognized pension and postretirement benefit costs, net of tax | | | (22,073 | ) | | | — | |
| | | |
| Total accumulated other comprehensive income (loss) | | $ | (18,504 | ) | | $ | 2,370 | |
| | | |
Upon the adoption of SFAS No. 158, the concept of minimum pension liability no longer exists. Accordingly, the minimum pension liability, net of tax, as of December 31, 2006 of $(0.8) million is comprised of $(1.1) million from 2005, and 2004 comprised the following:$0.3 million 2006 minimum pension liability adjustment which are both included in unrecognized pension and postretirement benefit costs as of December 31, 2006. The amount of the pension adjustment to initially apply SFAS No. 158, net of tax, is $21.3 million.
43
| | | | | | | | | |
| | | 2005 | | 2004 |
| | | |
| Foreign currency translation gains | | $ | 3,503 | | | $ | 2,352 | |
| Minimum pension liability adjustments (net of income taxes) | | | (1,133 | ) | | | (736 | ) |
| | | |
| Total accumulated other comprehensive income | | $ | 2,370 | | | $ | 1,616 | |
| | | |
(14) Selected Quarterly Data (Unaudited)(dollars in thousands, except per share data)
(As restated for adoption| | | | | | | | | | | | | | | | | |
| | | First | | Second | | Third | | Fourth |
| | | Quarter | | Quarter | | Quarter | | Quarter |
| 2006 | | | | | | | | | | | | | | | | |
| Net sales | | $ | 279,193 | | | $ | 275,607 | | | $ | 300,809 | | | $ | 321,991 | |
| Gross profit (a) | | | 51,024 | | | | 48,728 | | | | 52,675 | | | | 49,440 | |
| Net income | | | 16,049 | | | | 14,357 | | | | 15,492 | | | | 9,221 | |
| Preferred dividends | | | 242 | | | | 244 | | | | 235 | | | | 242 | |
| Net income applicable to common stock | | | 15,807 | | | | 14,113 | | | | 15,257 | | | | 8,979 | |
| Basic earnings per share | | $ | 0.95 | | | $ | 0.83 | | | $ | 0.82 | | | $ | 0.49 | |
| Diluted earnings per share | | $ | 0.86 | | | $ | 0.76 | | | $ | 0.82 | | | $ | 0.47 | |
| Common stock dividends declared per share | | $ | 0.06 | | | $ | 0.06 | | | $ | 0.06 | | | $ | 0.06 | |
| | | | | | | | | | | | | | | | | |
| 2005 | | | | | | | | | | | | | | | | |
| Net sales | | $ | 246,203 | | | $ | 250,967 | | | $ | 234,551 | | | $ | 227,257 | |
| Gross profit (a) | | | 44,262 | | | | 45,897 | | | | 40,470 | | | | 33,396 | |
| Net income | | | 11,770 | | | | 13,485 | | | | 10,317 | | | | 3,337 | |
| Preferred dividends | | | 240 | | | | 240 | | | | 240 | | | | 241 | |
| Net income applicable to common stock | | | 11,530 | | | | 13,245 | | | | 10,077 | | | | 3,096 | |
| Basic earnings per share | | $ | 0.73 | | | $ | 0.83 | | | $ | 0.63 | | | $ | 0.19 | |
| Diluted earnings per share | | $ | 0.65 | | | $ | 0.73 | | | $ | 0.56 | | | $ | 0.18 | |
| | |
| (a) | | Gross profit equals net sales minus cost of materials, warehouse, processing, and delivery costs and less depreciation and amortization expense. |
The Company reinstituted payment of FAS 123R)
| | | | | | | | | | | | | | | | | |
| | | First | | Second | | Third | | Fourth |
| | | Quarter | | Quarter | | Quarter | | Quarter |
| | | |
| 2005 | | | | | | | | | | | | | | | | |
| Net sales | | $ | 246,203 | | | $ | 250,967 | | | $ | 234,551 | | | $ | 227,257 | |
| Gross material margin | | | 72,903 | | | | 75,518 | | | | 70,595 | | | | 62,777 | |
| Net income | | | 11,770 | | | | 13,485 | | | | 10,317 | | | | 3,337 | |
| Preferred dividends | | | 240 | | | | 240 | | | | 240 | | | | 241 | |
| Net income applicable to common stock | | | 11,530 | | | | 13,245 | | | | 10,077 | | | | 3,096 | |
| Net income per share–basic | | $ | 0.73 | | | $ | 0.83 | | | $ | 0.63 | | | $ | 0.19 | |
| Net income per share–diluted | | $ | 0.65 | | | $ | 0.73 | | | $ | 0.56 | | | $ | 0.18 | |
| | | | | | | | | | | | | | | | | |
| 2004 | | | | | | | | | | | | | | | | |
| Net sales | | $ | 175,634 | | | $ | 188,221 | | | $ | 199,341 | | | $ | 197,803 | |
| Gross material margin | | | 51,153 | | | | 56,356 | | | | 57,308 | | | | 52,754 | |
| Net income | | | 1,863 | | | | 5,568 | | | | 5,857 | | | | 2,129 | |
| Preferred dividends | | | 239 | | | | 239 | | | | 239 | | | | 240 | |
| Net income applicable to common stock | | | 1,624 | | | | 5,329 | | | | 5,618 | | | | 1,889 | |
| Net income per share–basic | | $ | 0.10 | | | $ | 0.34 | | | $ | 0.36 | | | $ | 0.12 | |
| Net income per share–diluted | | $ | 0.10 | | | $ | 0.30 | | | $ | 0.32 | | | $ | 0.12 | |
Fourth quarter 2005 includes charges for the loss on extinguishment of debt of $4.9 million. Also in the fourth quarter of 2006 and 2005, the Company recorded a $5.1 million and $4.0 million unfavorable LIFO (last-in, first-out) charge (LIFO less FIFO inventory revaluation)., respectively.
