Page 1 of 2522
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
©ý | | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For Quarterly Period Ended | | September 30, 2006March 31, 2007 | | or, |
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o | | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the transition period from | | | | to | | |
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Commission File Number | | 1-5415 |
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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 | | (I.R.S. Employer Identification No.) |
incorporation of organization) | | |
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3400 North Wolf Road, Franklin Park, Illinois | | 60131 |
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(Address of Principal Executive Offices) | | (Zip Code) |
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Registrant’s telephone, including area code | | 847/455-7111 |
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None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is 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 Filer Accelerated Filer X Non-Accelerated Filer
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
Yes No X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | | | |
Class | | Outstanding at SeptemberApril 30, 2006 |
| | 2007 |
Common Stock, $0.01 Par Value | | 17,013,37117,451,272 shares |
Preferred Stock, $0.01 Par Value | | 12,000 shares |
Page 2 of 2522
A. M. CASTLE & CO.
Part I. FINANCIAL INFORMATION
Page 3 of 2522
| | | | | | | | |
CONSOLIDATED BALANCE SHEETS | | | |
(Dollars in thousands) | | As of | |
Unaudited | | Sept 30, | | | Dec 31 | |
| | 2006 | | | 2005 | |
ASSETS | | | | | | | | |
Current assets | | | | | | | | |
Cash and cash equivalents | | $ | 9,756 | | | $ | 37,392 | |
Accounts receivable, less allowances of $3,263 at September 30, 2006 and $1,763 at December 31, 2005 | | | 182,023 | | | | 107,064 | |
Inventories (principally on last-in, first-out basis) (latest cost higher by $121,865 at September 30, 2006 and $104,036 at December 31, 2005) | | | 216,216 | | | | 119,306 | |
Other current assets | | | 13,996 | | | | 6,351 | |
| | | | | | |
Total current assets | | | 421,991 | | | | 270,113 | |
Investment in joint venture | | | 13,000 | | | | 10,850 | |
Goodwill | | | 99,208 | | | | 32,222 | |
Intangible assets | | | 68,520 | | | | 70 | |
Prepaid pension cost | | | 39,082 | | | | 41,946 | |
Other assets | | | 6,462 | | | | 4,112 | |
Property, plant and equipment, at cost | | | | | | | | |
Land | | | 5,224 | | | | 4,772 | |
Buildings | | | 48,641 | | | | 45,890 | |
Machinery and equipment | | | 138,458 | | | | 127,048 | |
| | | | | | |
| | | 192,323 | | | | 177,710 | |
Less — accumulated depreciation | | | (121,080 | ) | | | (113,288 | ) |
| | | | | | |
| | | 71,243 | | | | 64,422 | |
| | | | | | |
Total assets | | $ | 719,506 | | | $ | 423,735 | |
| | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current liabilities | | | | | | | | |
Accounts payable | | $ | 144,298 | | | $ | 103,246 | |
Accrued liabilities | | | 32,972 | | | | 21,535 | |
Current and deferred income taxes | | | 10,863 | | | | 7,052 | |
Short-term debt | | | 129,223 | | | | — | |
Current portion of long-term debt | | | 12,527 | | | | 6,233 | |
| | | | | | |
Total current liabilities | | | 329,883 | | | | 138,066 | |
| | | | | | |
Long-term debt, less current portion | | | 97,718 | | | | 73,827 | |
Deferred income taxes | | | 48,618 | | | | 21,903 | |
Deferred gain on sale of assets | | | 5,907 | | | | 5,967 | |
Pension and postretirement benefit obligations | | | 9,181 | | | | 8,467 | |
Commitments and contingencies | | | | | | | | |
Stockholders’ equity | | | | | | | | |
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 17,013,371 at September 30, 2006 and 16,605,714 at December 31, 2005 | | | 170 | | | | 166 | |
Additional paid-in capital | | | 67,772 | | | | 60,916 | |
Retained earnings | | | 152,670 | | | | 110,530 | |
Accumulated other comprehensive income | | | 3,281 | | | | 2,370 | |
Treasury stock, at cost — 411,235 shares at September 30, 2006 and 546,065 shares at December 31, 2005 | | | (6,933 | ) | | | (9,716 | ) |
| | | | | | |
Total stockholders’ equity | | | 228,199 | | | | 175,505 | |
| | | | | | |
Total liabilities and stockholders’ equity | | $ | 719,506 | | | $ | 423,735 | |
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| | | | | | | | |
CONSOLIDATED BALANCE SHEETS | | | |
(Dollars in thousands) | | As of | |
Unaudited | | March 31, | | | Dec 31, | |
| | 2007 | | | 2006 | |
ASSETS | | | | | | | | |
Current assets | | | | | | | | |
Cash and cash equivalents | | $ | 11,453 | | | $ | 9,526 | |
Accounts receivable, less allowances of $3,268 at March 31, 2007 and $3,112 at December 31, 2006 | | | 189,934 | | | | 160,999 | |
Inventories (principally on last-in, first-out basis) (latest cost higher by $142,984 at March 31, 2007 and $128,404 at December 31, 2006) | | | 237,525 | | | | 202,394 | |
Other current assets | | | 10,360 | | | | 18,743 | |
| | | | | | |
Total current assets | | | 449,272 | | | | 391,662 | |
Investment in joint venture | | | 14,152 | | | | 13,577 | |
Goodwill | | | 101,790 | | | | 101,783 | |
Intangible assets | | | 64,490 | | | | 66,169 | |
Prepaid pension cost | | | 5,657 | | | | 5,681 | |
Other assets | | | 5,955 | | | | 5,850 | |
Property, plant and equipment, at cost | | | | | | | | |
Land | | | 5,222 | | | | 5,221 | |
Building | | | 48,927 | | | | 49,017 | |
Machinery and equipment | | | 144,348 | | | | 141,090 | |
| | | | | | |
| | | 198,497 | | | | 195,328 | |
Less — accumulated depreciation | | | (127,494 | ) | | | (124,930 | ) |
| | | | | | |
| | | 71,003 | | | | 70,398 | |
| | | | | | |
Total assets | | $ | 712,319 | | | $ | 655,120 | |
| | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current liabilities | | | | | | | | |
Accounts payable | | $ | 152,822 | | | $ | 117,561 | |
Accrued liabilities | | | 30,825 | | | | 30,152 | |
Income taxes payable | | | 2,748 | | | | 931 | |
Deferred income taxes — current | | | 15,746 | | | | 16,339 | |
Short-term debt | | | 125,749 | | | | 123,261 | |
Current portion of long-term debt | | | 12,844 | | | | 12,834 | |
| | | | | | |
Total current liabilities | | | 340,734 | | | | 301,078 | |
| | | | | | |
Long-term debt, less current portion | | | 88,338 | | | | 90,051 | |
Deferred income taxes | | | 34,341 | | | | 31,782 | |
Deferred gain on sale of assets | | | 5,419 | | | | 5,666 | |
Pension and postretirement benefit obligations | | | 10,948 | | | | 10,636 | |
Commitments and contingencies | | | | | | | | |
Stockholders’ equity | | | | | | | | |
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 17,085,091 at March 31, 2007 and 17,085,091 at December 31, 2006 | | | 170 | | | | 170 | |
Additional paid-in capital | | | 70,994 | | | | 69,775 | |
Retained earnings | | | 175,194 | | | | 160,625 | |
Accumulated other comprehensive loss | | | (17,895 | ) | | | (18,504 | ) |
Deferred unearned compensation | | | (1,157 | ) | | | (1,392 | ) |
Treasury stock, at cost - 362,114 shares at March 31, 2007 and 362,114 shares at December 31, 2006 | | | (6,006 | ) | | | (6,006 | ) |
| | | | | | |
Total stockholders’ equity | | | 232,539 | | | | 215,907 | |
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Total liabilities and stockholders’ equity | | $ | 712,319 | | | $ | 655,120 | |
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The accompanying notes are an integral part of these statements
Page 4 of 2522
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CONSOLIDATED STATEMENTS OF INCOME | | For the Three | | | For the Nine | |
(Dollars in thousands, except per share data) | | Months Ended | | | Months Ended | |
Unaudited | | Sept 30, | | | Sept 30, | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
Net sales | | $ | 300,809 | | | $ | 234,551 | | | $ | 855,610 | | | $ | 731,721 | |
Cost of material sold | | | 214,792 | | | | 163,956 | | | | 606,136 | | | | 512,705 | |
| | | | | | | | | | | | |
Gross material margin | | | 86,017 | | | | 70,595 | | | | 249,474 | | | | 219,016 | |
Plant and delivery expense | | | 30,117 | | | | 27,920 | | | | 88,720 | | | | 81,635 | |
Sales, general, and administrative expense | | | 26,847 | | | | 23,405 | | | | 76,805 | | | | 69,509 | |
Depreciation and amortization expense | | | 3,225 | | | | 2,205 | | | | 8,323 | | | | 6,752 | |
| | | | | | | | | | | | |
Total operating expense | | | 60,189 | | | | 53,530 | | | | 173,848 | | | | 157,896 | |
Operating income | | | 25,828 | | | | 17,065 | | | | 75,626 | | | | 61,120 | |
Interest expense, net | | | (1,903 | ) | | | (1,765 | ) | | | (3,949 | ) | | | (5,875 | ) |
Discount on sale of accounts receivable | | | — | | | | (127 | ) | | | — | | | | (1,127 | ) |
| | | | | | | | | | | | |
Income before income taxes and equity earnings of joint venture | | | 23,925 | | | | 15,173 | | | | 71,677 | | | | 54,118 | |
Income taxes | | | (9,470 | ) | | | (5,673 | ) | | | (29,110 | ) | | | (21,888 | ) |
| | | | | | | | | | | | |
Income before equity in earnings of joint venture | | | 14,455 | | | | 9,500 | | | | 42,567 | | | | 32,230 | |
Equity in earnings of joint venture | | | 1,037 | | | | 817 | | | | 3,332 | | | | 3,342 | |
| | | | | | | | | | | | |
Net income | | | 15,492 | | | | 10,317 | | | | 45,899 | | | | 35,572 | |
Preferred dividends | | | (235 | ) | | | (240 | ) | | | (720 | ) | | | (720 | ) |
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Net income applicable to common stock | | $ | 15,257 | | | $ | 10,077 | | | $ | 45,179 | | | $ | 34,852 | |
| | | | | | | | | | | | |
Basic earnings per share | | $ | 0.82 | | | $ | 0.63 | | | $ | 2.46 | | | $ | 2.19 | |
| | | | | | | | | | | | |
Diluted earnings per share | | $ | 0.82 | | | $ | 0.56 | | | $ | 2.45 | | | $ | 1.93 | |
| | | | | | | | | | | | |
Dividends per common share | | $ | 0.06 | | | $ | — | | | $ | 0.18 | | | $ | — | |
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| | | | | | | | |
CONSOLIDATED STATEMENTS OF INCOME | | For The Three | |
(Dollars in thousands, except per share data) | | Months Ended | |
Unaudited | | March 31, | |
| | 2007 | | | 2006 | |
Net sales | | $ | 375,351 | | | $ | 279,193 | |
Costs and expenses: | | | | | | | | |
Cost of materials (exclusive of depreciation) | | | 269,450 | | | | 196,100 | |
Warehouse, processing and delivery expense | | | 35,570 | | | | 29,625 | |
