Attached files
file | filename |
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EX-31.1 - EX-31.1 - METALICO INC | c64333exv31w1.htm |
EX-32.1 - EX-32.1 - METALICO INC | c64333exv32w1.htm |
EX-32.2 - EX-32.2 - METALICO INC | c64333exv32w2.htm |
EX-31.2 - EX-31.2 - METALICO INC | c64333exv31w2.htm |
EX-10.16 - EX-10.16 - METALICO INC | c64333exv10w16.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Metalico, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 001-32453 | 52-2169780 | ||
(State or other jurisdiction of incorporation or organization) | (Commission file number) | (I.R.S. Employer Identification No.) | ||
186 North Avenue East Cranford, NJ | 07016 | (908) 497-9610 | ||
(Address of Principal Executive Offices) | (Zip Code) | (Registrants Telephone Number) |
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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) YES o NO þ
Number of shares of Common stock, par value $.001, outstanding as of April 27, 2011: 47,374,473
METALICO, INC.
Form 10-Q Quarterly Report
Table of Contents
Form 10-Q Quarterly Report
Table of Contents
1
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
METALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2011 and December 31, 2010
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | (Note 1) | |||||||
($ thousands) | ||||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash |
$ | 5,482 | $ | 3,473 | ||||
Trade receivables, less allowance for doubtful accounts 2011 and 2010 - $1,027 |
77,064 | 55,112 | ||||||
Inventories |
68,351 | 73,454 | ||||||
Prepaid expenses and other current assets |
5,491 | 6,276 | ||||||
Income taxes receivable |
| 1,386 | ||||||
Deferred income taxes |
4,004 | 4,004 | ||||||
Total current assets |
160,392 | 143,705 | ||||||
Property and equipment, net |
79,607 | 70,215 | ||||||
Goodwill |
73,012 | 69,605 | ||||||
Other intangibles, net |
42,281 | 38,871 | ||||||
Other assets, net |
6,060 | 6,111 | ||||||
Total assets |
$ | 361,352 | $ | 328,507 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Short-term debt |
$ | 7,118 | $ | 7,051 | ||||
Current maturities of other long-term debt |
5,853 | 4,196 | ||||||
Accounts payable |
21,416 | 18,386 | ||||||
Accrued expenses and other current liabilities |
6,740 | 4,561 | ||||||
Income taxes payable |
4,350 | | ||||||
Total current liabilities |
45,477 | 34,194 | ||||||
Long-Term Liabilities |
||||||||
Senior unsecured convertible notes payable |
79,957 | 79,940 | ||||||
Other long-term debt, less current maturities |
39,542 | 34,775 | ||||||
Deferred income taxes |
9,571 | 6,726 | ||||||
Accrued expenses and other long-term liabilities |
5,638 | 5,557 | ||||||
Total long-term liabilities |
134,708 | 126,998 | ||||||
Total liabilities |
180,185 | 161,192 | ||||||
Commitments and Contingencies (Note 12) |
||||||||
Stockholders Equity |
||||||||
Common stock, par value $0.001, authorized shares of 100,000,000; issued
and outstanding shares of 47,374,473 and 46,559,878, respectively |
47 | 46 | ||||||
Additional paid-in capital |
180,182 | 175,094 | ||||||
Retained
earnings (accumulated deficit) |
1,253 | (7,510 | ) | |||||
Accumulated other comprehensive loss |
(315 | ) | (315 | ) | ||||
Total stockholders equity |
181,167 | 167,315 | ||||||
Total liabilities and stockholders equity |
$ | 361,352 | $ | 328,507 | ||||
See notes to condensed consolidated financial statements.
2
Table of Contents
METALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2011 and 2010
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2011 and 2010
2011 | 2010 | |||||||
(Unaudited) | ||||||||
($ thousands, except share data) | ||||||||
Revenue |
$ | 181,967 | $ | 134,079 | ||||
Costs and expenses
|
||||||||
Operating expenses |
153,643 | 109,893 | ||||||
Selling, general, and administrative expenses |
8,020 | 7,181 | ||||||
Depreciation and amortization |
3,320 | 3,400 | ||||||
164,983 | 120,474 | |||||||
Operating income |
16,984 | 13,605 | ||||||
Financial and other income (expense) |
||||||||
Interest expense |
(2,453 | ) | (2,948 | ) | ||||
Accelerated amortization and other costs related to refinancing of senior debt |
| (3,046 | ) | |||||
Financial instruments fair value adjustment |
(81 | ) | (948 | ) | ||||
Other |
(24 | ) | (99 | ) | ||||
(2,558 | ) | (7,041 | ) | |||||
Income before income taxes |
14,426 | 6,564 | ||||||
Provision for federal and state income taxes |
5,663 | 3,050 | ||||||
Net income |
$ | 8,763 | $ | 3,514 | ||||
Earnings per common share: |
||||||||
Basic |
$ | 0.19 | $ | 0.08 | ||||
Diluted |
$ | 0.19 | $ | 0.08 | ||||
Weighted Average Common Shares Outstanding: |
||||||||
Basic |
47,095,914 | 46,428,260 | ||||||
Diluted |
47,219,740 | 46,439,400 | ||||||
See notes to condensed consolidated financial statements.