ThirdFourth quarter 20042006 includes charges to costapproximately $0.7 million in tax benefits, principally contingency reserve reversals, recorded in connection with the completion of material sold for a net inventory adjustmentan IRS audit and the impact of $1.7 million. A comparable charge also occurredchanges in the fourth quarter 2004 in the amount of $2.2 million as well as a net LIFO charge of $2.6 million.certain state tax laws.
40
The prior quarters net income and per share amounts have been restated from amounts previously reported to reflect the retrospective adoption of FAS 123R in the fourth quarter of 2005 as discussed in Note 10 to the consolidated financial statements:
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Restated | | As Previously Reported |
| | | | | | | Net Income | | | | | | | | | | Net Income | | |
| | | | | | | Applicable | | | | | | | | | | Applicable | | |
| | | | | | | to Common | | | | | | | | | | to Common | | |
| | | Net Income | | Stock | | EPS* | | Net Income | | Stock | | EPS* |
| | | |
2005 | | | | | | | | | | | | | | | | | | | | | | | | |
| Q1 | | $ | 11,770 | | | $ | 11,530 | | | $ | 0.65 | | | $ | 12,118 | | | $ | 11,878 | | | $ | 0.70 | |
| Q2 | | | 13,485 | | | | 13,245 | | | | 0.73 | | | | 12,982 | | | | 12,742 | | | | 0.72 | |
| Q3 | | | 10,317 | | | | 10,077 | | | | 0.56 | | | | 10,284 | | | | 10,044 | | | | 0.56 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
2004 | | | | | | | | | | | | | | | | | | | | | | | | |
| Q1 | | | 1,863 | | | | 1,624 | | | | 0.10 | | | | 2,301 | | | | 2,062 | | | | 0.13 | |
| Q2 | | | 5,568 | | | | 5,329 | | | | 0.30 | | | | 5,997 | | | | 5,758 | | | | 0.35 | |
| Q3 | | | 5,857 | | | | 5,618 | | | | 0.32 | | | | 6,086 | | | | 5,847 | | | | 0.36 | |
| Q4 | | | 2,129 | | | | 1,889 | | | | 0.12 | | | | 2,489 | | | | 2,249 | | | | 0.15 | |
| |
4144
Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors and Stockholders of A.M.A. M. Castle & Co.:
Franklin Park, Illinois
We have audited the accompanying consolidated balance sheets of A.M. Castle & Co. and subsidiaries (the “Company”) as of December 31, 20052006 and 2004,2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows and stockholders’ equity for each of the three years in the period ended December 31, 2005.2006. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of A.M. Castle & Co. and subsidiaries as of December 31, 20052006 and 2004,2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005,2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 10,1, effective December 31, 2006, the Company changed its method of accounting for stock-based compensation upon the adoption ofadopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” effective October 1, 2005, which was applied retrospectively to prior periods.158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005,2006, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 28, 200620, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverseunqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Chicago, IllinoisMarch 28, 2006 | | |
/s/ Deloitte & Touche LLPDELOITTE & TOUCHE LLP | | |
| | |
| Chicago, Illinois | | |
| March 20, 2007 | | |
4245
Management’s Assessment on Internal Control Over Financial ReportingMANAGEMENT’S ASSESSMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Castle’s The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in the Securities Exchange Act of 1934 rule 240.13a-15(f). Castle’sThe Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive OfficeOfficer and Chief Financial Officer to provide reasonable assurance regarding the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Castle, under the direction of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2005 based upon the framework published by the Committee of Sponsoring Organizations of the Treadway Commission, referred to as the Internal Control Integrated Framework.
Internal control over financial reporting, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Therefore, even effective internal control over financial reporting can only provide reasonable assurance with respect to the financial statement preparation and presentation.
A material weakness is a control deficiency, or combinationThe Company, under the direction of control deficiencies, that results in a more than remote likelihood that a material misstatementits Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the annual or interim financial statements will not be prevented or detected. Aseffectiveness of December 31, 2005, the Company did not maintain effectiveits internal control over financial reporting. As evidenced by audit adjustments to thereporting as of December 31, 20052006 based upon the framework published by the Committee of Sponsoring Organizations of the Treadway Commission, referred to as theInternal Control — Integrated Framework.
Based on our evaluation under the framework inInternal Control — Integrated Framework,the Company’s management has concluded that our internal control over financial reporting was effective as of December 31, 2006.
During the fiscal year ended December 31, 2006, the Company completed a significant acquisition. On September 5, 2006, the Company acquired Transtar Intermediate Holdings #2, Inc. (“Transtar”) , whose financial statements constitute one percent and 38 percent of net and total assets, respectively, seven percent of net sales, and four percent of net income of the consolidated financial statementsstatement amounts as of and related disclosures which were necessary to presentfor the financial statements inyear ended December 31, 2006. In accordance with generally accepted accounting principles, the Company (1) lacks sufficient resources with the appropriate levelSEC regulations, management has elected to exclude Transtar from its 2006 assessment of technical accounting expertise in areas such as stock-based compensation, income taxes and LIFO (last-in, first-out) inventory valuation, and (2) did not maintain sufficient monitoring controlsreport on internal control over its financial closing and reporting process.reporting.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 20052006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.