Sales, general, and administrative expense | | | 36,394 | | | | 24,885 | |
Depreciation and amortization expense | | | 4,896 | | | | 2,444 | |
| | | | | | |
Operating income | | | 29,041 | | | | 26,139 | |
Interest expense, net | | | (4,261 | ) | | | (1,087 | ) |
| | | | | | |
Income before income taxes and equity earnings of joint venture | | | 24,780 | | | | 25,052 | |
Income taxes | | | (9,877 | ) | | | (10,242 | ) |
| | | | | | |
Net income before equity in earnings of joint venture | | | 14,903 | | | | 14,810 | |
Equity in earnings of joint venture | | | 932 | | | | 1,239 | |
| | | | | | |
Net income | | | 15,835 | | | | 16,049 | |
Preferred stock dividends | | | (243 | ) | | | (242 | ) |
| | | | | | |
Net income applicable to common stock | | $ | 15,592 | | | $ | 15,807 | |
| | | | | | |
Basic earnings per share | | $ | 0.84 | | | $ | 0.95 | |
| | | | | | |
Diluted earnings per share | | $ | 0.81 | | | $ | 0.86 | |
| | | | | | |
Dividends per common share paid | | $ | 0.06 | | | $ | 0.06 | |
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The accompanying notes are an integral part of these statements
Page 5 of 2522
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CONSOLIDATED STATEMENTS OF CASH FLOWS | | | |
(Dollars in thousands) | | For the Nine Months | |
Unaudited | | Ended Sept 30, | |
| | 2006 | | | 2005 | |
Cash flows from operating activities: | | | | | | | | |
Net income | | $ | 45,899 | | | $ | 35,572 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | |
Depreciation and amortization | | | 8,323 | | | | 6,752 | |
Amortization of deferred gain | | | (559 | ) | | | (639 | ) |
Equity in earnings from joint venture | | | (3,332 | ) | | | (3,342 | ) |
Stock compensation expense | | | 2,911 | | | | 2,607 | |
Deferred tax provision | | | 4,730 | | | | 241 | |
Excess tax benefits from stock-based payment arrangements | | | (1,210 | ) | | | — | |
Increase (decrease) from changes, net of acquisitions, in: | | | | | | | | |
Accounts receivable | | | (40,380 | ) | | | (35,776 | ) |
Inventories | | | (36,020 | ) | | | 18,205 | |
Prepaid pension costs | | | 2,865 | | | | 987 | |
Other current assets | | | (2,115 | ) | | | 316 | |
Accounts payable | | | 20,423 | | | | (8,182 | ) |
Accrued liabilities | | | 3,849 | | | | 4,401 | |
Income tax payable | | | (9,946 | ) | | | 5,265 | |
Postretirement benefit obligations and other liabilities | | | (1,585 | ) | | | 308 | |
| | | | | | |
Net cash (used in) from operating activities | | | (6,147 | ) | | | 26,715 | |
Cash flows from investing activities: | | | | | | | | |
Investments and acquisitions, net of cash acquired | | | (175,795 | ) | | | (236 | ) |
Dividends from joint venture | | | 1,231 | | | | 1,705 | |
Capital expenditures | | | (10,170 | ) | | | (4,784 | ) |
Collection of note receivable | | | — | | | | 2,639 | |
| | | | | | |
Net cash used in investing activities | | | (184,734 | ) | | | (676 | ) |
Cash flows from financing activities: | | | | | | | | |
Proceeds from issuance of short-term debt | | | 128,943 | | | | — | |
Proceeds from issuance of long-term debt | | | 30,574 | | | | 4,000 | |
Repayments of long-term debt | | | (680 | ) | | | (21,542 | ) |
Preferred stock dividend | | | (720 | ) | | | (720 | ) |
Dividends paid | | | (3,039 | ) | | | — | |
Exercise of stock options and other | | | 6,525 | | | | 597 | |
Excess tax benefits from stock-based payment arrangements | | | 1,210 | | | | — | |
| | | | | | |
Net cash from (used in) financing activities | | | 162,813 | | | | (17,665 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | 432 | | | | 476 | |
Net (decrease) increase in cash and cash equivalents | | | (27,636 | ) | | | 8,850 | |
| | | | | | |
Cash and cash equivalents — beginning of year | | $ | 37,392 | | | $ | 3,106 | |
| | | | | | |
Cash and cash equivalents — end of period | | $ | 9,756 | | | $ | 11,956 | |
| | | | | | |
Supplemental cash disclosure — cash paid during the period: | | | | | | | | |
Interest | | $ | 3,391 | | | $ | 6,808 | |
| | | | | | |
Income taxes | | $ | 32,190 | | | $ | 15,410 | |
| | | | | | |
| | | | | | | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | |
(Dollars in thousands) | | For the Three Months | |
Unaudited | | Ended Mar 31, | |
| | 2007 | | | 2006 | |
|
Cash flows from operating activities: | | | | | | | | |
Net income | | $ | 15,835 | | | $ | 16,049 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | |
Depreciation and amortization | | | 4,896 | | | | 2,444 | |
Amortization of deferred gain | | | (223 | ) | | | (213 | ) |
Loss on disposal of fixed assets | | | 1,340 | | | | — | |
Equity in earnings from joint venture | | | (932 | ) | | | (1,239 | ) |
Stock compensation expense | | | 1,454 | | | | 974 | |
Deferred tax provision | | | 1,649 | | | | (1,117 | ) |
Excess tax benefits from stock-based payment arrangements | | | — | | | | (168 | ) |
Increase (decrease) from changes, net of acquisitions, in: | | | | | | | | |
Accounts receivable | | | (28,859 | ) | | | (26,712 | ) |
Inventories | | | (35,012 | ) | | | (1,846 | ) |
Prepaid pension costs | | | 827 | | | | 1,058 | |
Other current assets | | | 2,216 | | | | (813 | ) |
Other assets | | | (67 | ) | | | (32 | ) |
Accounts payable | | | 32,325 | | | | 10,100 | |
Accrued liabilities | | | 694 | | | | (2,514 | ) |
Income tax payable | | | 8,055 | | | | 4,395 | |
Postretirement benefit obligations and other liabilities | | | 288 | | | | 252 | |
| | | | | | |
Net cash from operating activities | | | 4,486 | | | | 618 | |
Cash flows from investing activities: | | | | | | | | |
Dividends from joint venture | | | 358 | | | | 354 | |
Capital expenditures | | | (2,179 | ) | | | (4,999 | ) |
Proceeds from sale of equipment | | | 9 | | | | — | |
| | | | | | |
Net cash used in investing activities | | | (1,812 | ) | | | (4,645 | ) |
Cash flows from financing activities: | | | | | | | | |
Proceeds from issuance of short-term debt | | | 2,500 | | | | — | |
Repayments of long-term debt | | | (1,703 | ) | | | (129 | ) |
Payment of debt issuance fees | | | (21 | ) | | | — | |
Preferred stock dividend | | | (243 | ) | | | (242 | ) |
Dividends paid | | | (1,023 | ) | | | (1,004 | ) |
Exercise of stock options and other | | | — | | | | 479 | |
Excess tax benefits from stock-based payment arrangements | | | — | | | | 168 | |
| | | | | | |
Net cash used in financing activities | | | (490 | ) | | | (728 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | (257 | ) | | | 67 | |
Net (decrease) increase in cash and cash equivalents | | | 1,927 | | | | (4,688 | ) |
| | | | | | |
Cash and cash equivalents — beginning of year | | $ | 9,526 | | | $ | 37,392 | |
| | | | | | |
Cash and cash equivalents — end of period | | $ | 11,453 | | | $ | 32,704 | |
| | | | | | |
Supplemental disclosure of cash flows information — Cash paid during the period: | | | | | | | | |
Interest | | $ | 3,009 | | | $ | 54 | |
| | | | | | |
Income taxes | | $ | 1,035 | | | $ | 7,044 | |
| | | | | | |
See Note 3 to the consolidated financial statements for disclosure of noncash investing activity.
The accompanying notes are an integral part of these statements
Page 6 of 2522
A. M. Castle & Co.
Notes to Consolidated Financial Statements
September 30, 2006
March 31, 2007
(Unaudited)
1. | | Consolidated Financial Statements |
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| | The consolidated financial statements included herein are unaudited.have been prepared by A.M. Castle & Co. and subsidiaries (the “Company”), without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The Consolidated Balance Sheet at December 31, 20052006 is derived from the audited financial statements at that date. A. M. Castle & Co. and subsidiaries (the “Company”) believeThe Company believes that the disclosures included herein are adequate and make the information not misleading. However,misleading; however, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted accounting principlesin the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).SEC. In the opinion of management, the unaudited consolidated financial statements, included herein, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position, the cash flows and the results of operations for the periods presented. These condensedthen ended. It is suggested that these consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report onForm 10-K.10-K. The 20062007 interim results reported herein may not necessarily be indicative of the results of the Company’s operations for the full year. |
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2. | | Impact of RecentlyNew Accounting Standards – Issued Accounting PrinciplesNot Yet Adopted |
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| | On July 13,In September 2006 the Financial Accounting Standards Board (“FASB”) issued InterpretationStatement of Financial Accounting Standards (“SFAS”) No. 48 (“FIN157, “Fair Value Measurement” and in February 2007, the FASB issued SFAS No. 48”)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 for Uncertainty in Income Taxes: an interpretationpronouncements, including SFAS No. 107, “Disclosures about Fair Value of FASB StatementFinancial Instruments”, where applicable. SFAS No. 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement principles157 is effective for financial statements of tax positions taken or expected to be taken on a tax return. This interpretation is effectiveissued for fiscal years beginning after DecemberNovember 15, 2006.2007. 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 is assessing the impactdoes not expect the adoption of FIN No. 48 will have on the Company’s consolidated financial position and results of operations. |
In September 2006, the FASB issued the Statement of Financial Accounting Standards (“FAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, which was an amendment of FAS No. 87, 88, 106 and 132(R). Among other items, FAS 158 requires recognition of the overfunded or underfunded status of an entity’s defined benefit postretirement plan as an asset or liability in the financialthese statements requires recognition of the funded status of defined benefit postretirement plans in other comprehensive income. FAS No. 158 is effective for fiscal years ending after December 15, 2006 and early application is encouraged. The Company is currently assessing the impact that the adoption of this standard will have on the Company’s consolidated financial position.