3
Table of Contents
METALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2011 and 2010
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2011 and 2010
2011 | 2010 | |||||||
(Unaudited) | ||||||||
($ thousands) | ||||||||
Cash Flows from Operating Activities
|
||||||||
Net income |
$ | 8,763 | $ | 3,514 | ||||
Adjustments to reconcile net income to net cash provided by (used
in) operating activities: |
||||||||
Depreciation and amortization |
3,859 | 3,614 | ||||||
Deferred income taxes |
| 3,048 | ||||||
Provision for doubtful accounts receivable |
| 267 | ||||||
Compensation expense on restricted stock and stock options issued |
584 | 692 | ||||||
Deferred financing costs expensed |
| 2,107 | ||||||
Net gain on sale and disposal of property and equipment |
(322 | ) | (5 | ) | ||||
Financial instruments fair value adjustment |
81 | 948 | ||||||
Other non-cash changes |
40 | | ||||||
Change in assets and liabilities, net of acquisitions: |
||||||||
(Increase) decrease in: |
||||||||
Trade receivables |
(19,428 | ) | (26,595 | ) | ||||
Inventories |
6,313 | 1,268 | ||||||
Prepaid expenses and other current assets |
2,241 | (1,057 | ) | |||||
Increase in: |
||||||||
Accounts payable, accrued expenses, and income taxes payable |
6,962 | 4,732 | ||||||
Net cash provided by (used in) operating activities |
9,093 | (7,467 | ) | |||||
Cash Flows from Investing Activities |
||||||||
Proceeds from insurance recovery and sale of property and equipment |
558 | 11 | ||||||
Purchase of property and equipment |
(6,030 | ) | (1,052 | ) | ||||
Cash paid for business acquisitions, less cash acquired |
(1,836 | ) | | |||||
(Increase) decrease in other assets |
9 | (8 | ) | |||||
Net cash used in investing activities |
(7,299 | ) | (1,049 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Net borrowings under revolving lines-of-credit |
337 | 2,911 | ||||||
Proceeds from other borrowings |
1,272 | 8,093 | ||||||
Principal payments on other borrowings |
(1,344 | ) | (710 | ) | ||||
Debt issuance costs paid |
(196 | ) | (1,269 | ) | ||||
Proceeds from issuance of common stock on exercised options |
146 | 61 | ||||||
Net cash provided by financing activities |
215 | 9,086 | ||||||
Net increase in cash and cash equivalents |
2,009 | 570 | ||||||
Cash and cash equivalents: |
||||||||
Beginning |
3,473 | 4,938 | ||||||
Ending |
$ | 5,482 | $ | 5,508 | ||||
4
Table of Contents
METALICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ thousands, except per share data)
(Unaudited)
($ thousands, except per share data)
(Unaudited)
Note 1 General
Business
Metalico, Inc. and subsidiaries (the Company) operates in three distinct business segments:
(a) scrap metal recycling (Scrap Metal Recycling), (b) platinum group and minor metals recycling
(PGM and Minor Metals Recycling), and (c) lead metal product fabricating (Lead Fabricating).
The Companys operating facilities as of March 31, 2011 included twenty-six metal recycling
facilities located in Buffalo, Rochester, Niagara Falls, Lackawanna, Ithaca, Jamestown and
Syracuse, New York, Akron, Youngstown and Warren, Ohio, Newark, New Jersey, Buda and Dallas, Texas,
Gulfport, Mississippi, Pittsburgh, Brownsville, Sharon, West Chester, Bradford and Quarryville,
Pennsylvania, and Colliers, West Virginia; an aluminum de-ox plant located in Syracuse, New York
and four lead product manufacturing and fabricating plants located in Birmingham, Alabama,
Healdsburg and Ontario, California and Granite City, Illinois. The Company markets a majority of
its products domestically but maintains several international customers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the
SEC). All significant intercompany accounts, transactions and profits have been eliminated.
Certain information related to the Companys organization, significant accounting policies and
footnote disclosures normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. These unaudited condensed
consolidated financial statements reflect, in the opinion of management, all material adjustments
(which include only normal recurring adjustments) necessary to fairly state the financial position
and results of operations for the periods presented.
Operating results for the interim periods are not necessarily indicative of the results that
can be expected for a full year. These interim financial statements should be read in conjunction
with the Companys audited consolidated financial statements and notes thereto for the year ended
December 31, 2010, included in the Companys Annual Report on Form 10-K as filed with the SEC. The
accompanying condensed consolidated balance sheet as of December 31, 2010 has been derived from the
audited balance sheet as of that date included in the Form 10-K
Reclassifications: Effective January 1, 2011 the Company has identified PGM and Minor Metals
Recycling as a new operating segment previously grouped in the Scrap Metal Recycling segment.
Certain balance sheet and operating details about the Platinum and Minor Metals segment have been
reported in Note 13 Segment Reporting. As such, previous year information reported
in Note 13 has been adjusted to reflect comparative data.
Effective January 1, 2011, the Company has also reclassified discontinued operations into
other income (expense) on the Consolidated Statement of Operations for the three months ended
March 31, 2010 as reportable amounts were deemed immaterial for the previous and current year.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update Disclosure of Supplementary Pro Forma Information for Business Combinations (Topic
805)Business Combinations, to improve consistency in how the pro forma disclosures are
calculated. Additionally, the update enhances the disclosure requirements and requires description
of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable
to a business combination. The guidance is effective for the first quarter of fiscal 2011 and
should be applied prospectively to business combinations for which the acquisition date is after
the effective date. The adoption of the guidance did not have a material impact on the Companys
consolidated results of operations and financial condition.
5
Table of Contents
Note 2 Business Acquisitions and Capital Expenditures
Business acquisition (scrap metal recycling segment): On January 31, 2011, the Company
acquired 100% of the outstanding capital stock of Goodman Services, Inc., a Bradford,
Pennsylvania-based full service recycling company with additional operations in Jamestown, New York
and Canton, Ohio. The acquisition is consistent with the Companys expansion strategy of
penetrating geographically contiguous markets and benefiting from intercompany and operating
synergies that are available through consolidation. The purchase price included cash and Metalico
common stock among other items of consideration. The financial statements include a preliminary
purchase price allocation. Funding for the acquisition included a drawdown under the Companys
Credit Agreement. As part of the purchase price for the acquisition, the Company issued 782,763
shares of its common stock, par value $0.001 per share having an aggregate value to the sellers of
$4,391 determined at a price per share of $5.61. Unaudited pro forma results are not presented as
they are not material to the Companys overall consolidated financial statements.