March 28, 200620, 2007
4346
Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors and Stockholders of A.M.A. M. Castle & Co.:
Franklin Park, Illinois
We have audited management’s assessment, included in the accompanying Management’s Assessment on Internal Control overOver Financial Reporting, that A.M.A. M. Castle & Co. and subsidiaries (the “Company”) did not maintainmaintained effective internal control over financial reporting as of December 31, 2005, because of the effect of the material weaknesses identified in management’s assessment2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Assessment on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Transtar Intermediate Holdings #2, Inc. (“Transtar”), which was acquired on September 5, 2006 and whose financial statements constitute one percent and 38 percent of net and total assets, respectively, seven percent of net sales, and four percent of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2006. Accordingly, our audit did not include the internal control over financial reporting at Transtar. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment:
The Company’s controls over the period-end financial closing and reporting process are inadequate and such inadequate controls constitute material weaknesses in the design and operating effectiveness of internal control over financial reporting. Specifically, the Company (1) lacks sufficient resources with the appropriate level of technical accounting expertise in areas such as stock-based compensation, income
44
taxes and LIFO (last-in, first-out) inventory valuation, and (2) did not maintain sufficient monitoring controls over its financial closing and reporting process to provide reasonable assurance that appropriate reviews of reconciliations and analyses were performed in a timely manner. As a result of these weaknesses, significant adjustments to the December 31, 2005 consolidated financial statements and related disclosures were necessary to present the financial statements in accordance with generally accepted accounting principles. Due to the misstatements identified, the potential for further misstatements as a result of the internal control deficiencies, and the significance of the financial closing and reporting process to the preparation of reliable financial statements, there is a more than remote likelihood that a material misstatement of the interim and annual financial statements would not have been prevented or detected.
These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2005, of the Company and this report does not affect our report on such consolidated financial statements and financial statement schedule.
In our opinion, management’s assessment that the Company did not maintainmaintained effective internal control over financial reporting as of December 31, 2005,2006, is fairly stated, in all material respects, based on the criteria established inInternal Control—IntegratedControl-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2005,2006, based on the criteria established inInternal Control—IntegratedControl-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
47
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 20052006 of A. M. Castle & Co. and subsidiariesthe Company and our report dated March 28, 200620, 2007 expressed an unqualified opinion on those consolidated financial statements and accompanying financial statement schedule and included an explanatory paragraph related to a change in the method of accounting for stock-based compensation due to the Company’s adoption of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” as of October 1, 2005.158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans effective December 31, 2006.
| | | |
/s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP | | |
| | | |
DELOITTE & TOUCHE LLPChicago, Illinois | | |
| March 20, 2007 | | |
Chicago, Illinois
March 28, 2006
4548
ITEM 9 —Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A —Controls & Procedures
Disclosure Controls and Procedures
A review and evaluation was performed by the Company’s management, including the Chairman of the Board (Chairman), Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Security Exchange Act of 1934). Based upon that review and evaluation, the Chairman, CEO and CFO have concluded that due to material weaknesses discussed in Management’s Report on Internal Control Over Financial Reporting on page 38 hereof, the Company’s disclosure controls and procedures were not effective as of December 31, 2005.2006.
Management’s Annual Report on Internal Control Over Financial Reporting
Management’s report on internal control over financial reporting is included in Part II of this report and incorporated in this Item 9A by reference.
Attestation Report of the Independent Registered Public Accounting Firm
Deloitte & Touche LLP has audited management’s assessment of the effectiveness of internal control over financial reporting as stated in their report included in Part II Item 8 and incorporated by reference herein.
Change in Internal Control Over Financial Reporting
In the firstfourth quarter of 20052006, the Company implemented changes in its internal control over financial reporting in response to the deficiencies identified in 2004.2005.
The Company is now performing physical inventory counts at each of its facilitiesTo remediate deficiencies in the accounting close and reconciling these counts to the financial statements. In addition,reporting process, the Company engaged a consulting firm to document its financial close process and recommend changes, which were implemented in the fourth quarter of 2006. To improve its internal capabilities for tax accounting, new software has been purchased and is obtaining quarterly confirmations ofbeing implemented for the Company’s inventory located at each of its outside processors. Thetax provision calculations and tracking. To remediate deficiencies in complex accounting issues, the Company has determined, after the physical counts were completedengaged outside service providers and reconciled in 2005, that the internal controls put in place have cured this deficiency which was reportedutilized these resources to aide in the annual report on Form 10-K forpurchase accounting associated with the year ended December 31, 2004.
Management continues to evaluate its internal control over financial reporting. The following initiatives are either underway or will be adopted byTranstar acquisition. In late 2006, the Company created and filled, with an outside temporary hire who subsequently joined the Company in 2006April 2007, the position of Director of Financial Reporting to enhance its internal control over financial reporting.