Also, in September 2006 the FASB issued FAS No. 157, “Fair Value Measurement”. Among other items, FAS 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. FAS No. 157 encourages entities to combine fair value information disclosed under FAS No. 157 with other accounting pronouncements, including FAS No. 107, “Disclosures about Fair Value of Financial Instruments”, where applicable. The guidance in this statement applies to derivatives and other financial instruments measured at fair value under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, at initial and in all subsequent periods. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect this interpretation will materially affect its consolidated financial results of operations, cash flows or its financial position.
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3. | | Noncash Investing Activity |
|
| | The Company had noncash investing activities for the quarter ended March 31, 2007 of $2,957,000, which represented capital expenditures in accounts payable. This item is the Company’s initial payment due and payable in April 2007 to Oracle Corporation as part of the Company’s investment in its new Enterprise Resource Planning (“ERP”) technology. |
Page 7 of 25
3. | | Acquisition |
|
| | 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. |
Transtar is a leading supplier of high performance 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 will have expanded access to aerospace customers and avenues to cross-sell its other products into this growth market. The acquisition will also provide both companies the benefits of deeper access to certain inventories and purchasing synergies, as well as provide the Company an existing platform to markets in Asia and other international markets. These results and the assets of Transtar are included in the Company’s Metals segment, because Transtar has similar economic and other characteristics of the Metals segment.
The aggregate purchase price was $173.3 million, excluding transaction related costs, but includes the assumption of $1.0 million of foreign debt and $0.6 million in Transtar capital leases. An escrow in the amount of $18.0 million funded from the purchase price was established to satisfy H.I.G. Transtar Inc.’s indemnification obligations related to the acquisition. The purchase price was funded via new debt financing and existing cash balances and is subject to adjustment based on a final calculation of Transtar’s working capital at the date of acquisition. In addition, the Company is in the process of obtaining third-party valuations of certain intangible assets and liabilities, thus the following allocation of the purchase price is preliminary and represents the aggregate purchase price, certain cash, debt and capital leases assumed as well as transaction costs:
Preliminary Purchase Price Allocation
| | | | |
Current assets | | $ | 102,674 | |
PP & E, net | | | 4,274 | |
Intangibles | | | 69,005 | |
Goodwill | | | 66,960 | |
Other long-term assets | | | 366 | |
| | | |
Total assets | | | 243,279 | |
| | | | |
Current liabilities | | | 35,076 | |
Long-term liabilities | | | 29,732 | |
| | | |
Total liabilities | | | 64,808 | |
| | | | |
Net assets | | $ | 178,471 | |
| | | |
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 the current and preceding fiscal year.
| | | | | | | | | | | | | | | | |
| | Three Months | | Nine Months |
($’s in millions, except per share data) | | Ended September 30, | | Ended September 30, |
| | 2006 | | 2005 | | 2006 | | 2005 |
Net sales | | $ | 341.9 | | | $ | 292.6 | | | $ | 1,036.1 | | | $ | 900.4 | |
Net income | | $ | 15.1 | | | $ | 10.7 | | | $ | 48.6 | | | $ | 36.8 | |
Net income per diluted common share | | $ | 0.80 | | | $ | 0.58 | | | $ | 2.59 | | | $ | 2.00 | |
These pro forma results of operations have been presented for informational purposes only
Page 8 of 25
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.
224. | | Earnings Per Shareper share |
|
| | The Company’s preferred stock participates in dividends paid on the Company’s common stock on an “if converted” basis. In accordance with Emerging Issues Task Force Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB StatementSFAS No. 128, Earnings per Share”, basic earnings per share is 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 is computed by dividing net income by the weighted average number of shares of common stock plus common stock equivalents. Common stock equivalents consist of stock options, restricted stock awards and convertible preferred stock shares, which have been included in the calculation of weighted average shares outstanding using the treasury stock method. In accordance with FASSFAS No. 128, “Earnings per Share”, the following table is a reconciliation of the basic and fully diluted earnings per share calculations for the periods reported.three months ended March 31, 2007 and 2006(in thousands, except per share data): |
| | | | | | | | | | | | | | | | | | | | | | | | |
(dollars and shares in thousands, | | For The Three Months | | For The Nine Months | | |
except per share data | | Ended September 30, | | Ended September 30, | | |
| | | For The Three Months | |
| | | Ended March 31, | |
| | 2006 | | 2005 | | 2006 | | 2005 | | | 2007 | | 2006 | |
| | | |
Numerator: | | |
Net income | | $ | 15,492 | | $ | 10,317 | | $ | 45,899 | | $ | 35,572 | | | $ | 15,835 | | $ | 16,049 | |
Preferred dividends distributed | | | (235 | ) | | | (240 | ) | | | (720 | ) | | | (720 | ) | | | (243 | ) | | | (242 | ) |
| | | | | | | | |
Undistributed earnings | | $ | 15,257 | | $ | 10,077 | | $ | 45,179 | | $ | 34,852 | | | $ | 15,592 | | $ | 15,807 | |
| | | | | | | | |
Undistributed earnings attributable to: | | |
Common stockholders | | 14,014 | | 10,077 | | 41,485 | | 34,852 | | | $ | 14,327 | | $ | 15,807 | |
Preferred stockholders, as if converted | | 1,243 | | 3,694 | | | 1,265 | | — | |
| | | | | | | | |
Total undistributed earnings | | $ | 15,257 | | $ | 10,077 | | $ | 45,179 | | $ | 34,852 | | | $ | 15,592 | | $ | 15,807 | |
| | | | | | | | |
Denominator: | | |
Denominator for basic earnings per share: | | |
Weighted average common shares outstanding | | 17,013 | | 15,948 | | 16,860 | | 15,883 | | | 17,048 | | 16,633 | |
Effect of dilutive securities: | | |
Outstanding employee and directors’ common stock options and restricted stock | | 125 | | 600 | | 88 | | 749 | | |
Outstanding employee and director common stock options and restricted stock | | | 771 | | 322 | |
Convertible preferred stock | | 1,794 | | 1,794 | | 1,794 | | 1,794 | | | 1,794 | | 1,794 | |
| | | | | | | | |
Denominator for diluted earnings per share | | 18,932 | | 18,342 | | 18,742 | | 18,426 | | | 19,613 | | 18,749 | |
| | | | | | | | |
Basic earnings per common share | | $ | 0.82 | | $ | 0.63 | | $ | 2.46 | | $ | 2.19 | | | $ | 0.84 | | $ | 0.95 | |
| | | | | | | | |
Diluted earnings per common share | | $ | 0.82 | | $ | 0.56 | | $ | 2.45 | | $ | 1.93 | | | $ | 0.81 | | $ | 0.86 | |
| | | | | | | | |
Outstanding employees & directors common stock options and restricted and preferred stock shares having no dilutive effect | | — | | 41 | | — | | 126 | | |
Outstanding employee & director common stock options and restricted and convertible preferred stock shares having no dilutive effect | | | 30 | | 6 | |
| | | | | | | | |
Page 98 of 2522
5. | | Debt |
|
| | On September 5,Short-term and long-term debt consisted of the following at March 31, 2007 and December 31, 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.(dollars in thousands): |
| | | | | | | | |
| | March 31, | | December |
| | 2007 | | 31, 2006 |
| | |
SHORT-TERM DEBT | | | | | | | | |
U.S. Revolver | | $ | 108,500 | | | $ | 108,000 | |
Canadian facility | | | 509 | | | | — | |
Mexico | | | 2,350 | | | | 1,863 | |
Transtar | | | 1,627 | | | | 1,383 | |
Trade acceptances | | | 12,763 | | | | 12,015 | |
| | |
Total short-term debt | | | 125,749 | | | | 123,261 | |
| | | | | | | | |
LONG-TERM DEBT | | | | | | | | |
U.S. Term Loan due in scheduled installments from 2007 through 2011 | | | 27,000 | | | | 28,500 | |
6.76% insurance company loan due in scheduled installments from 2007 through 2015 | | | 69,283 | | | | 69,283 | |
Industrial development revenue bonds due in varying amounts through 2009 | | | 3,600 | | | | 3,600 | |
Other, primarily capital leases | | | 1,299 | | | | 1,502 | |
| | |
Total long-term debt | | | 101,182 | | | | 102,885 | |
Less-current portion | | | (12,844 | ) | | | (12,834 | ) |
| | |
Total long-term portion | | | 88,338 | | | | 90,051 | |
| | | | | | | | |
TOTAL SHORT-TERM AND LONG-TERM DEBT | | $ | 226,931 | | | $ | 226,146 | |
| | |
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 $170.0$170 million revolving loan (the ”U.S. Revolver”) to be drawn on by the Companycompany from time to time, (ii) a $30.0$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 U.S. dollars), (the “Canadian Facility”) to be drawn on by the Company’s Canadian subsidiary from time to time. The Canadian Facility can be drawn in either U.S. dollars or Canadian dollars. The revolving loans and term loan will mature in 2011.
The U.S. FacilityAvailable revolving credit capacity is guaranteed by the material domestic subsidiaries of the Company (“Guarantee Subsidiaries”) and is secured by substantially all of the assets of the Company and the Guarantee Subsidiaries pursuantprimarily used to an Amended and Restated Security Agreement entered into by the Company and the Guarantee Subsidiaries on the same date. 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% and a variable margin. 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.fund working capital needs. As of September 30, 2006, the company’s interest rate was 7.09%.
The Canadian Facility is guaranteed by the Company and is secured by substantially all of the assets of the Canadian Subsidiary.
The Company used the proceeds from the $30.0 million term loan and drew $117.0 million of the amount available under the U.S. Revolver to finance the acquisition of Transtar Intermediate Holdings #2, Inc. (see Note 3). In accordance with the aforementioned acquisition, the Company assumed $1.1 million of foreign short-term bank debt. As of September 30, 2006,March 31, 2007, the Company had $1.2outstanding borrowings of $108.5 million outstanding in foreign debt.
As of September 30, 2006, the Company had $158.0 million outstanding under theits U.S. Revolver Facility and there were nohad availability of $53.7 million. The Company’s Canadian subsidiary had $0.5 million in outstanding borrowings under the Canadian Facility. At DecemberRevolver and availability of $9.4 million at March 31, 2005, the Company had no borrowings outstanding under any2007.
Page 9 of its revolving credit facilities.
Complete details of the amended senior credit facility are described in the Company’s Form 8-K dated September 5, 2006 filed with the SEC.
In addition to the above the Company has long-term senior secured debt negotiated in 2005 of $75.0 million. 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. Also, it has long-term capital leases of $1.6 million and Industrial Revenue Bonds of $3.6 million.