Capital Expenditures: On February 18, 2011, the Company purchased a 44-acre parcel, including
a 177,500-square-foot building, in suburban Buffalo to house an indoor scrap metal shredder. The
installation will include a new state-of-the-art downstream separation system to maximize the
recovery of valuable non-ferrous products. The Company expects to make a capital investment of more
than $10 million for the acquisition of the property, plant and support equipment and related
improvements for the shredder project. The Company will use proceeds from the Credit Agreement to
fund the expenditures. The facility is expected to be operational by the end of 2011.
Note 3 Major Customer
Revenues for the three months ended March 31, 2011 and 2010, include revenue from net sales to
a particular customer of our PGM and Minor Metals Recycling segment (which at times has accounted for 10% or
more of the total revenue of the Company), together with trade receivables due from such customer
as of March 31, 2011 and December 31, 2010.
Net Revenues from Customer as a | ||||||||||||||||
percentage of Total Revenues | Trade Receivable Balance as of | |||||||||||||||
Three Months Ended | Three Months Ended | March 31, | December 31, | |||||||||||||
March 31, 2011 | March 31, 2010 | 2011 | 2010 | |||||||||||||
Customer A |
21 | % | 13 | % | $ | 8,973 | $ | 7,994 |
Note 4 Inventories
Inventories as of March 31, 2011 and December 31, 2010 were as follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Raw materials |
$ | 7,530 | $ | 8,125 | ||||
Work-in-process |
3,331 | 3,927 | ||||||
Finished goods |
8,056 | 6,735 | ||||||
Ferrous scrap metal |
22,154 | 24,093 | ||||||
Non-ferrous scrap metal |
27,280 | 30,574 | ||||||
$ | 68,351 | $ | 73,454 | |||||
Note 5 Goodwill and Other Intangibles
The Companys goodwill resides in multiple reporting units. The carrying amount of goodwill
and indefinite-lived intangible assets are tested annually as of December 31 or whenever events or
circumstances indicate that impairment may have occurred. No indicators of impairment were
identified for the three months ended March 31, 2011. Changes in the carrying amount of goodwill,
by segment for the three months ended March 31, 2011 were as follows:
6
Table of Contents
PGM and | Lead | |||||||||||||||||||
Scrap | Minor | Fabrication | ||||||||||||||||||
Metal | Metal | and | Corporate | |||||||||||||||||
Recycling | Recycling | Recycling | and Other | Consolidated | ||||||||||||||||
December 31, 2010 |
$ | 39,585 | $ | 24,652 | $ | 5,368 | $ | | $ | 69,605 | ||||||||||
Acquired during the period |
3,407 | | | | 3,407 | |||||||||||||||
March 31, 2011 |
$ | 42,992 | $ | 24,652 | $ | 5,368 | $ | | $ | 73,012 | ||||||||||
The Company tests all finite-lived intangible assets and other long-lived assets, such as
property and equipment, for impairment only if circumstances indicate that possible impairment
exists. Estimated useful lives of intangible assets are determined by reference to both contractual
arrangements such as non-compete covenants and current and projected cash flows for supplier and
customer lists. At March 31, 2011, no adjustments were made to the estimated lives of finite-lived
assets. Other intangible assets as of March 31, 2011 and December 31, 2010 consisted of the
following:
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
March 31, 2011 |
||||||||||||
Covenants not-to-compete |
$ | 4,106 | $ | (570 | ) | $ | 3,536 | |||||
Trademarks and tradenames |
6,075 | | 6,075 | |||||||||
Supplier relationships |
39,130 | (6,880 | ) | 32,250 | ||||||||
Know how |
397 | | 397 | |||||||||
Patents and databases |
94 | (71 | ) | 23 | ||||||||
$ | 49,802 | $ | (7,521 | ) | $ | 42,281 | ||||||
December 31, 2010 |
||||||||||||
Covenants not-to-compete |
$ | 4,310 | $ | (3,120 | ) | $ | 1,190 | |||||
Trademarks and tradenames |
6,075 | | 6,075 | |||||||||
Supplier relationships |
37,500 | (6,322 | ) | 31,178 | ||||||||
Know how |
397 | | 397 | |||||||||
Patents and databases |
94 | (63 | ) | 31 | ||||||||
$ | 48,376 | $ | (9,505 | ) | $ | 38,871 | ||||||
The changes in the net carrying amount of amortizable intangible assets by classifications for
the three months ended March 31, 2011 were as follows:
Covenants | ||||||||||||
Not-to- | Supplier | Patents and | ||||||||||
Compete | Relationships | Databases | ||||||||||
Balance, December 31, 2010 |
$ | 1,190 | $ | 31,178 | $ | 31 | ||||||
Acquisitions/additions |
2,427 | 1,630 | | |||||||||
Amortization |
(81 | ) | (558 | ) | (8 | ) | ||||||
Impairment charges |
| | | |||||||||
Balance, March 31, 2011 |
$ | 3,536 | $ | 32,250 | $ | 23 | ||||||
Amortization expense on finite-lived intangible assets for the three months ended March 31,
2011 and 2010 was $647 and $708, respectively. Estimated aggregate amortization expense on
amortized intangible and other assets for each of the periods listed below is as follows:
Years Ending December 31: | Amount | |||
Remainder of 2011 |
$ | 2,181 | ||
2012 |
2,823 | |||
2013 |
2,948 | |||
2014 |
2,885 | |||
2015 |
2,883 | |||
Thereafter |
22,089 | |||
$ | 35,809 | |||
7
Table of Contents
Note 6 Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of March 31, 2011 and December 31, 2010 consisted of
the following:
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
Current | Long-Term | Total | Current | Long-Term | Total | |||||||||||||||||||
Environmental remediation costs |
$ | 193 | $ | 1,348 | $ | 1,541 | $ | 216 | $ | 1,348 | $ | 1,564 | ||||||||||||
Payroll and employee benefits |
3,082 | 424 | 3,506 | 1,194 | 424 | 1,618 | ||||||||||||||||||
Interest and bank fees |
1,158 | | 1,158 | 1,134 | | 1,134 | ||||||||||||||||||
Put warrant liability |
| 3,866 | 3,866 | | 3,785 | 3,785 | ||||||||||||||||||
Other |
2,307 | | 2,307 | 2,017 | | 2,017 | ||||||||||||||||||
$ | 6,740 | $ | 5,638 | $ | 12,378 | $ | 4,561 | $ | 5,557 | $ | 10,118 | |||||||||||||
Note 7 Stock Options and Stock-Based Compensation
Stock-based compensation expense was $584 and $692 for the three months ended March 31, 2011
and 2010, respectively. Compensation expense is recognized on a straight-line basis over the
employees vesting period.