The Company started a business system replacement initiative in the third quarter of 2005. The project scope includes a replacementin-house SEC and GAAP compliance expertise and oversight of the Company’s financial systems (general ledger, accounts payable and accounts receivable) as a first phase of the overall project plan. The Company is currently performing parallel testing and expects to be in production with its new financial systems in mid-2006. In conjunction with the business systems replacement initiative, the Company has invested in new report writing technology that will automate and expedite the creation of its key financial and other business reports. This program is also expected to be installed by mid-2006. Management believes this investment in technology will allow for a more thorough and timely review of its financial statements by its financial staff, thereby enhancing its internal control over financial reporting.
In March 2006, the Company filled its newly created position of Tax Manager. This addition to the Company’s financial management team will serve to enhance its in-house expertise in the tax accounting area.
Management will also evaluate thecontinue to use of additional external and/or internal accounting resources to assist with the identification and proper application of generally accepted accounting principles in recording complex transactions. The Company is in the process of reviewing and documenting the internal control structure of Transtar and, if necessary, will make appropriate changes to Transtar’s internal control over financial reporting.
4649
Item 9B —Other Information
None
PART III
ITEM 10 —Directors and Executive Officers of the Registrant
Corporate Officers of The Registrant
| | | | | | | |
| Name and Title | | Age | | Business Experience |
G. Thomas McKane
Chairman of the Board | | | 61 | | | Mr. McKane began his employment with the registrant in May of 2000 and was appointed to the position of President and Chief Executive Officer, a position he held until January 26, 2006. In January 2004 he was also elected to the position of Chairman of the Board. Formerly, he had been employed by Emerson Electric since 1968 in a variety of executive positions. |
| | | | | | |
Michael H. Goldberg
President & Chief Executive
Officer | | | 5253 | | | Mr. Goldberg was elected President and Chief Executive Officer on January 26, 2006. Prior to joining the Registrant he was Executive Vice President of Integris Metals (an aluminum and metals service center) from November 2001 to January 2005. From August 1998 to November 2001 Mr. Goldberg was Executive Vice President of North American metals Distribution Group a division of Rio Algom LTD. |
| | | | | | | |
Stephen V. Hooks
Executive Vice President
— President — Castle Metals | | | 5455 | | | Mr. Hooks began his employment with the registrant in 1972. He was elected to the position of Vice President —– Midwest Region in 1993, Vice President — Merchandising in 1998 Senior Vice President—President–Sales & Merchandising in 2002 and Executive Vice President of the Registrant and Chief Operating Officer of Castle Metals in January 2004. In 2005 Mr. Hooks was appointed President of Castle Metals |
| | | | | | | |
Lawrence A. Boik
Vice President
Chief Financial Officer and Treasurer | | | 4647 | | | Mr. Boik began his employment with the registrant in September 2003 and was appointed to the position of Vice President-Controller, Treasurer as well as Chief Accounting Officer. In October 2004, he was named to the position of Vice President-Finance, Chief Financial Officer and Treasurer. Formerly he served as the CFO of Meridan Rail from January 2002.2002 to September 2003. Prior employment included Vice President-Controller of ABC-NACO since July 2000, and Assistant Corporate Controller of US Can Co. back to October 1997. |
| | | | | | | |
Paul J. Winsauer
Vice President —
- Human Resources | | | 5455 | | | Mr. Winsauer began his employment with the registrant in 1981. In 1996, he was elected to the position of Vice-PresidentVice- President — Human Resources. |
| | | | | | | |
Jerry M. Aufox
Secretary and Corporate
Counsel | | | 6364 | | | Mr. Aufox began his employment with the registrant in 1977. In 1985 he was elected to the position of Secretary and Corporate Counsel. He is responsible for all legal affairs of the registrant. |
| | | | | | | |
Henry J. Veith
Controller and
Chief Accounting Officer | | | 5253 | | | Mr. Veith began his employment with the registrant in October 2004 and was appointed to the position of Controller as well asand Chief Accounting Officer. Formerly he served as the Controller of Meridan Rail from July 2002 to February 2004. Prior employment included Controller of Tinplate Partners From February 2001 to July 2002 and Director of Information Technology at U.S. Can Co. back to September 1996. |
4750
Metals Segment Officers of the Registrant
| | | | | | | |
| Name and Title | | Age | | Business Experience |
Castle Metals | | | | | | |
Albert J. Biemer, III
Vice President —
Supply Chain | | | 4445 | | | Mr. Biemer began his employment with the registrant in 2001 and was elected Vice President —– Supply Chain. Formerly with CSC, Ltd. as Vice President, Logistics in 2000 and Carpenter Technology Corporation from 1997 to 2000. |
| | | | | | | |
Kevin Coughlin
Vice President —
Operations | | | 5556 | | | Mr. Coughlin began his employment with the registrant in 2005 and was appointed to the position of Vice President-Operations. Prior to joining the Registrant he was Director of Commercial Vehicle Electronics and Automotive Starter Motor Groups for Robert Bosch-North America sincefrom 2001 to 2004 and Vice President of Logistics and Services for the Skill-Bosch Power Tool Company from 1997 to 2000. |
| | | | | | | |
J. Michael Coulson
Vice President and
Region Manager— Global Solutions | | | 4849 | | | Mr. Coulson began his employment with the registrant in 1979. He was appointed District Manager in 1991, Midwest Region Manager in 2003, and Vice President and Regional Manager in 2005.2005 and in 2006 was appointed to the position of Vice President – Global Solutions. |
| | | | | | | |