226. | | Goodwill and Intangible Assets |
|
| | 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. For more information regarding the acquisition of Transtar, refer to our 2006 Annual Report on Form 10-K. |
|
| | The changes in carrying amounts of goodwill were as follows (dollars in thousands): |
| | | | | | | | | | | | |
| | Metals | | Plastics | | |
| | Segment | | Segment | | Total |
|
Balance as of December 31, 2006 | | $ | 88,810 | | | $ | 12,973 | | | $ | 101,783 | |
Currency translation | | | 7 | | | | — | | | | 7 | |
| | |
Balance as of March 31, 2007 | | $ | 88,817 | | | $ | 12,973 | | | $ | 101,790 | |
| | |
| | The Company performs an annual impairment test on goodwill during the first quarter of each fiscal year. Based on the test performed during the first quarter of 2006,2007, the Company has determined that there is no impairment of goodwill. |
|
| | The following summarizes the components of intangible assets at March 31, 2007 and December 31, 2006 (dollars in thousands): |
| | | | | | | | | | | | | | | | |
| | March 31, 2007 | | December 31, 2006 |
| | Gross | | | | | | Gross | | |
| | Carrying | | Accumulated | | Carrying | | Accumulated |
| | Amount | | Amortization | | Amount | | Amortization |
| | |
Customer Relationships | | $ | 66,851 | | | $ | 3,578 | | | $ | 66,851 | | | $ | 2,061 | |
Non-Compete Agreements | | | 1,557 | | | | 340 | | | | 1,557 | | | | 178 | |
| | |
Total | | $ | 68,408 | | | $ | 3,918 | | | $ | 68,408 | | | $ | 2,239 | |
| | |
| | The weighted-average amortization period is 10.8 years, 11 years for customer contracts and 3 years for non-compete agreements. Substantially all of the Company’s intangible assets were acquired as part of the acquisition of Transtar on September 5, 2006. |
|
| | For the three month period ended March 31, 2007, the aggregate amortization expense was $1.7 million. For the three month period ended March 31, 2006, the aggregate amortization expense was immaterial. |
Page 10 of 25
The changes in carrying amounts of goodwill were as follows(in thousands):
| | | | | | | | | | | | |
| | Metals | | | Plastics | | | | |
| | Segment | | | Segment | | | Total | |
|
Balance as of December 31, 2005 | | $ | 19,249 | | | $ | 12,973 | | | $ | 32,222 | |
Acquisition of Transtar | | | 66,960 | | | | — | | | | 66,960 | |
Currency valuation | | | 26 | | | | — | | | | 26 | |
| | |
Balance as of September 30, 2006 | | $ | 86,235 | | | $ | 12,973 | | | $ | 99,208 | |
| | |
Intangible assets at September 30, 2006 consist primarily of customer relationships/contracts and non-compete agreements acquired as part of the Transtar acquisition. The value preliminarily assigned to such assets is approximately $69.0 million and approximately $0.5 million of amortization has been recorded against such assets since the acquisition. Amortization expense on the Company’s intangible assets for the years ending December 31, 2006, 2007, 2008, 2009, 2010 and 2011 is expected to be $2.2 million, $6.7 million, $6.7 million, $6.5 million, $6.1 million and $6.1 million, respectively.
227. | | Inventory |
|
| | Final inventory valuationsdetermination under the last-in, first-out (LIFO) method can only be made at the end of each fiscal year based on the actual inventory levels and costs at that time. Accordingly, interim LIFO amounts,determinations, including those at September 30, 2006,March 31, 2007, are based solely on management’s estimates of year-end inventory levels and costs. Since future estimates of inventory levels and costs are subject to certain forces beyond the control of management, interim financial results are subject to fiscal year-end LIFO inventory calculations.valuations. |
Current replacement cost of inventories exceeded book value by $121.9$143.0 million and $104.0$128.4 million at September 30, 2006March 31, 2007 and December 31, 2005,2006, respectively. Income taxes would become payable on any realization of this excess from reductions in the level of the Company’s inventories.
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. RevenueNet sales derived from consigned inventories at customer locations for the nine-months ended September 30, 20062007 was $14.8$4.3 million, or 1.7%1.1% of sales. Inventory on consignment at customers as of September 30, 2006March 31, 2007 was $1.7$4.0 million, or 0.8%1.7%, of consolidated net inventory as reported on the Company’s consolidated balance sheets.
8. | | Share-Based Compensation |
|
| | As describedThe fair value of stock options granted has been estimated using the Black-Scholes option pricing model. There were no stock options granted in the first quarter of 2007. Other forms of share-based compensation have generally used the market price of the Company’s Annual Reportstock on Form 10-K for the year-ended December 31,date of grant to estimate fair value. |
| | In 2005, the Company adopted FAS No. 123R, “Share-Based Payments”, effective October 1,established the 2005 usingPerformance Stock Equity Plan (the “Performance Plan”). Under the modified retrospective method of adoption. Accordingly, all prior period financial statementsPerformance Plan, 438,448 stock awards have been restatedgranted of which 76,069 have been forfeited. In the first quarter of 2007, no awards were granted and 1,250 were forfeited in this plan. The number of shares that could potentially be issued is 724,758. |
|
| | In 2007, the Company established the 2007 Long-Term Incentive Plan (the “2007 Performance Plan”), which is similar in form to reflect the adoptionPerformance Plan. Under this Plan, 82,400 restricted stock awards were granted in January 2007 and 38,100 restricted stock awards were granted in April 2007. None have been forfeited. The number of shares that could potentially be issued under this standard.plan is 241,000. The grant date fair values range from $25.45 to $34.33. Under the 2007 Performance Plan, the shares related to the awards will be distributed in 2010 contingent upon meeting company-wide performance goals over the 2007-2009 performance period. |
The fair value of stock options granted has been estimated using the Black-Scholes option pricing model. There were no stock options granted in the first nine-months of 2006. Other forms of share-based compensation have used the market price of the Company’s stock on the date of grant to estimate fair value.
In 2005, the Company established the 2005 Performance Stock Equity Plan (the “Performance Plan”). Under the Performance Plan, 438,448 stock awards were granted of which 73,319 have been forfeited. In the third quarter of 2006, awards of 2,750 were granted. The number of shares that could potentially be issued is 730,258.
Page 11 of 2522
9. | | Comprehensive Income |
|
| | Comprehensive income includes net income and all other non-owner changes to equity that are not reported in net income. Below is the Company’s comprehensive income for the three months ended March 31, 2007 and 2006(dollars in millions). |
| | | | | | | | |
| | March 31, | | March 31, |
| | 2007 | | 2006 |
Net income | | $ | 15.8 | | | $ | 16.0 | |
Foreign currency translation | | | 0.1 | | | | (0.2 | ) |
Pension cost amortization, net of tax | | | 0.5 | | | | — | |
| | |
Total Comprehensive Income | | $ | 16.4 | | | $ | 15.8 | |
| | |
The total accumulated other comprehensive losses at March 31, 2007 and December 31, 2006 comprised (dollars in millions):
| | | | | | | | |
| | March 31, | | December 31, |
| | 2007 | | 2006 |
| | |
Foreign currency valuation | | $ | 3.7 | | | $ | 3.6 | |
Unrecognized pension and postretirement benefit costs, net of tax | | | (21.6 | ) | | | (22.1 | ) |
| | |
Total Accumulated Other Comprehensive Loss | | $ | (17.9 | ) | | $ | (18.5 | ) |
| | |
10. | | 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 reviews and manages these two businesses separately. As such, these businesses are considered separate segments in accordance withaccording to FAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” and are reported accordingly in the Company’s consolidated financial statements. |
The accounting policies for all segments are described in Note 1, “Principal Accounting Policies” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2005. Management evaluates performance of its business segments based on operating income. The Company does not maintain separate standalone financial statements prepared in accordance with generally accepted accounting principles
|
| | The accounting policies for all segments are described in Note 3 “Segment Reporting” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Management evaluates performance of its business segments based on operating income. The Company does not maintain separate standalone financial statements prepared in accordance with GAAP for each of its operating segments. |
The following is the segment information for the quarters ended September 30, 2006March 31, 2007 and 2005:2006:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Gross | | | Other | | | Operating | | | Capital | | | | |
| | Net | | | Material | | | Operating | | | Income | | | Expendi- | | | Depre- | |
(dollars in millions) | | Sales | | | Margin | | | Expense | | | (Loss) | | | tures | | | ciation | |
|
2006 | | | | | | | | | | | | | | | | | | | | | | | | |
Metals Segment | | $ | 272.1 | | | $ | 76.3 | | | $ | 50.4 | | | $ | 25.9 | | | $ | 2.3 | | | $ | 2.9 | |
Plastics Segment | | | 28.7 | | | | 9.7 | | | | 7.5 | | | | 2.2 | | | | 0.1 | | | | 0.3 | |
Other | | | — | | | | — | | | | 2.3 | | | | (2.3 | ) | | | — | | | | — | |
| | |
Consolidated | | $ | 300.8 | | | $ | 86.0 | | | $ | 60.2 | | | $ | 25.8 | | | $ | 2.4 | | | $ | 3.2 | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
2005 | | | | | | | | | | | | | | | | | | | | | | | | |
Metals Segment | | $ | 208.7 | | | $ | 61.8 | | | $ | 44.3 | | | $ | 17.5 | | | $ | 2.4 | | | $ | 1.9 | |
Plastics Segment | | | 25.9 | | | | 8.8 | | | | 7.2 | | | | 1.6 | | | | 0.2 | | | | 0.3 | |
Other | | | — | | | | — | | | | 2.0 | | | | (2.0 | ) | | | — | | | | — | |
| | |
Consolidated | | $ | 234.6 | | | $ | 70.6 | | | $ | 53.5 | | | $ | 17.1 | | | $ | 2.6 | | | $ | 2.2 | |