The fair value of the stock options granted in the three months ended March 31, 2011 was
estimated on the date of the grant using a Black-Scholes option-pricing model that uses the
assumptions noted in the following table. No options were granted during the three months ended
March 31, 2010.
Black-Scholes Valuation Assumptions (1) | March 31, 2011 | |||
Weighted average expected life (in years) (2) |
5.0 | |||
Weighted average expected volatility (3) |
84.42 | % | ||
Weighted average risk free interest rates (4) |
2.16 | % | ||
Expected dividend yield |
|
(1) | Forfeitures are estimated based on historical experience. | |
(2) | The expected life of stock options is estimated based on historical experience. | |
(3) | Expected volatility is based on the average of historical volatility. The historical volatility is determined by observing actual prices of the Companys stock over a period commensurate with the expected life of the awards. | |
(4) | Based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options. |
Changes in the Companys stock options for the three months ended March 31, 2011 were as
follows:
Number of | Weighted Average | |||||||
Stock Options | Exercise Price | |||||||
Options outstanding, beginning of period |
2,350,993 | $ | 7.19 | |||||
Granted |
20,000 | $ | 5.50 | |||||
Exercised |
(31,832 | ) | $ | 4.58 | ||||
Forfeited or expired |
(38,000 | ) | $ | 7.15 | ||||
Options outstanding, end of period |
2,301,161 | $ | 7.21 | |||||
Options exercisable, end of period |
1,497,696 | $ | 8.71 | |||||
The weighted average remaining contractual term and the aggregate intrinsic value of options
outstanding as of March 31, 2011 was 2.9 years and $2,899, respectively. The weighted average fair
value for the stock options granted during the three months ended March 31, 2011 was $3.70. The
weighted average remaining contractual term and the aggregate intrinsic value of options
exercisable as of March 31, 2011 was 2.4 years and $1,069, respectively. The total intrinsic value
of stock options exercised during the three months ended March 31, 2011and 2010 was $47 and $34,
respectively.
8
Table of Contents
On June 1, 2010, the Company granted 7,500 shares of restricted common stock to a Company
employee with a fair value of $4.78 per share. The shares vest quarterly over a three-year period.
At March 31, 2011, there were 5,000
restricted shares remaining unvested with a weighted average
grant date fair value of $4.78 per share of which 1,875 shares with a weighted average grant date
fair value of $4.78 per share are expected to vest by December 31, 2011.
As
of March 31, 2010, total unrecognized stock-based compensation expense related to stock
options and restricted stock was $2,040 and $24, respectively, which is expected to be recognized
over a weighted average period of 1.8 years and 2.0 years, respectively.
Note 8 Short and Long-Term Debt
On
March 2, 2010, the Company entered into a Credit Agreement dated as of February 26, 2010
(the Credit Agreement) with a syndicate of lenders led by JPMorgan Chase Bank, N.A and including
RBS Business Capital and Capital One Leverage Finance Corp. The three-year facility consisted of
senior secured credit facilities in the aggregate amount of $65,000, including a $57,000 revolving
line of credit (the Revolver) and an $8,000 machinery and equipment term loan facility. The
Revolver provides for revolving loans which, in the aggregate, were not to exceed the lesser of
$57,000 or a Borrowing Base amount based on specified percentages of eligible accounts receivable
and inventory and bears interest at the Base Rate (a rate determined by reference to the prime
rate) plus 1.25% or, at the Companys election, the current LIBOR rate plus 3.5% (reduced to 3.25%
per the Second Amendment described below). The term loan bears interest at the Base Rate plus 2%
or, at the Companys election, the current LIBOR rate plus 4.25% (reduced to 3.75% per the Second
Amendment described below). Under the Credit Agreement, the Company is subject to certain operating
covenants and is restricted from, among other things, paying cash dividends, repurchasing its
common stock over certain stated thresholds, and entering into certain transactions without the
prior consent of the lenders. In addition, the Credit Agreement contains certain financial
covenants, including minimum EBITDA, minimum fixed charge coverage ratios, and maximum capital
expenditures covenants. Obligations under the Credit Agreement are secured by substantially all of
the Companys assets other than real property, which is subject to a negative pledge. The proceeds
of the Credit Agreement are used for present and future acquisitions, working capital, and general
corporate purposes.
On January 27, 2011, the Company entered into a Second Amendment (the Amendment) to the
Credit Agreement. The Amendment provided for an increase in the maximum amount available under the
Credit Agreement to $85,000, including $70,000 under the Revolver (up from $57,000) and an
additional term loan to be available in multiple draws in the aggregate amount of $9,000 earmarked
for contemplated capital expenditures, primarily the shredder project in suburban Buffalo, New
York. The term loan funded at the closing of the Credit Agreement continues to amortize. The
Amendment increases the advance rate for inventory under the Revolvers borrowing base formula.