Robert R. Hudson
Vice President —
Tubular & Plate Products– Procurement | | | 5051 | | | Mr. Hudson began his employment with the registrant in 2002 and was appointed to the position of Vice President —Tubular–Tubular Products. In 2003 he was given the added responsibilities of plate products and Strategic Account Development. In 2006 Mr. Hudson was appointed to the position of Vice President Procurement. Formerly he was with U.S. Food Service as a division President from 2000 to 2002 and Ispat International NV from 1983 to 2000. |
| | | | | | | |
Tim N. Lafontaine
Vice President —
Alloy Products Marketing | | | 5253 | | | Mr. Lafontaine began his employment with the registrant in 1975, and was elected Vice President — Alloy Products in 19981998. In 2006 Mr. Lafontaine was appointed to the position of Vice President – Marketing. |
| | | | | | | |
Blain A. Tiffany
Vice President and
Region Manager— Sales | | | 4748 | | | Mr. Tiffany began his employment with the registrant in 2000 and was appointed to the position of District Manager. He was appointed Eastern Region Manager in 2003, and Vice President —– Regional Manager in 2005.2005 and in 2006 was appointed to the Position of Vice President – Sales. |
| | | | | | | |
Craig R. Wilson
Vice President —
Advanced Material ProductsMetals Express | | | 54 | | | Mr. Wilson began his employment with the registrant in 1979. He was elected to the position of Vice President - -Eastern Region in 1997; Vice President — Business Improvement and Quality in 1998; and Vice President and General Manager-Great Lakes Region in 1999. He was named Vice President-Advanced Materials Products in 2000. |
| | | | | | | |
Paul A. Lisius
Vice President and
General Manager
Metal Express, LLC | | | 5758 | | | Mr. Lisius began his employment with the registrant in 2001 and was appointed to the position of Controller, Metal Express, LLC. In 2004 he was elected to the position of Vice President and General Manager, Metal Express, LLC. Prior |
| | | | | | |
Transtar Metals | | | | | | |
| | | | | | |
Steven Scheinkman
President
Transtar Metals | | | 53 | | | Mr. Scheinkman began his employment with the registrant in September of 2006 upon the acquisition of Transtar. From 1999 to joining Metal Express2006, he was the controllerPresident and Chief Executive Officer of Hentzen CoatingsTranstar Metals (and its predecessors). Mr. Scheinkman’s prior experience includes serving as the President, Chief Operating Officer, and Chief Financial Officer of Macsteel Service Centers USA (formerly known as Ferro Union) from 1982 to 1999. |
4851
Plastics Segment OfficersOfficer of the Registrant
| | | | | | | |
| Name and Title | | Age | | Business Experience |
Total Plastics, Inc. | | | | | | |
Thomas L. Garrett
President
Total Plastics, Inc. | | | 4344 | | | Mr. Garrett began his employment with the registrant in 1988 and was appointed to the position of controller.controller of Total Plastics, Inc.. He was elected to the position of Vice President, Total Plastics, Inc. in 1996 and President, Total Plastics, Inc. in 2001. |
| | | | | | |
Daniel E. Talbott
Vice President
Total Plastics, Inc. | | | 42 | | | Mr. Talbott began his employment with the registrant in 1987 and became Branch Manager in 1990. He was elected to the position of Vice President, Total Plastics, Inc. in 2004. |
| | | | | | |
Thomas C. Roe
Director of Finance
Total Plastics Inc. | | | 55 | | | Mr. Roe began his employment with the registrant in 2005 and was appointed to the position of Director of Finance. Formerly he served as Chief Accounting Officer of X-Rite from July 2003 and Corporate Controller back to 1994. |
All additional information required to be filed in Part III, Item 10, Form 10-K, has been included in the Definitive Proxy Statement dated March 15, 200623, 2007 filed with the Securities and Exchange Commission, pursuant to Regulation 14A entitled “Information Concerning Nominees for Directors” and “Meetings and Committees of the Board” and is hereby incorporated by this specific reference.
ITEM 11 —Executive Compensation
All information required to be filed in Part III, Item 11, Form 10-K, has been included in the Definitive Proxy Statement dated March 15, 2006,23, 2007, filed with the Securities and Exchange Commission, pursuant to Regulation 14A entitled “Management Remuneration” and is hereby incorporated by this specific reference.
52
The following graph compares the cumulative total stockholder return on our common stock for the five-year period ended December 31, 2006, with the cumulative total return of the Standard and Poor’s S & P 500 Index and to a peer group of metals distributors. The comparison in the graph assumes the investment of $100 on December 31, 2001. Cumulative total stockholder return means share price increases or decreases plus dividends paid, with the dividends reinvested in our common stock.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among A.M. Castle & Co., The S & P 500 Index
And A Peer Group
| | |
| * | | $100 invested on 12/31/01 in stock or index including reinvestment of dividends. Fiscal year ending December 31. |
Copyright© 2007 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/01 | | 12/02 | | 12/03 | | 12/04 | | 12/05 | | 12/06 |
| | |
| A. M. Castle & Co. | | | 100.00 | | | | 55.49 | | | | 89.02 | | | | 145.61 | | | | 266.34 | | | | 312.75 | |
| S & P 500 | | | 100.00 | | | | 77.90 | | | | 100.24 | | | | 111.15 | | | | 116.61 | | | | 135.03 | |
| Peer Group* | | | 100.00 | | | | 82.98 | | | | 131.38 | | | | 176.47 | | | | 257.94 | | | | 310.39 | |
| | |
| * | | Peer Group consists of 1) Olympic Steel, Inc., 2) Reliance Steel & Aluminum Co., 3) Ryerson Inc. and 4) Central Steel & Wire Company. |
53
ITEM 12 —Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required to be filed in Part III, Item 2, Form 10-K, has been included in the Definitive Proxy Statement dated March 15, 2006,23, 2007, filed with the Securities and Exchange Commission pursuant to Regulation 14A, entitled “Information Concerning Nominees for Directors” and “Stock Ownership of Certain Beneficial Owners and Management” is hereby incorporated by this specific reference.