| | |
The following is the segment information for the nine-months ended September 30, 2006 and 2005:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Gross | | | Other | | | Operating | | | Capital | | | | |
| | Net | | | Material | | | Operating | | | Income | | | Expendi- | | | Depre- | |
(dollars in millions) | | Sales | | | Margin | | | Expense | | | (Loss) | | | tures | | | ciation | |
|
2006 | | | | | | | | | | | | | | | | | | | | | | | | |
Metals Segment | | $ | 767.5 | | | $ | 220.0 | | | $ | 144.2 | | | $ | 75.8 | | | $ | 9.4 | | | $ | 7.6 | |
Plastics Segment | | | 88.1 | | | | 29.5 | | | | 22.8 | | | | 6.7 | | | | 0.8 | | | | 0.8 | |
Other | | | — | | | | — | | | | 6.9 | | | | (6.9 | ) | | | — | | | | — | |
| | |
Consolidated | | $ | 855.6 | | | $ | 249.5 | | | $ | 173.9 | | | $ | 75.6 | | | $ | 10.2 | | | $ | 8.3 | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
2005 | | | | | | | | | | | | | | | | | | | | | | | | |
Metals Segment | | $ | 650.7 | | | $ | 192.4 | | | $ | 129.9 | | | $ | 62.5 | | | $ | 3.9 | | | $ | 6.0 | |
Plastics Segment | | | 81.0 | | | | 26.6 | | | | 21.5 | | | | 5.1 | | | | 0.9 | | | | 0.8 | |
Other | | | — | | | | — | | | | 6.5 | | | | (6.5 | ) | | | — | | | | — | |
| | |
Consolidated | | $ | 731.7 | | | $ | 219.0 | | | $ | 157.9 | | | $ | 61.1 | | | $ | 4.8 | | | $ | 6.8 | |
| | |
“Other” – Operating loss includes the costs of executive, finance and legal departments, and other corporate activities which support both the metals and plastics segments of the Company. | | | | | | | | | | | | | | | | |
| | Net | | Operating | | Capital | | Depreciation & |
(dollars in millions) | | Sales | | Income | | Expenditures | | Amortization |
|
2007 | | | | | | | | | | | | | | | | |
Metals Segment | | $ | 346.6 | | | $ | 30.3 | | | $ | 1.8 | | | $ | 4.6 | |
Plastics Segment | | | 28.8 | | | | 1.5 | | | | 0.4 | | | | 0.3 | |
Other | | | — | | | | (2.8 | ) | | | — | | | | — | |
| | |
Consolidated | | $ | 375.4 | | | $ | 29.0 | | | $ | 2.2 | | | $ | 4.9 | |
| | |
| | | | | | | | | | | | | | | | |
2006 | | | | | | | | | | | | | | | | |
Metals Segment | | $ | 250.7 | | | $ | 26.5 | | | $ | 4.6 | | | $ | 2.1 | |
Plastics Segment | | | 28.5 | | | | 1.8 | | | | 0.4 | | | | 0.3 | |
Other | | | — | | | | (2.2 | ) | | | — | | | | — | |
| | |
Consolidated | | $ | 279.2 | | | $ | 26.1 | | | $ | 5.0 | | | $ | 2.4 | |
| | |
Page 12 of 2522
The segment information for total assets at September 30, | | “Other” – Operating loss includes the costs of executive, finance and legal departments, and other corporate activities which support both the Metals and Plastics segments of the Company. |
|
| | The segment information for total assets at March 31, 2007 and December 31, 2006 and December 31, 2005 was as follows: |
| | | | | | | | | | | | |
| | September 30, | | December 31, | | | March 31, | | December 31, |
(dollars in thousands) | | 2006 | | 2005 | | |
(dollars in millions) | | | 2007 | | 2006 |
| Metals Segment | | $ | 652,895 | | $ | 362,822 | | | $ | 648.6 | | $ | 593.7 | |
Plastics Segment | | 50,098 | | 49,775 | | | 49.5 | | 47.8 | |
Other | | 16,513 | | 11,138 | | | 14.2 | | 13.6 | |
| | | | |
Consolidated | | $ | 719,506 | | $ | 423,735 | | | $ | 712.3 | | $ | 655.1 | |
| | | | |
| | “Other” — The segment’s total assets consist of the Company’s income tax receivable and its investment in a joint venture. |
|
10.11. | | Pension and Postretirement Benefits |
|
| | The following are the components of the net pension and post-retirementpostretirement benefit expenses ((dollars in thousands): |
| | | | | | | | |
For Quarter Ended | | September 30, | |
| | 2006 | | | 2005 | |
| | | |
Service cost | | $ | 917.8 | | | $ | 720.5 | |
Interest cost | | | 1,805.8 | | | | 1,593.0 | |
Expected return on plan | | | (2,423.9 | ) | | | (2,394.2 | ) |
Amortization of prior service cost | | | 26.4 | | | | 27.7 | |
Amortization of net loss | | | 945.8 | | | | 14.6 | |
| | | |
Net periodic cost | | $ | 1,271.9 | | | $ | 561.6 | |
| | | |
| | | | | | | | |
For Nine-Months Ended | | September 30, | |
| | 2006 | | | 2005 | |
| | | |
Service cost | | $ | 2,753.4 | | | $ | 2,161.5 | |
Interest cost | | | 5,417.4 | | | | 4,779.1 | |
Expected return on plan | | | (7,271.7 | ) | | | (7,182.6 | ) |
Amortization of prior service cost | | | 79.2 | | | | 82.9 | |
Amortization of net loss | | | 2,837.4 | | | | 1,843.9 | |
| | | |
Net periodic cost | | $ | 3,815.7 | | | $ | 1,684.8 | |
| | | |
As of September 30, 2006, the Company has not made any cash contributions to its pension plans for this fiscal year. | | | | | | | | |
| | For the three months ended |
| | March 31, |
| | 2007 | | 2006 |
| | |
Service cost | | $ | 934.5 | | | $ | 917.8 | |
Interest cost | | | 1,911.1 | | | | 1,805.8 | |
Expected return on plan | | | (2,520.0 | ) | | | (2,423.9 | ) |
Amortization of prior service cost | | | 26.4 | | | | 26.4 | |
Amortization of net loss | | | 787.0 | | | | 945.8 | |
| | |
Net periodic cost | | $ | 1,139.0 | | | $ | 1,271.9 | |
| | |
11. | | As of March 31, 2007 the Company has not made any cash contributions to its pension plans for this fiscal year but will continue to evaluate options for funding this plan in 2007. |
|
12. | | Commitments and Contingent Liabilities |
|
| | At September 30, 2006,March 31, 2007 the Company had a $1.7$5.3 million of irrevocable letterletters 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 revolving credit facility.outstanding industrial revenue bonds. |
Page 13 of 2522
13. | | Income Taxes |
|
| | In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes” – an interpretation of FASB No. 109. This interpretation 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”. It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. |
|
| | The Company adopted FIN 48 on January 1, 2007. No increase in liability for unrecognized tax benefits were recorded as a result of the adoption. As of March 31, 2007, the Company has a $1.0 million liability recorded for unrecognized tax benefits of which $0.4 million would impact the effective tax rate if recognized. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of tax expense. |
|
| | The Company anticipates the amount of unrecognized tax benefits to increase $0.2 million by December 31, 2007. This increase will result in an increase in currently unrecognized tax benefits. |
|
| | The Company or its subsidiaries files income tax returns in the U.S., 28 states and 5 foreign jurisdictions. The Canadian income tax returns for 2002 through 2004 are currently under audit. No material adjustments have been proposed to date. The tax years 2003 through 2006 remain open to examination by the major taxing jurisdictions to which the Company is subject. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations
Financial Review
This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and Notes.
Executive Overview
Economic Trends and Current Business Conditions
A. M. Castle & Co. and subsidiaries (“the Company”) continued to enjoy favorable demandpricing for its products through the thirdfirst quarter of 2006. The2007. Projected 2007 demand in the aerospace and oil and gas markets remain bullish, and general economic indicators do not currently suggest that a significant downturn in the Metals business is on the near-term horizon. Forecasted 2007 demand in the North American durable goods manufacturing sector, the Company’s primary market,which is a leading economic indicator, continues to exhibit demand requirements above 20052006 levels. The aerospace, oil and gas, and mining and construction equipment sectors continued to show particular strength. The Company’s metals product offerings are predominantly in carbon bar or tubing, alloy bar, high-end specialty metals (such as nickel alloy, stainless steel and aluminum), and carbon plate up to twenty inches thick.
Historically, the Company has used the Purchaser’s Managers Index (“PMI”) provided by the Institute of Supply Managers to track general demand trends in its customer markets. Table 1 below shows recent PMI trends from the first quarter of 2005 through the thirdfirst quarter of 2006.2007. Generally speaking, an index above 50.0 indicates growth in the manufacturing sector of the U.S. economy. As the table indicates, there has been sustainedthe demand trend, while down from earlier quarters, still reflected a favorable growth inrate for the manufacturing sector for several quarters.
Table 1
| | | | | | | | | | | | | | | | |
YEAR | | Qtr 1 | | Qtr 2 | | Qtr 3 | | Qtr 4 |
|
2005 | | | 55.7 | | | | 53.2 | | | | 56.0 | | | | 57.0 | |
2006 | | | 55.6 | | | | 55.2 | | | | 54.0 | | | | | |
first quarter of 2007. The Company’s revenue growth in real terms, or net of material price increases, has historically improved over these same quarters. ThirdHowever, first quarter 2006 revenue2007 volume growth for the Company on a consolidated basis, wasexcluding Transtar, is approximately 28.2% ahead of5% less than the same quarter in 20052006. The Company experienced its highest volume growth rate in the first quarter of 2006 versus any other quarter in recent years. First quarter 2007 volume, excluding Transtar, was up slightly versus each of the prior three quarters.
Page 14 of 22
| | | | | | | | |
YEAR | | Qtr 1 | | Qtr 2 | | Qtr 3 | | Qtr 4 |
|
2005 | | 55.7 | | 53.2 | | 55.8 | | 57.2 |
2006 | | 55.6 | | 55.2 | | 53.8 | | 50.9 |
2007 | | 50.8 | | | | | | |
|
Results of Operations: Year-to-Year Comparisons and 16.9% ahead onCommentary
Consolidated results by business segment are summarized in the following table for the quarter ended March 31, 2007 and 2006. First quarter 2007 net income included a comparative year-to-date basis.$0.9 million after-tax charge for the write-off of the Company’s investments in information technology systems, which were under development and are included in the Company’s Metals segment reporting. During the quarter, the Company signed an agreement to purchase Oracle’s ERP system in support of its strategic growth initiative, leading to the accelerated write-off of the Company’s investment in its current systems.