LIBOR-based interest rates have been reduced to the current LIBOR rate plus 3.25% (an effective
rate of 3.66% as of March 31, 2011) for revolving loans and the current LIBOR rate plus 3.75% (an
effective rate of 3.98% as of March 31, 2011) for term loans. The Amendment also adjusted the
definition of Fixed Charges and several covenants, allowing for increases in permitted
indebtedness, capital expenditures, and permitted acquisition baskets and extends the Credit
Agreements maturity date from March 1, 2013 to January 23, 2014. The remaining material terms of
the Credit Agreement remain unchanged by the Amendment. As of March 31, 2011, the Revolver had
$32.1 million available for borrowing and $2.3 million outstanding letters of credit. The
outstanding balance under the Credit Agreement at March 31, 2011 and December 31, 2010 was $40,923
and $41,253, respectively.
Listed below are the material debt covenants as prescribed by the Credit Agreement. As of
March 31, 2011, the Company was in compliance with such covenants.
Fixed Charge Coverage Ratio trailing twelve month period ended on March 31, 2011 must not
be less than covenant.
Covenant | 1:1 to 1:0 | |||
Actual | 2.2 to 1:0 |
Year 2011 Capital Expenditures Year 2011 annual capital expenditures must not exceed covenant
Covenant | $22,000 | |||
Actual year to date | $6,030 |
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Senior Unsecured Notes Payable:
On April 23, 2008, the Company entered into a Securities Purchase Agreement with
accredited investors (Note Purchasers) which provided for the sale of $100 million of Senior
Unsecured Convertible Notes (the Notes) convertible into shares of the Companys common stock
(Note Shares). The Notes are convertible to common stock at all times. The initial and current
conversion price of the Notes is $14.00 per share. The Notes bear interest at 7% per annum, payable
in cash, and will mature in April 2028. In addition, the Notes contain (i) an optional repurchase
right exercisable by the Note Purchasers on the sixth, eighth and twelfth anniversary of the date
of issuance of the Notes, whereby each Note Purchaser will have the right to require the Company to
redeem the Notes at par and (ii) an optional redemption right exercisable by the Company beginning
on May 1, 2011, the third anniversary of the date of issuance of the Notes, and ending on the day
immediately prior to the sixth anniversary of the date of issuance of the Notes, whereby the
Company shall have the option but not the obligation to redeem the Notes at a redemption price
equal to 150% of the principal amount of the Notes to be redeemed plus any accrued and unpaid
interest thereon, limited to 30% of the aggregate principal amount of the Notes as of the issuance
date, and from and after the sixth anniversary of the date of issuance of the Notes, the Company
shall have the option to redeem any or all of the Notes at a redemption price equal to 100% of the
principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon.
The Notes also contain (i) certain repurchase requirements upon a change of control, (ii)
make-whole provisions upon a change of control, (iii) weighted average anti-dilution protection,
subject to certain exceptions, (iv) an interest make-whole provision in the event that the Note
Purchasers are forced to convert their Notes between the third and sixth anniversary of the date of
issuance of the Notes whereby the Note Purchasers would receive the present value (using a 3.5%
discount rate) of the interest they would have earned had their Notes so converted been outstanding
from such forced conversion date through the sixth anniversaries of the date of issuance of the
Notes, and (v) a debt incurrence covenant which limits the ability of the Company to incur debt,
under certain circumstances.
Listed below is the material debt covenant as prescribed by the Notes. As of March 31, 2011,
the company was in compliance with such covenant.
Consolidated Funded Indebtedness to trailing twelve month EBITDA must not exceed covenant,
Covenant | 3.5 to 1.0 | |||
Actual | 0.9 to 1.0 |
In connection with the convertible note issuance described above, the Note Purchasers
also received a total of 250,000 warrants (Put Warrants) for shares of the Companys common stock
at an exercise price of $14.00 per share (subject to adjustment) with a term of six years. The
initial fair value of the put warrants was $1,652 which was recorded as a debt discount and is
being amortized over the life of the Notes. At March 31, 2011 and December 31, 2010, the
unamortized discount was $1,153 and $1,170, respectively. In the event of a change of control, at
the request of the Note Purchaser delivered before the ninetieth (90th) day after the consummation
of such change in control, the Company (or its successor entity) shall purchase the Put Warrant
from the holder by paying the holder, within five (5) business days of such request (or, if later,
on the effective dated of the change of control, cash in an amount equal to the Black-Scholes Value
of the remaining unexercised portion of the Put Warrant on the date of such change of control.
As of March 31, 2011 and December 31, 2010, the outstanding balance on the Notes was $79,957
and $79,940, respectively (net of $1,153 and $1,170, respectively in unamortized discount related
to the original fair value warrants issued with the Notes).