Other than the information provided above, Part III has been omitted pursuant to General Instruction G for Form 10-K and Rule 12b-23 since the Company will file a Definitive Proxy Statement not later than 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A, which involves the election of Directors.
49
Equity Plan Disclosures:
The following table includes information regarding the Company’s equity compensation plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (a) | | (b) | | (c) | | (a) | | (b) | | (c) | |
| | | Number of securities remaining | | Number of securities remaining | |
| | | Number of securities to | | Weighted-average | | available for future issuances | | Number of securities to | | Weighted-average | | available for future issuances | |
| | | be issued upon exercise | | exercise price of | | under equity compensation | | be issued upon exercise | | exercise price of | | under equity compensation | |
| | | of outstanding options, | | outstanding options, | | plans [excluding securities | | of outstanding options, | | outstanding options, | | plans [excluding securities | |
| Plan category | | warrants and rights | | warrants and rights | | reflected in column (a)] | | warrants and rights | | warrants and rights | | reflected in column (a)] | |
| | | | |
| Equity compensation plans approved by | | Options | | 649,064 | | $ | 9.79 | | | Options | 379,638 | | $ | 10.37 | |
| security holders | | Performance | | | 768,896 | *** | | $ | 0.00 | * | | 975,361 | | | Performance | 727,258 | *** | | $ | 0.00 | * | | 935,315 | |
| | | |
| Equity compensation plans not approved by security holders | | — | | — | | — | | | — | | — | | — | |
| | | | |
| Total | | 1,417,960 | | $ | 4.48 | ** | | 975,361 | | | 1,106,896 | | $ | 3.56 | * | | 935,315 | |
| | | | | |
| | |
| * | | Performance shares were, at the time target grants were established, valued at market price of $11.75 per share. |
| |
| ** | | $10.8511.28 per share if performance shares were valued at market price on grant date. |
| |
| *** | | Represents total number of securities authorized for issuance under the Performance Plan. |
ITEM 13 —Certain Relationships and Related Transactions
All information required to be filed in Part III, Item 13, Form-10K, has been included in the Definitive Proxy Statement dated March 15, 2006,23, 2007, filed with the Securities and Exchange Commission pursuant to Regulation 14A entitled “Related Party Transactions” is hereby incorporated by this specific reference.
ITEM 14 —Principal Accountant Fees and Services
All information required to be filed in Part III, Item 14, Form 10-K, has been included in the Definitive Proxy Statement dated March 15, 2006,23, 2007, filed with the Securities and Exchange Commission, pursuant to Regulation 14A entitled “Audit Committee Report to Stockholders” is hereby incorporated by this specific reference.
5054
PART IV
ITEM 15 —Exhibits and Financial Statement Schedules
A. M. Castle & Co.
Index To Financial Statements and Schedules
| | | | | |
| | | Page | |
Consolidated Statements of Operations — For the years ended December 31, 2006, 2005 2004 and 20032004 | | | 18 | |
| | | | |
Consolidated Balance Sheets — December 31, 20052006 and 20042005 | | | 19 | |
| | | | |
Consolidated Statements of Cash Flows — For the years ended December 31, 2006, 2005 2004 and 20032004 | | | 20-21 | |
| | | 20 | |
Consolidated Statements of Stockholders’ Equity —– For the years ended December 31, 2006, 2005 2004 and 20032004 | | | 21 | |
| | | | |
| Notes to Consolidated Financial Statements | | | 22-41 | |
| | | 22-42 | |
| Report of Independent Registered Public Accounting Firm | | | 42 | |
| | | 43 | |
| Management’s Assessment of Internal Controls Over Financial Reporting | | | 43 | |
| | | 44 | |
| Report of Independent Registered Public Accounting Firm | | | 44-45 | |
| | | 45-46 | |
| Valuation and Qualifying Accounts — Schedule II | | | 5456 | |
5155
The following exhibits are filed herewith or incorporated by reference.