Operating Results by Segment
| | | | | | | | | | | | | | | | |
| | Quarter Ended | | |
(dollars in millions) | | March 31, | | Fav/(Unfav) |
| | 2007 | | 2006 | | Fav/(Unfav) | | % Change |
|
Net Sales | | | | | | | | | | | | | | | | |
Metals | | $ | 346.6 | | | $ | 250.7 | | | $ | 95.9 | | | | 38.3 | % |
Plastics | | | 28.8 | | | | 28.5 | | | | 0.3 | | | | 1.1 | |
| | |
Total Net Sales | | $ | 375.4 | | | $ | 279.2 | | | $ | 96.2 | | | | 34.4 | % |
| | | | | | | | | | | | | | | | |
Cost of Materials | | | | | | | | | | | | | | | | |
Metals | | $ | 250.0 | | | $ | 177.1 | | | $ | 72.9 | | | | 41.2 | % |
% of Metals Sales | | | 72.1 | % | | | 70.6 | % | | | (1.5 | )% | | | | |
Plastics | | | 19.5 | | | | 19.0 | | | | 0.5 | | | | 2.6 | % |
% of Plastics Sales | | | 67.7 | % | | | 66.7 | % | | | (1.0 | )% | | | | |
| | |
Total Cost of Materials | | $ | 269.5 | | | $ | 196.1 | | | $ | 73.4 | | | | 37.4 | % |
% of Total Net Sales | | | 71.8 | % | | | 70.2 | % | | | (1.6 | )% | | | | |
| | | | | | | | | | | | | | | | |
Other Operating Costs and Expenses | | | | | | | | | | | | | | | | |
Metals | | $ | 66.3 | | | $ | 47.1 | | | $ | 19.2 | | | | 40.8 | % |
Plastics | | | 7.8 | | | | 7.7 | | | | 0.1 | | | | 1.3 | |
Other | | | 2.8 | | | | 2.2 | | | | 0.6 | | | | 27.3 | |
| | |
Total Other Operating Costs & Expense | | $ | 76.9 | | | $ | 57.0 | | | $ | 19.9 | | | | 34.9 | % |
% of Total Net Sales | | | 20.5 | % | | | 20.4 | % | | | (0.1 | )% | | | | |
|
Operating Income | | | | | | | | | | | | | | | | |
Metals | | $ | 30.3 | | | $ | 26.5 | | | $ | 3.8 | | | | 14.3 | % |
% of Metals Sales | | | 8.7 | % | | | 10.6 | % | | | (1.9 | )% | | | | |
Plastics | | | 1.5 | | | | 1.8 | | | | (0.3 | ) | | | (16.7 | )% |
% of Plastics Sales | | | 5.2 | % | | | 6.3 | % | | | (1.1 | )% | | | | |
Other | | | (2.8 | ) | | | (2.2 | ) | | | (0.6 | ) | | | (27.3 | )% |
| | |
Total Operating Income | | $ | 29.0 | | | $ | 26.1 | | | $ | 2.9 | | | | 11.1 | % |
% of Total Net Sales | | | 7.7 | % | | | 9.3 | % | | | (1.6 | )% | | | | |
Page 15 of 22
“Other” – Operating loss includes the costs of executive, finance and legal departments, and other corporate activities which support both the Metals and Plastics segments of the Company.
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 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 For more information regarding the acquisition of Transtar, refer to our 2006 Annual Report on Form 10-K. In order to present a consistent quarter-over-quarter analysis of financial condition and results of operation, the Company will have expanded access to aerospace customers and avenues to cross-sellis herein disclosing the incremental impact of its other products into this growth market. The acquisition will also provide both companies the benefits of deeper access to certain inventories and purchasing synergies, as well as provide the Company an existing platform to markets in Asia and other international markets.recent acquisition.
The aggregate purchase price was $173.3 million which includes the assumption of $1.0 million of foreign debt and $0.6 million in Transtar capital leases. An escrow in the amount of $18.0 million funded from the purchase price was established to satisfy H.I.G. Transtar Inc.’s indemnification obligations related to the acquisition. The purchase price is subject to adjustment based on a final calculation of Transtar’s working capital at the date of acquisition. This final calculation is still in-process, but is not expected to significantly change the purchase price.
Page 14 of 25
The following unaudited pro-forma information presents a summary of the Company’s consolidated results of operations as if the acquisition had taken place as of the beginning of the current and preceding fiscal year.
| | | | | | | | | | | | | | | | |
| | Three Months | | | Nine Months | |
($’s in millions, except per share data) | | Ended September 30, | | | Ended September 30, | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| |
Net sales | | $ | 341.9 | | | $ | 292.6 | | | $ | 1,036.1 | | | $ | 900.4 | |
Net income | | $ | 15.1 | | | $ | 10.7 | | | $ | 48.6 | | | $ | 36.8 | |
Net income per diluted common share | | $ | 0.80 | | | $ | 0.58 | | | $ | 2.59 | | | $ | 2.00 | |
These pro forma results of operations have been presented for informational 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.
Results of Operations: Year-to-Year Comparisons and Commentary
Consolidated results by business segment are summarized in the following table for the quarter ended September 30, 2006 and 2005.
Operating Results by Segment
| | | | | | | | | | | | | | | | |
(dollars in millions) | | Quarter Ended | | | Fav/(Unfav) | |
| | September 30, | | | | | | | |
| | 2006 | | | 2005 | | | Fav/(Unfav) | | | % Chge | |
|
Net Sales | | | | | | | | | | | | | | | | |
Metals | | $ | 272.1 | | | $ | 208.7 | | | $ | 63.4 | | | | 30.4 | % |
Plastics | | | 28.7 | | | | 25.9 | | | | 2.8 | | | | 10.8 | |
| | |
Total Net Sales | | $ | 300.8 | | | $ | 234.6 | | | $ | 66.2 | | | | 28.2 | % |
| | | | | | | | | | | | | | | | |
Gross Material Margin | | | | | | | | | | | | | | | | |
Metals | | $ | 76.3 | | | $ | 61.8 | | | $ | 14.5 | | | | 23.5 | % |
% of Metals Sales | | | 28.0 | % | | | 29.6 | % | | | (1.6 | )% | | | | |
Plastics | | | 9.7 | | | | 8.8 | | | | 0.9 | | | | 10.2 | |
% of Plastics Sales | | | 33.8 | % | | | 34.0 | % | | | (0.2 | )% | | | | |
| | |
Total Gross Material Margin | | $ | 86.0 | | | $ | 70.6 | | | $ | 15.4 | | | | 21.8 | % |
% of Total Net Sales | | | 28.6 | % | | | 30.1 | % | | | (1.5 | )% | | | | |
| | | | | | | | | | | | | | | | |
Operating Expense | | | | | | | | | | | | | | | | |
Metals | | $ | 50.4 | | | $ | 44.3 | | | $ | (6.1 | ) | | | (13.8 | )% |
Plastics | | | 7.5 | | | | 7.2 | | | | (0.3 | ) | | | (4.2 | ) |
Other | | | 2.3 | | | | 2.0 | | | | (0.3 | ) | | | (15.0 | ) |
| | |
Total Operating Expense | | $ | 60.2 | | | $ | 53.5 | | | $ | (6.7 | ) | | | (12.5 | )% |
% of Total Net Sales | | | 20.0 | % | | | 22.8 | % | | | 2.8 | % | | | | |
| | | | | | | | | | | | | | | | |
Operating Income | | | | | | | | | | | | | | | | |
Metals | | $ | 25.9 | | | $ | 17.5 | | | $ | 8.4 | | | | 48.0 | % |
% of Metals Sales | | | 9.5 | % | | | 8.4 | % | | | 1.1 | % | | | | |
Plastics | | | 2.2 | | | | 1.6 | | | | 0.6 | | | | 37.5 | |
% of Plastics Sales | | | 7.7 | % | | | 6.2 | % | | | 1.5 | % | | | | |
Other | | | (2.3 | ) | | | (2.0 | ) | | | (0.3 | ) | | | 15.0 | |
| | |
Total Operating Income | | $ | 25.8 | | | $ | 17.1 | | | $ | 8.7 | | | | 50.9 | % |
% of Total Net Sales | | | 8.6 | % | | | 7.3 | % | | | 1.3 | % | | | | |
“Other” – Operating expense includes the costs of executive, finance and legal departments, and other corporate activities which support both the metals and plastics segments of the Company.
Page 15 of 25
Net Sales:
Consolidated net sales of $300.8$375.4 million increased 28.2%34.4%, or $66.2$96.2 million, versus the thirdfirst quarter of 2005.2006. Transtar added $72.8 million of net sales for the quarter and the remaining $302.6 million of net sales were $23.4 million, or 8.4%, ahead of the same quarter last year. Metals segment sales of $272.1$346.6 million were $63.4$95.9 million, or 30.4%38.3%, ahead of last year. Both increases include $18.6 million ofOf the 38.3% sales relatedincrease, 29.0% was attributable to the acquired Transtar business. Without the effect of the acquired business, consolidated net sales and Metals segment sales14.4% was attributable to increased 20.3% and 21.5%, respectively. Strong demand continued for the Company’s metals products, particularlymaterial pricing, offset by a 5.1% decline in the aerospace and oil and gas markets. Increased volume, excluding the acquisition, accounted for approximately 9% of this segment’s sales growth with the balance due to favorable material price.volume.
Plastics segment sales of $28.7$28.8 million were $2.8$0.3 million, or 11%approximately 1.1%, stronger than the same quarter of 2005. Increased volume accounted for 9%2006. Volume and material pricing in the plastics segment were essentially flat versus the first quarter of 2006.
Cost of Materials
Consolidated first quarter 2007 costs of materials (exclusive of depreciation) increased $73.4 million, or 37.4%, to $269.5 million. The acquisition of Transtar contributed $50.8 million of the sales growth while 2%increase. The balance of the increase was attributabledue to higher material pricing levels.costs from suppliers, typically in the form of surcharges.
Gross Material MarginOther Operating Expenses and Operating Income:
Consolidated gross material margin of $86.0 million was $15.4 million, or 21.8%, higher than last year driven by increased sales. Metals segment gross material margin of $76.3 million was $14.5 million, or 23.5%, ahead of the third quarter of 2005. About one-third of both increases were the result of the Transtar acquisition. Gross material margin as a percentage of net sales (“gross margin rate”) in our Metals business was lower during the quarter due to increased supplier surcharges, primarily in nickel alloy, that were passed through to our customers at cost. The acquisition had a negligible impact on the gross margin rate.
Plastics segment gross material margin increased by $0.9 million, or 10.2%, to a level of $9.7 million. The Company has generally been able to maintain its material margin percentages in the Plastics segment.
Total consolidated operating expenses of $60.2$76.9 million increased $6.7$19.9 million, or 12.5%34.9%, versus the thirdfirst quarter of last year on a 28.2%34.4% increase in net sales. The increased expenses were due to the impactTranstar acquisition added $15.9 million of the Transtar acquisition, including intangible asset amortization expense ($0.6 million), as well as increased demandincrease, the systems write-off accounted for $1.4 million, and related distribution activity across both segments.general inflation on wages, benefits and other variable expenses account for the balance of the change.
Consolidated operating income of $25.8$29.0 million (8.6%(7.7% of sales) is $8.7$2.9 million betterhigher than the thirdfirst quarter of last year.year largely reflecting continued top line growth.
Other Income and Expense, Income Taxes and Net Results:Income:
Equity in earnings of joint venture of $1.0$0.9 million was $0.2$0.3 million higherlower than 2005,in 2006, reflecting increasedweaker automotive industry-related sales and earnings performance byat the Company’s joint venture, Kreher Steel.