Aggregate annual maturities, excluding discounts, required on all debt outstanding as of March
31, 2011, are as follows:
Twelve months ending March 31: | Amount | |||
2012 |
$ | 12,971 | ||
2013 |
5,140 | |||
2014 |
30,466 | |||
2015 |
82,857 | |||
2016 |
1,365 | |||
Thereafter |
824 | |||
$ | 133,623 | |||
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Note 9 Stockholders Equity
A reconciliation of the activity in Stockholders Equity accounts for the three months ended
March 31, 2011 is as follows:
Retained Earnings/ | ||||||||||||||||||||
Common | Additional | (Accumulated | Other Comprehensive | Total Stockholders | ||||||||||||||||
Stock | Paid-in Capital | Deficit) | Loss | Equity | ||||||||||||||||
Balance December 31, 2010 |
$ | 46 | $ | 175,094 | $ | (7,510 | ) | $ | (315 | ) | $ | 167,315 | ||||||||
Net income |
| | 8,763 | | 8,763 | |||||||||||||||
Issuance of 31,832 shares of
common stock in exchange for
options exercised |
| 146 | | | 146 | |||||||||||||||
Stock-based compensation expense |
| 584 | | | 584 | |||||||||||||||
Issuance of 782,763 shares of
common stock for acquisition,
net of issuance costs |
1 | 4,358 | | | 4,359 | |||||||||||||||
Balance March 31, 2011 |
$ | 47 | $ | 180,182 | $ | 1,253 | $ | (315 | ) | $ | 181,167 | |||||||||
Comprehensive income for the three months ended March 31, 2011 was $8,763,
comprised entirely of net income. Comprehensive income for the three months ended March 31,
2010 was $3,886, representing net income of $3,514, plus the effect of the terminated interest
rate swap contract of $372.
Note 10 Statements of Cash Flows Information
The following describes the Companys noncash investing and financing activities:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
March 31, 2011 | March 31, 2010 | |||||||
Issuance of common stock for business acquisitions (see Note 2) |
$ | 4,391 | $ | | ||||
Issuance of short and long-term debt for business acquisition |
4,964 | | ||||||
Repayment of debt with new borrowings |
| 44,109 |
The Company paid $2,282 and $2,778 in cash for interest expense in the three months ended
March 31, 2011 and 2010, respectively. The Company received cash income tax refunds of $96 and made
cash income tax payments of $22 in the three months ended March 31, 2011. For the three months
ended March 31, 2010, the Company received cash income tax refunds of $398 and made cash income tax
payments of $16.
Note 11 Earnings Per Share
Basic earnings per share (EPS) is computed by dividing income from continuing operations by
the weighted average common shares outstanding. Diluted EPS reflects the potential dilution that
could occur from the exercise of stock options and warrants which are accounted for under the
treasury stock method and convertible notes which are accounted for under the if-converted method.
Following is information about the computation of EPS for the three months ended March 31, 2011 and
2010.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||
Income | Shares | Per Share | Income | Shares | Per Share | |||||||||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | |||||||||||||||||||
Basic EPS |
||||||||||||||||||||||||
Net income |
$ | 8,763 | 47,095,914 | $ | 0.19 | $ | 3,514 | 46,428,260 | $ | 0.08 | ||||||||||||||
Effect of Dilutive Securities |
||||||||||||||||||||||||
Stock options |
| 123,826 | | 11,140 | ||||||||||||||||||||
Diluted EPS |
||||||||||||||||||||||||
Net income |
$ | 8,763 | 47,219,740 | $ | 0.19 | $ | 3,514 | 46,439,400 | $ | 0.08 | ||||||||||||||
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The Company excludes stock options, warrants and convertible notes with exercise or
conversion prices that are greater than the average market price from the calculation of diluted
EPS because their effect would be anti-dilutive. For
the three months ended March 31, 2011, 1,048,681 options, 1,419,231 warrants and 5,793,605
shares issuable upon conversion of Notes had exercise prices greater than the average market price
and were excluded in the computation of diluted net income per share. For the three months ended
March 31, 2010, 996,586 options, 1,424,231 warrants and 5,829,320 shares issuable upon conversion
of Notes had exercise prices greater than the average market price and were excluded in the
computation of diluted net income per share.
Note 12 Commitments and Contingencies
Environmental Remediation Matters
The Companys General Smelting & Refining, Inc. (GSR) and Metalico-College Grove, Inc.
(MCG) subsidiaries formerly conducted secondary lead smelting and refining operations in
Tennessee. Operations ceased at GSR in December 1998 and at MCG in 2003.
For the GSR site, as of March 31, 2011 and December 31, 2010, estimated remaining
environmental remediation costs reported as a component of accrued expenses were $987 and $1,006,
respectively. Of the $987 accrued as of March 31, 2011, $149 is reported as a current liability and
the remaining $838 is estimated to be paid as follows: $131 from 2012 through 2014 and $707
thereafter. These costs include the post-closure monitoring and maintenance of the landfills at the
former GSR facility and decontamination and related costs incurred applicable to continued
decommissioning of property owned by MCG. While changing environmental regulations might alter the
accrued costs, management does not currently anticipate a material adverse effect on estimated
accrued costs.
The Company does not carry, and does not expect to carry for the foreseeable future,
significant insurance coverage for environmental liability because the Company believes that the
cost for such insurance is not economical. Accordingly, if the Company were to incur liability for
environmental damage in excess of accrued environmental remediation liabilities, its financial
position, results of operations, and cash flows could be materially adversely affected. The Company
and its subsidiaries are at this time in material compliance with all of their pending remediation
obligations.
Employee Matters
As of March 31, 2011, approximately 10% of the Companys workforce was covered by
collective bargaining agreements at two of the Companys operating facilities. Fifty-four employees
located at the Companys Lead Fabricating facility in Granite City, Illinois were represented by the United
Steelworkers of America and twenty-two employees located at the scrap processing facility in Akron,
Ohio were represented by the Chicago and Midwest Regional Joint Board. The agreement with the Joint
Board expires on June 25, 2011. The agreement with the United Steelworkers of America expired on
March 15, 2011. The Company is currently in negotiations with union representatives to reach a
mutually beneficial agreement. However, the avoidance of a work stoppage or management lockout
cannot be guaranteed.
Other Matters
The Company is involved in certain other legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such other proceedings
and litigation will not materially affect the Companys financial position, results of operations,
or cash flows.