| | | | | |
| Exhibit | | |
| Number | | Description of Exhibit |
| |
2.2 | | 2.1 | | Agreement of Merger and Plan of Reorganization (1) |
| | | |
| 2.2 | | Stock Purchase Agreement dated as of August 12, 2006 by and among A. M. Castle & Co. and Transtar Holdings #2, LLC. (8) |
| | |
| 3.1 | | | | Articles of Incorporation of the Company (1) |
| | | | | |
| 3.2 | | | | Articles of Merger Between A. M. Castle & Co. (Delaware Corporation) and Castle Merger a Maryland Corporation Dated June 5, 2001. (1) |
| | | | | |
| 3.3 | | | | By-Laws of the Company |
| | | | | |
| 3.4 | | | | Articles Supplementary to the Company’s Articles of Incorporation creating the Company’s Series A Cumulative Convertible Preferred Stock, filed November 22, 2002 with the State Department of Assessments and Taxation of Maryland (2) |
| | | | | |
| 4.1 | | | | Collateral Agency and Intercreditor Agreement, dated as of March 20, 2003, among U.S. Bank National Association, BofA, Nationwide, Allstate, Northwestern Mutual, Massachusetts Mutual, Mutual of Omaha, United of Omaha, Northern, Castle, Datamet, Inc., Keystone Tube, TPI, Paramont Machine Company, LLC, Advanced Fabricating Technology, LLC, Oliver Steel, Metal Mart, LLC (4) |
| | | | |
4.2 | | | | Credit Agreement dated July 29, 2005 among the Company, the Company’s subsidiary, A. M. Castle & Co. (Canada) Inc as borrowers and Bank of America, N.A., Bank of America, N.A. Canada Branch, J.P. Morgan Chase Bank N.A. and other lenders, as lenders. (5) |
| | | | |
4.3 | | | | Note Agreement dated November 17, 2005 for 6.26% Senior Secured Note Due November 17, 2005 between the Company as issuer and the Prudential Insurance Company of American and Prudential Retirement Insurance and Annuity Company as Purchasers. (6) |
| | | |
| 4.2 | | Amendment No. 1 to Note Agreement, dated September 5, 2006, between the Company and The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company Amendment. (9) |
| | |
| 4.3 | | Amended and Restated Credit Agreement, dated September 5, 2006, by and between A. M. Castle & Co. and Bank of America, N.A., as U.S. Agent, Bank of America, N.A., Canada Branch, as Canadian Agent, JPMorgan Chase Bank, N.A. as Syndication Agent and LaSalle Business Credit, LLC as Documentation Agent. (9) |
| | |
| 4.4 | | Guarantee Agreement, dated September 5, 2006, by and between the Company and the Guarantee Subsidiaries. (9) |
| | |
| 4.5 | | Amended and Restated Collateral Agency and Intercreditor Agreement, dated September 5, 2006 by and among A.M. Castle & Co., Bank of America, N.A., as Collateral Agent, The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company and The Northern Trust Company. (9) |
| | |
| 4.6 | | Amended and Restated Security Agreement, dated September 5, 2006, among the Company and the Guarantee Subsidiaries. (9) |
| | |
| 4.7 | | Guarantee Agreement, dated September 5, 2006, by and between the Company and Canadian Lenders and Bank of America, N.A. Canadian Branch, as Canadian Agent. (9) |
| | |
| 10.1 | | | | Registration Rights Agreement, dated as of November 22, 2002 among the Company, the investors named therein (the “Investors”) and W.B. & Co, for itself, and as nominee and agent of the Investors relating to the Company’s Series A Cumulative Convertible Preferred Stock (2) |
| | | | | |
| 10.2 | | | | A.M. Castle & Co. 2000 Restricted Stock and Stock Option Plan (1) |
| | | | |
10.3 | | | | A.M. Castle & Co. 2004 Restricted Stock, Stock Option and Equity Compensation Plan (3) |
| | | | |
10.4 | | | | Employment Agreement with Company’s President and CEO dated January 26, 2006 |
| | | | |
10.5 | | | | Change of Control Agreement with Senior Executives of the Company (4) |
| | | | |
10.6 | | | | Management Incentive Plan* |
| | | | |
10.7 | | | | Description of Director’s Deferred Compensation Plan(7) |
| | | | |
10.8 | | | | Employment Agreement with Company’s Chairman of the Board dated January 26, 2006 |
| | | | |
10.9 | | | | Executive Agreement with Company’s Executive Vice President dated January 26, 2006 |
| | | | |
10.10 | | | | Executive Agreement with Company’s Chief Financial Officer dated July 2, 2003 |
5256
| | | | |
| Exhibit | | |
| Number | | Description of Exhibit |
| |
14.110.3 | | A. M. Castle & Co. 2004 Restricted Stock, Stock Option and Equity Compensation Plan (3) |
| | |
| 10.4 | | Employment Agreement with Company’s President and CEO dated January 26, 2006 (10) |
| | |
| 10.5 | | Change of Control Agreement with Senior Executives of the Company (4) |
| | |
| 10.6 | | Management Incentive Plan* (4) |
| | |
| 10.7 | | Description of Director’s Deferred Compensation Plan (7) |
| | |
| 10.8 | | Employment Agreement with Company’s Chairman of the Board dated January 26, 2006 (10) |
| | |
| 10.9 | | Executive Agreement with Company’s Executive Vice President dated January 26, 2006 (10) |
| | |
| 10.10 | | Executive Agreement with Company’s Chief Financial Officer dated July 2, 2003 (10) |
| | |
| 14.1 | | Code of Ethics for Officers and Directors of A.M. Castle & Co. (3) |
| | | | | |
| 21.1 | | | | Subsidiaries of Registrant (4) |
| | | | |
| 23.1 | | | | Consent of Independent Registered Public Accounting Firm |
| | | | | |
| 31.1 | | | | Certification by G. Thomas McKane, Chairman of the Board, required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 |