Financing costs, forwhich consist primarily of interest expense, were $4.3 million in the thirdfirst quarter of 2006 were $1.92007 which was $3.2 million which included one monthhigher than the same period in 2006. The primary driver of acquisition debt. Thishigher interest expense was the same asCompany’s increased borrowings related to the corresponding periodacquisition of Transtar in 2005. However, these costs are expected to increase in the near future as a result of the debt issued to fund the Transtar acquisition.September 2006.
Consolidated net income applicable to common stock was $15.3$15.6 million, or $0.82$0.81 per diluted share, in the thirdfirst quarter of 20062007 versus a consolidated net income applicable to common stock of $10.1$15.8 million, or $0.56$0.86 per diluted share, in the corresponding period of 2005.2006. Transtar contributed $3.7 million to net income during the quarter. First quarter 2007 net income included a $0.9 million after-tax charge ($0.04 per diluted share) for the write-off of the Company’s prior investment in information technology systems.
Page 16 of 25
Results of Operations: Nine-Month Comparisons and Commentary
Consolidated results by business segment are summarized in the following table for the nine-months ended September 30, 2006 and 2005
| | | | | | | | | | | | | | | | |
| | Nine-Months Ended Sept 30, | | | Fav/(Unfav) | |
| | 2006 | | | 2005 | | | $ Change | | | % Change | |
|
Net Sales | | | | | | | | | | | | | | | | |
Metals | | $ | 767.5 | | | $ | 650.7 | | | $ | 116.8 | | | | 17.9 | % |
Plastics | | | 88.1 | | | | 81.0 | | | | 7.1 | | | | 8.8 | |
| | |
Total Net Sales | | $ | 855.6 | | | $ | 731.7 | | | $ | 123.9 | | | | 16.9 | % |
| | | | | | | | | | | | | | | | |
Gross Material Margin | | | | | | | | | | | | | | | | |
Metals | | $ | 220.0 | | | $ | 192.4 | | | $ | 27.6 | | | | 14.3 | % |
% of Metals Sales | | | 28.7 | % | | | 29.6 | % | | | (0.9 | )% | | | | |
Plastics | | | 29.5 | | | | 26.6 | | | | 2.9 | | | | 10.9 | |
% of Plastics Sales | | | 33.5 | % | | | 32.8 | % | | | 0.6 | % | | | | |
| | |
Total Gross Material Margin | | $ | 249.5 | | | $ | 219.0 | | | $ | 30.5 | | | | 13.9 | % |
% of Total Net Sales | | | 29.2 | % | | | 29.9 | % | | | (0.8 | )% | | | | |
| | | | | | | | | | | | | | | | |
Operating Expense | | | | | | | | | | | | | | | | |
Metals | | $ | 144.2 | | | $ | 129.9 | | | $ | (14.3 | ) | | | (11.0 | )% |
Plastics | | | 22.8 | | | | 21.5 | | | | (1.3 | ) | | | (6.0 | ) |
Other | | | 6.9 | | | | 6.5 | | | | (0.4 | ) | | | (6.2 | ) |
| | |
Total Operating Expense | | $ | 173.9 | | | $ | 157.9 | | | $ | (16.0 | ) | | | (10.1 | )% |
% of Total Net Sales | | | 20.3 | % | | | 21.6 | % | | | 1.3 | % | | | | |
| | | | | | | | | | | | | | | | |
Operating Income | | | | | | | | | | | | | | | | |
Metals | | $ | 75.8 | | | $ | 62.5 | | | $ | 13.3 | | | | 21.3 | % |
% of Metals Sales | | | 9.9 | % | | | 9.6 | % | | | 0.3 | % | | | | |
Plastics | | | 6.7 | | | | 5.1 | | | | 1.6 | | | | 31.4 | |
% of Plastics Sales | | | 7.6 | % | | | 6.3 | % | | | 1.3 | % | | | | |
Other | | | (6.9 | ) | | | (6.5 | ) | | | (0.4 | ) | | | 6.2 | |
| | |
Total Operating Income | | $ | 75.6 | | | $ | 61.1 | | | $ | 14.5 | | | | 23.7 | % |
% of Total Net Sales | | | 8.8 | % | | | 8.4 | % | | | 0.5 | % | | | | |
“Other” – Operating expense includes the costs of executive, finance and legal departments, and other corporate activities which support both the metals and plastics segments of the Company.
Net Sales:
Nine-month 2006 consolidated net sales of $855.6 million were $123.9 million, or 16.9%, stronger than last year. Metals segment sales of $767.5 million were $116.8 million, or 17.9%, ahead of last year. Both increases include $18.6 million of sales related to the acquired Transtar business. Without the effect of the acquired business, consolidated net sales and Metals segment sales increased, 14.4% and 15.1%, respectively. Strong demand existed across our customer base through the first nine-months of 2006. For the nine-months ended September 30, 2006, Metals segment sales volume, net of material price increases and the effect of the Transtar acquisition, was 8.0% higher than for the same period in 2005. Metals material sales were approximately 7.0% higher than the corresponding 2005 period due to price increases.
Page 17 of 25
Plastics segment sales of $88.1 million were $7.1 million, or 8.8%, higher than the first nine months of 2005. Approximately 6.0% of the revenue increase was attributable to higher material pricing levels. The balance of the year-over-year sales increase in the Plastics segment was due to increased customer demand.
Gross Material Margin and Operating Profit:
Consolidated gross material margin for the first nine-months of 2006 was $249.5 million, or 13.9% higher than the same period of 2005. Metals segment gross material margin of $220.0 million was $27.6 million, or 14.3%, higher than last year due to increased sales levels. Excluding the effect of the Transtar acquisition consolidated gross material margin and Metals segment gross material margin would have increased 11.6% and 11.7%, respectively. Gross material margin as a percentage of net sales (“gross margin rate”) in our Metals segment was lower in 2006 due to increased supplier surcharges that were passed through to our customers at cost.
Plastics segment gross material margin increased by $2.9 million, or 10.9%, to a level of $29.5 million versus the first nine-months of 2005.
Year-to-date consolidated operating expenses of $173.9 million were $16.0 million, or 10.1% higher than last year, largely due to increased overall volume as well as the effect of the Transtar acquisition.
Consolidated operating profit of $75.6 million, or 8.8% of sales, was $14.5 million better than last year.
Other Income and Expense, and Net Results:
Joint venture equity earnings for the first nine-months of 2006 of $3.3 million were slightly below the corresponding period in 2005.
Nine-month financing costs, which consist of interest expense and discount on sale of accounts receivable in 2005, were $3.9 million for 2006 and $7.0 million for 2005 due to reduced borrowings and lower interest rates on our refinanced debt. However, interest expense is expected to increase in the near future as a result of the debt issued to fund the Transtar acquisition.
Year-to-date consolidated net income applicable to common stock (after preferred dividends of $0.7 million) was $45.2 million, or $2.45 per diluted share, versus $34.9 million, or $1.93 per diluted share, in the corresponding period of 2005.
22Critical Accounting Policies:
The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes” – an interpretation of FASB No. 109. See Note 12 to the consolidated financial statements for more information regarding the Company’s adoption of FIN 48. There have been no other changes in critical accounting policies from those described in the Company’s Annual Report on Form 10-K for the year-endedyear ended December 31, 2005.2006.
In September of 2006, as part of the acquisition of Transtar the Company acquired $69.0 million of identifiable intangible assets. The fair value of these identifiable intangible assets, principally customer relationships and contracts, has been preliminarily derived by using certain estimates and assumptions such as potential customer attrition and a discount rate factor. Under FAS No. 142,Goodwill and Other Intangible Assets, identifiable intangible assets are amortized over their useful lives. We review the recoverability of such assets whenever significant events or changes occur which might impair the recovery of recorded costs. We measure possible impairment based on either significant losses of an entity or the ability to recover the balance of the long-lived asset from expected future operating cash flows on a discounted basis. If impairment is identified, we would calculate the amount of such impairment based upon the discounted cash flows as compared to the recorded book value of the entity.
Recent Accounting Pronouncements:
See footnote 2 to the condensed consolidated financial statements for discussion of accounting standards recently issued and not yet adopted by the Company.
Page 18 of 25
Liquidity and Capital Resources
The Company’s principal sources of liquidity are earnings from operations, management of working capital and the $210.0$210 million amended senior credit facility with a syndicate of banks. This facility replaced the Company’s $82.0 million Revolver entered into in 2005. 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% and a variable margin. 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 September 30, 2006, the company’s interest rate was 7.09%.
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 Facility”) to be drawn on by the Company’s Canadian subsidiary from time to time. The Canadian Facility can be drawn in either U.S. dollars or Canadian dollars. The revolving loans and term loan will mature in 2011.
The Company used the proceeds from the $30.0 million term loan and drew $117.0 million of the amount available under the U.S. Revolver to finance the acquisition of Transtar. See footnote 5 to the condensed consolidated financial statements for a more detailed discussion of the Company’s debt arrangements.facility.
Cash used infrom operating activities throughin the first nine-monthsquarter of 20062007 was $6.1$4.5 million. In general, working capital cash needs offset cash generated from operations.
Working capital, including the effect of the acquisition and excluding the current portion of long- and short-termlong-term debt, isof $121.4 million was up $95.6$18.0 million since the beginning of the year. Trade receivables of $182.0$189.9 million were up $75.0 million. About one-half of the increase in accounts receivable is$28.9 million due to the addition of Transtar, while the remaining increase reflects strong sales growth year-to-date as receivableincreased sales. Receivable days sales outstanding (DSO) only increased 0.9declined 4.2 days from year-endDecember 31, 2006 to a level of 44 days.43.1 days reflecting strong collections during the quarter. Inventory at net book value of $216.2$237.5 million, including LIFO (last-in, first-out)last-in, first-out reserves of $121.9$143.0 million, is up $96.9increased $35.1 million from year-end of which $64.6 million is attributable to Transtar.December, 2006. Days sales in inventory (DSI) increased 3of 121.7 days from year-endreflects higher receipts of nickel and aluminum materials in the first quarter.
Available revolving credit capacity is primarily used to a levelfund working capital needs. As of 122 days.March 31, 2007, the Company had outstanding borrowings of $108.5 million under its U.S. Revolver and had availability of $53.7 million. The Company expects to reduce current inventory levelsCompany’s Canadian subsidiary had $0.5 million in outstanding borrowings under the Canadian Revolver and operateavailability of $9.4 million at an average DSI of below 120 days in 2006.March 31, 2007.
The Company also paid a cash dividend to its shareholders of $0.06 per common share, or $1.0 million, during the thirdfirst quarter of 2006. Year-to-date, $3.02007. The Company also paid $0.2 million in preferred stock dividends during the first quarter of cash dividends have been paid, excluding the $0.7 million of dividends paid to preferred stockholders.