Note 13 Segment Reporting
Effective January 1, 2011, the Company has defined three operating segments: Scrap Metal
Recycling, PGM and Minor Metals Recycling and Lead Fabricating. The component operations of the PGM
and Minor Metals Recycling segment were previously reported under the Scrap Metal Recycling segment
for the three months ended March 31, 2010 and the information reported below has been adjusted to
reflect comparative information. The segments are distinguishable by the nature of their operations
and the types of products sold. Corporate and Other includes the cost of providing and maintaining
corporate headquarters functions, including salaries, rent, legal, accounting, travel and
entertainment expenses, depreciation, utility costs, outside services and interest cost other than
direct equipment
financing and income (loss) from equity investments. Listed below is financial data as of or
for the three months ended March 31, 2011 and 2010 for these segments:
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PGM and Minor | ||||||||||||||||||||
Scrap Metal | Metals | Corporate | ||||||||||||||||||
Recycling | Recycling | Lead Fabricating | and Other | Consolidated | ||||||||||||||||
As of and for the three months ended March 31, 2011 | ||||||||||||||||||||
Revenues from external customers |
$ | 109,466 | $ | 56,364 | $ | 16,137 | $ | | $ | 181,967 | ||||||||||
Operating income (loss) |
12,757 | 4,033 | 912 | (718 | ) | 16,984 | ||||||||||||||
Total assets |
232,199 | 77,537 | 41,236 | 10,380 | 361,352 |
As of and for the three months ended March 31, 2010 | ||||||||||||||||||||
Revenues from external customers |
$ | 77,053 | $ | 42,831 | $ | 14,195 | $ | | $ | 134,079 | ||||||||||
Operating income (loss) |
10,770 | 3,255 | (75 | ) | (345 | ) | 13,605 | |||||||||||||
Total assets |
196,971 | 66,491 | 38,437 | 14,834 | 316,733 |
Note 14 Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state
income tax examinations by tax authorities for years before 2007. The Companys interim period
income tax provisions (benefits) are recognized based upon projected effective income tax rates for
the fiscal year in its entirety and, therefore, requires management to make estimates of future
income, expense and differences between financial accounting and income tax requirements in the
jurisdictions in which the Company is taxed. The Companys effective income tax rate for the three
months ended March 31, 2011 and 2010 was 39% and 46%, respectively. The effective rate may differ from the blended expected
statutory income tax rate of 39% due to permanent differences between income for tax purposes and
income for book purposes. These permanent differences include fair value adjustments to financial
instruments, stock-based compensation, amortization of certain intangibles and certain other
non-deductible expenses.
Note 15 Financial Instruments Liabilities
In connection with the $100,000 of Notes issued on April 23, 2008, the Company issued 250,000
Put Warrants. The Company also issued 1,169,231 Put Warrants in connection with the issuance of
common stock on March 27, 2008. These warrants are free-standing financial instruments which, upon
a change in control of the Company, may require the Company to repurchase the warrants at their
then-current fair market value. Accordingly, the warrants are accounted for as long-term
liabilities and marked-to-market each balance sheet date with a charge or credit to Financial
instruments fair value adjustments in the statements of operations.
At March 31, 2011 and December 31, 2010, the estimated fair value of warrants outstanding on
those dates was $3,866 and $3,785, respectively. The change in fair value of the Put Warrants
resulted in expense of $81 and $948 for the three months ended March 31, 2011 and 2010,
respectively.
The recorded liability as described above would only require cash settlement in the case of a
change in control, as defined in the warrants, during the term of the warrants. Any recorded
liability existing at the date of exercise or expiration would be reclassified as an increase in
additional paid-in capital.
Note 16 Fair Value Disclosure
Accounting
Standards Codification (ASC) Topic 820 Fair Value Measurements and Disclosures
(ASC Topic 820) requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to estimate the value.
In cases where quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the instrument.
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The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents, trade receivables, accounts payable and accrued expenses: The
carrying amounts approximate the fair value due to the short maturity of these instruments.
Notes payable and long-term debt: The carrying amount is estimated to approximate fair value
because the interest rates fluctuate with market interest rates or the fixed rates are based on
estimated current rates offered to the Company for debt with similar terms and maturities. The
Company has determined that the fair value of its 7% Notes is unascertainable due to the lack of
public trading market and the inability to currently obtain financing with similar terms in the
current economic environment. The Notes are included in the balance sheet as of March 31, 2011 at
$79,957 which is inclusive of unamortized discount of $1,153. The Notes bear interest at 7% per
annum, payable in cash, and will mature in April 2028.
Put Warrants: The carrying amounts are equal to fair value based upon the Black-Scholes
method.
Other assets and liabilities of the Company that are not defined as financial instruments are
not included in the above disclosures, such as property and equipment. Also, non-financial
instruments typically not recognized in financial statements nevertheless may have value but are
not included in the above disclosures. These include, among other items, the trained work force,
customer goodwill and similar items.
Effective January 1, 2008, the Company adopted new provisions of ASC Topic 820. ASC Topic 820
clarifies that fair value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants.
Under ASC Topic 820, fair value measurements are not adjusted for transaction costs. ASC Topic 820
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurement inputs) and the lowest
priority to unobservable inputs (Level 3 measurement inputs). The three levels of the fair value
hierarchy under ASC Topic 820 are described below:
Basis of Fair Value Measurement:
| Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets. | ||
| Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, quoted prices for similar assets, or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset. | ||
| Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
The following table presents the Companys liabilities that are measured and recognized at
fair value on a recurring basis classified under the appropriate level of the fair value hierarchy
as of :
March 31, 2011 | ||||||||||||||||
Liabilities | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Put warrants |
| | $ | 3,866 | $ | 3,866 |
December 31, 2010 | ||||||||||||||||
Liabilities | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Put warrants |
| | $ | 3,785 | $ | 3,785 |
Following is a description of valuation methodologies used for assets and liabilities recorded
at fair value:
Put Warrants: The put warrants are valued using the Black-Scholes method. The weighted average
value per outstanding warrant at March 31, 2011 is computed to be $2.72 using a discount rate of
1.29% and an average volatility factor of 93.9%. The weighted average value per outstanding warrant
at December 31, 2010 is computed to be $2.67 using a discount rate of 1.52% and an average
volatility factor of 93.9%.