| | | | |
31.2 | | | | Certification by Michael H. Goldberg, President and Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 |
| | | | | |
| 31.2 | | | | Certification by Lawrence A. Boik, Vice President and Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 |
| | | | | |
| 32.1 | | | | Certification by G. Thomas McKane, Chairman of the Board, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code |
| | | | |
32.2 | | | | Certification by Michael H. Goldberg, President and Chief Executive Officer, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code |
| | | | | |
32.3 | | 32.2 | | Certification by Lawrence A. Boik, Vice President and Chief Financial Officer, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code |
| | |
| * | | These agreements are considered a compensatory plan or arrangement required to be filed pursuant to Item 14 of Form 10-K.arrangement. |
| |
| (1) | | Incorporated by reference to the Company’s Definitive Proxy Statement filed with the SEC on March 23, 2001. |
| |
| (2) | | Incorporated by reference to the Form 8-K filed with the SEC on December 2, 2002. |
| |
| (3) | | Incorporated by reference to the Company’s Definitive Proxy Statement filed with the SEC on March 12, 2004. |
| |
| (4) | | Incorporated by reference to the Company’s Annual Report for 2004 and Form 10K10-K filed with the SEC dated March 16, 2005. |
| |
| (5) | | Incorporated by reference to the Form 8-K filed with the SEC on July 28, 2005. |
| |
| (6) | | Incorporated by reference to the Form 8-K filed with the SEC on November 21, 2005. |
| |
| (7) | | Incorporated by reference to the Company’s Definitive Proxy Statement filed with the SEC on March 31, 2006. |
|
| (8) | | Incorporated by reference to the Form 8-K filed with the SEC on August 17, 2006. |
|
| (9) | | Incorporated by reference to the Form 8-K filed with the SEC on September 8, 2006. |
|
| (10) | | Incorporated by reference to the Company’s Annual Report for 2005 and Form 10-K filed with the SEC dated March 31, 2006. |
5357
SCHEDULE II
A. M. Castle & Co.
Accounts Receivable — Allowance for Doubtful Accounts
Valuation and Qualifying Accounts
For The Years Ended December 31, 2006, 2005 2004 and 20032004
(Dollars in thousands)
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| |
| Balance, beginning of year | | $ | 1,760 | | | $ | 526 | | | $ | 693 | |
| | | | | | | | | | | | | |
| Add-Provision charged to income | | | 356 | | | | 1,987 | | | | 400 | |
| -Recoveries | | | 173 | | | | 86 | | | | 82 | |
| | | | | | | | | | | | | |
| Less-Uncollectible accounts charged against allowance | | | (526 | ) | | | (839 | ) | | | (649 | ) |
| | | |
| | | | | | | | | | | | | |
| Balance, end of year | | $ | 1,763 | | | $ | 1,760 | | | $ | 526 | |
| | | |
| | | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 |
| |
| Balance, beginning of year | | $ | 1,763 | | | $ | 1,760 | | | $ | 526 | |
| |
| Add — Provision charged to expense | | | 1,095 | | | | 356 | | | | 1,987 | |
| — Transtar allowance at date of acquisition | | | 1,229 | | | | — | | | | — | |
| — Recoveries | | | 567 | | | | 173 | | | | 86 | |
| |
| Less — Uncollectible accounts charged against allowance | | | (1,542 | ) | | | (526 | ) | | | (839 | ) |
| | | |
| Balance, end of year | | $ | 3,112 | | | $ | 1,763 | | | $ | 1,760 | |
| | | |
5458
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
A. M. Castle & Co.
(Registrant)
| | | | |
| A. M. Castle & Co. | | |
| | |
| | (Registrant) | | |
| | | | | |
| By: | | /s/ Henry J. Veith | | |
| | | | | |
| | | Henry J. Veith, Controller and Chief | | |
| | Accounting Officer | | |
| | | (Principal Accounting Officer) | | |
| | | | |
| Date: | | March 20, 2007 | | |
Date: March 28, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities as shown following their name on the dates indicated on this 28th12th day of March, 2006.2007.
| | | | | | | | |
| /s/ Michael Simpson | | | | /s/ John McCartney | | | | /s/ John W. Puth |
| | | | | | | | | |
| Michael Simpson, Director | | | | John McCartney, DirectorChairman of the Board and Member, Audit Committee | | | | John W. Puth, Director |
Chairman Emeritus | | Chairman, Audit Committee | | Member, Audit Committee |
| | | | | | | | |
| /s/ G. Thomas McKane | | | | /s/ William K. Hall | | | | /s/ Patrick J. Herbert, III |
| | | | | | | | | |
G. Thomas McKane Chairman of | | | | William K. Hall | | | | Patrick J. Herbert, III |
Board and Director | | | | Director | | | | Director |
| | | | | | | | |
| /s/ Michael H. Goldberg | | | | /s/ Robert S. Hamada | | | | /s/ Brian P. Anderson |
| | | | | | | | | |
| Michael H. Goldberg, President, | | Robert S. Hamada | | Brian P. Anderson. Director |
Chief Executive Officer and Director | | Director | | Member, Audit Committee |
(Principal Executive Officer) | | | | Robert S. Hamada
Director | | | | Brian P. Anderson. Director Chairman, Audit Committee |
| | | | | | | | |
| /s/ Thomas A Donahoe. | | | | /s/ Ann M. Drake | | | | /s/ Lawrence A. Boik. |
| | |
| | | | | | |
| Thomas A. Donahoe, Director Member, Audit Committee | | | | Ann M. Drake
Director | | | | Lawrence A. Boik | | |
Member, Audit Committee | |
Vice President and Chief Financial Officer | | |
| |
(Principal Financial Officer) | | |
5559