2007. Capital expenditures in the first nine-monthsquarter of 20062007 were $10.2 million. Expenditures included spending associated with the new Birmingham, Alabama facility ($3.2 million) and the Company’s ongoing business system replacement initiative ($2.1 million), along with$2.2 million, reflecting typical equipment replacement and upgrades. Despite increased working capital levels, the Company reduced its debt, net of cash position, by $1.1 million since the beginning of the year.
The Company’s principal payments on long-term debt, including the current portion of long-term debt, required over the next few years are summarized below in Table 2(dollars in thousands):.
| | | | | | | | | | |
Table 2 | | |
| | |
Year ending December 31, | | Year ending December 31, | |
| 2006 | | $ | 7,418 | | |
2007 | | 12,822 | | |
2007 (for the nine months April 1, 2007 to December 31, 2007) | | 2007 (for the nine months April 1, 2007 to December 31, 2007) | | $ | 11,131 | |
2008 | | 12,980 | | 2008 | | 12,998 | |
2009 | | 16,462 | | 2009 | | 16,470 | |
2010 | | 13,208 | | 2010 | | 13,220 | |
2011 and beyond | | 47,355 | | |
2011 | | 2011 | | 12,140 | |
2012 and beyond | | 2012 and beyond | | | 35,223 | |
| | | | | |
Total debt | | $ | 110,245 | | Total debt | | $ | 101,182 | |
| | | | | | | | |
Page 19 of 25
As of September 30, 2006,March 31, 2007, the Company remains in compliance with the covenants of its financial agreements, which require it to maintain certain funded debt-to-capital ratios, working capital-to-debt ratios and a minimum equity value as defined within the agreement. A summary of covenant compliance is shown below.
| | | | | | | | |
| | Required | | | Actual | |
| | | | | | 9/30/06 | |
| |
Debt-to-Capital Ratio | | | | < 0.55 | | | | 0.45 |
| | | | | | | | |
Working Capital-to-Debt Ratio | | | | > 1.00 | | | | 1.36 |
| | | | | | | | |
Book Value of Equity | | $167.5 million | | $228.2 million |
Current business conditions lead management to believe it will be able to generate sufficient cash from operations and ongoing working capital management to fund its ongoing capital expenditure programs and meet its debt obligations.
Page 17 of 22
Commitments and Contingencies
At September 30, 2006,March 31, 2007 the Company had a $1.7$5.3 million of irrevocable letterletters of credit outstanding, to comply$1.7 million of which were for compliance with the insurance reserve requirements of its workers’ compensation insurance carrier. The letter of credit is obtained under a provisionremaining $3.6 million was in support of the revolving credit facility.outstanding industrial revenue bonds.
The Company is the defendant in several lawsuits arising out of the conduct of its business. These lawsuits are incidental and occur in the normal course of the Company’s business affairs. It is the opinion of management,the Company, 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.
On October 22, 2006 members of the United Steelworks Union ratified a four-year collective bargaining agreement through September 30, 2010. The new agreement covers 278 of the 289 union employees included in its total workforce.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to various interest rate, commodity price, and metals and plastics priceforeign exchange rate risks that arise in the normal course of business. The Company finances its operations with fixed and variable rate borrowings. Market risk arises from
There have been no significant or material changes to such risks since December 31, 2006. Refer to Item 7a in variable interest rates. Under its Revolver,our Annual Report on Form 10-K filed for the Company’s interest rate on borrowings is subject to changes in the LIBOR and Prime Rate. A 1.0% change in its interest rate would alter the Company’s interest expense by $0.2 million annually at the current debt level. The Company’s raw material costs are comprised primarilyyear ended December 31, 2006 for further discussion 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 material sold than in its selling prices.such risks.
Item 4. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (the ”CEO”)(CEO) and Chief Financial Officer (the “CFO”),(CFO) of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) underof the SecuritiesSecurity Exchange Act of 1934) as of the end of the period covered by this report.
Page 20 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 251934 rule 240.13a-15(f). The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer 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.
In its Annual Report on Form 10-K for the year ended December 31, 2005,2006, the Company reported that, it had identified certain material weaknesses in its system of internal controls over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Specifically, in conducting itsbased upon their review and evaluation, of the Company’s internal control over financial reporting atdisclosure controls and procedures were effective as of December 31, 2005, management identified material weaknesses that it (1) lacks sufficient resources with the appropriate level 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 controls over its financial closing and reporting process.2006.
As part of its evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report, and in accordance with the framework published by the Committee of Sponsoring Organizations of the Treadway Commission, referred to as theInternal Control — Integrated Framework,the Company’s management has (i) identified no material weaknesses other than those described above and (ii) evaluated whether the material weaknesses described above continue to exist. Although the Company believesconcluded that the changes inour internal controls discussed below begin to address the reported material weaknesses, management cannot conclude that these weaknesses are eliminated until the Company performs further testing of internal controlscontrol over financial reporting in subsequent periods and takes further action steps to address these weaknesses. Therefore, the CEO and CFO have concluded that the Company’s current disclosure controls and procedures,was effective as designed and implemented, were not effective in ensuring that the information the Company is required to disclose in this quarterly report is recorded, processed, summarized and reported reliably in accordance with generally accepted accounting principles within the time period required by the rules of the Securities and Exchange Commission.end of the period covered by this report.
Page 18 of 22
(b)Changes in Internal Controls
In response
There was no change in the Company’s “internal control over financial reporting” (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to deficienciesmaterially affect, the Company’s internal control over financial reporting.
During the quarter, the Company signed an agreement to purchase Oracle’s ERP system in support of its strategic growth initiative. While no changes have been made to our internal control over financial reporting at this time, we will continue to review our internal control over financial reporting as identified above, managementthe ERP system is implemented within the following changes in the Company’s internal control over financial reporting during the period ended September 30, 2006 in addition to initiatives highlighted in previous Securities and Exchange Commission Form 10-Q filings.
To remediate deficiencies in the accounting close and reporting processCompany. Additionally, the Company engaged a firm to document its financial close process and recommend changes. Their recommendations on the close process are currently being implemented. The reporting process is currently under review. To improve its internal capabilities for tax accounting, new software has been purchased and is being implemented for the tax provision calculations and tracking. To remediate deficiencies in complex accounting issues, the Company has engaged outside service providers to aide in the purchase accounting associated with the Transtar acquisition. The Company will continue to augment its capabilities on as needed basis when complex issues arise.
The Company has begun the process of reviewing and documenting the internal control structure of Transtar and, if necessary, will make appropriate changes as it incorporates its controls and procedures into this recently acquired business. This review will continue beyond December 31, 2006 and therefore management’s annual assessment of the effectiveness of the Company’sto Transtar’s internal control over financial reporting as of December 31, 2006 will exclude the recently acquired Transtar business, which represents approximately 3% of the Company’s total sales and approximately 34% of the Company’s total assets for the nine month period ended September 30, 2006reporting.
Page 21 of 25
Part II. OTHER INFORMATION
| | |
Item 1. | | Legal Proceedings |
| | |
| | There arewere no material legal proceedings other than the ordinary routine litigation incidental to the business of the Company. |
| | |
| | | Our business, operations and financial conditions are subjectDuring the quarter there were no material changes to various risks and uncertainties. Current or potential investors should carefully consider the risks and uncertainties describedrisk factors set forth in the Company’s Annual Report on Form 10K on file with10-K for the SEC, and other documents filed with the SEC, before making any investment decisions with respect to the Company’s securities. In addition, during this quarter additional risk factors were identified as outlined below. |
|
| | | General Business Risks
On September 5, 2006, the Company acquired Transtar Metals. This acquisition and its integration into the Company increases the risk associated with the financial close process by adding additional variability and entities into the consolidation process. |
|
| | | Concentration in Aerospace and Defense Industry
With the addition of Transtar Metals, the Company has increased participation in the aerospace and defense industries. This industry now represents about 30% of the Company’s business. This participation increases the likelihood that the Company is susceptible to fluctuations in the global aerospace and defense industry having a significant impact on the Company’s performance.fiscal year ended December 31, 2006. |
| | |
Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds |
| | | | | | | | |
| | | | | | | | (d) Maximum |
| | | | | | (c) Total Number | | Number (or |
| | | | | | of Shares (or | | Approximate |
| | | | | | Units) Purchased | | Dollar Value) of |
| | (a) Total Number | | (b) Average | | as Part of | | Shares (or Units) |
| | of Shares (or | | Price Paid per | | Publicly | | that May Yet Be |
Period | | Units) Purchased | | Share (or Unit) | | Announced | | Purchased |
| | | | | | Plans or | | (Under the Plans |
| | | | | | Programs | | or Programs) |
|
January 1 – January 31 | | — | | — | | — | | — |
| | | | | | | | |
February 1 – February 28 | | — | | | (d) Maximum— | | — | | — |
| | | | | | | | | | (c) Total | | | Number (or | |
| | | | | | | | | | Number of | | | Approximate | |
| | (a) Total | | | | | | | Shares (or | | | Dollar Value) of | |
| | Number of | | | (b) Average | | | Units) | | | Shares (or | |
| | Shares (or | | | Price Paid per | | | Purchased as | | | Units) that May | |
| | Units) | | | Share (or Unit) | | | Part of Publicly | | | Yet Be | |
| | Purchased | | | | | | | Announced | | | Purchased | |
Period | | | | | | | | | | Plans or | | | (Under the | |
| | | | | | | | | | Programs | | | Plans or | |
| | | | | | | | | | | | | | Programs) | |
|
JulyMarch 1 — July– March 31 | | | — | | | | N/A | | — | | — | | | | — | |
| | | | | | | | | | | | | | | | |
August 1 — August 31 | | | — | | | | N/A | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
September 1 — September 30 | | | — | | | | N/A | | | | — | | | | — | |
| | |
| | | | | | | | | | | | | | | | |
Total | | | N/A— | | — | | N/A— | | | | N/A | | | | N/A | — |
| | |
Exhibit 31.1 Certification Pursuant to Section 302 by CEO
Exhibit 31.2 Certification Pursuant to Section 302 by CFO
| | |
| | Exhibit 31.1 Certification Pursuant to Section 302 by CEO
Exhibit 31.2 Certification Pursuant to Section 302 by CFO
Exhibit 32.1 Certification Pursuant to Section 906 by CEO & CFO |
Page 2219 of 2522
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | |
| | | | A. M. Castle & Co. | | |
| | | | |
| | | | (Registrant) | | |
| | | | | | |
Date: November 8, 2006May 4, 2007 | | By: | | /s/ Henry J. Veith | | |
| | | | | | |
| | | | Henry J. Veith | | |
| | | | | | |
| | | | Controller | | |
| | | | (Mr. Veith is the Chief Accounting Officer and has been authorized to sign on behalf of the Registrant.) | | |