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A reconciliation of the beginning and ending balances for liabilities measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) during the period is as
follows:
Fair Value Measurements | ||||||||
Using Significant Unobservable Inputs | ||||||||
(Level 3) | ||||||||
Three Months Ended | Three Months Ended | |||||||
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Put Warrants | Put Warrants | |||||||
Beginning balance |
$ | 3,785 | $ | 3,289 | ||||
Total unrealized losses included in earnings |
81 | 948 | ||||||
Ending balance |
$ | 3,866 | $ | 4,237 | ||||
The amount of loss for the period included
in earnings attributable to the change in
unrealized losses relating to liabilities
still held at the reporting date |
$ | 81 | $ | 948 | ||||
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This Form 10-Q includes certain statements that may be deemed to be forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements
in this Form 10-Q which address activities, events or developments that Metalico, Inc. (herein,
Metalico, the Company, we, us, our or other similar terms) expects or anticipates will or
may occur in the future, including such things as future acquisitions (including the amount and
nature thereof), business strategy, expansion and growth of our business and operations, general
economic and market conditions and other such matters are forward-looking statements. Although we
believe the expectations expressed in such forward-looking statements are based on reasonable
assumptions within the bounds of our knowledge of our business, a number of factors could cause
actual results to differ materially from those expressed in any forward-looking statements. These
and other risks, uncertainties and other factors are discussed under Risk Factors appearing in
our Annual Report on Form 10-K for the year ended December 31, 2010 (Annual Report), as the same
may be amended from time to time.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included under Item 1 of this Report. In
addition, reference should be made to the audited consolidated financial statements and notes
thereto and related Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our 2010 Annual Report. Amounts reported in the following discussions are
not reported in thousands unless otherwise specified.
General
We operate in three distinct business segments: (a) scrap metal recycling (Scrap Metal
Recycling), (b) platinum group and minor metals recycling (PGM and Minor Metals Recycling) and
(c) lead metal product fabricating (Lead Fabricating). Our operating facilities as of March 31,
2011 included twenty-six metal recycling facilities located in Buffalo, Rochester, Niagara
Falls, Lackawanna, Syracuse, Ithaca and Jamestown New York, Akron, Youngstown and Warren, Ohio,
Newark, New Jersey, Buda and Dallas, Texas, Gulfport, Mississippi, Pittsburgh, Brownsville, Sharon,
West Chester, Quarryville and Bradford Pennsylvania, and Colliers, West Virginia; an aluminum de-ox
plant located in Syracuse, New York; and four lead product manufacturing and fabricating plants
located in Birmingham, Alabama, Healdsburg and Ontario, California and Granite City, Illinois. The
Company markets a majority of its products on a national basis but maintains several international
customers.
Effective January 1, 2011, the Company has identified the PGM and Minor Metals Recycling as a
new operating segment previously grouped in the Scrap Metal Recycling segment. Management feels the
separation provides clarity on the Companys traditional scrap metal recycling operations and the
operations of its specialized PGM and higher value Minor metals recycling. Where applicable, all
previous year information reported below has been adjusted to reflect comparative data.
Overview of Quarterly Results
The following items represent a summary of financial information for the three months ended
March 31, 2011 compared with the three months ended March 31, 2010
| Sales increased to $182.0 million, compared to $134.1 million. | ||
| Operating income increased to $17.0 million, compared to operating income of $13.6 million. | ||
| Net income of $8.8 million, compared to a net income of $3.5 million. | ||
| Net income of $0.19 per diluted share, compared to a net income of $0.08 per diluted share. |
Critical Accounting Policies and Use of Estimates
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of our financial statements
requires the use of estimates and judgments that affect the reported amounts and related
disclosures of commitments and contingencies. We rely on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances to make judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ materially from these
estimates. There were no changes to the policies as described in our Annual Report except for
the change in presentation of segment data.
16
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We believe the following critical accounting policies, among others, affect the more
significant judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition
Revenue from product sales is recognized based on free on board (FOB) terms which generally
is when title transfers and the risks and rewards of ownership have passed to customers. Brokerage
sales are recognized upon receipt of materials by the customer and reported net of costs in product
sales. Historically, there have been very few sales returns and adjustments in excess of reserves
for such instances that would impact the ultimate collection of revenues, therefore, no material
provisions have been made when a sale is recognized. The loss of any significant customer could
adversely affect our results of operations or financial condition.
Accounts Receivable and Allowance for Uncollectible Accounts Receivable
Accounts receivable consist primarily of amounts due from customers from product sales. The
allowance for uncollectible accounts receivable totaled $1.0 million at March 31, 2011 and December
31, 2010, respectively. Our determination of the allowance for uncollectible accounts receivable
includes a number of factors, including the age of the accounts, past experience with the accounts,
changes in collection patterns and general industry conditions.
While we believe our allowance for uncollectible accounts is adequate, changes in economic
conditions or continued weakness in the steel, metals, or construction industry could require us to
increase our reserve for uncollectible accounts and adversely impact our future earnings.
Derivatives and Hedging
We are exposed to certain risks relating to our ongoing business operations. The primary risks
managed by using derivative instruments are commodity price risk and interest rate risk. We use
forward sales contracts with PGM substrate processors to protect against volatile commodity prices.
This process ensures a fixed selling price for the material we purchase and process. We secure
selling prices with PGM processors, in ounces of Platinum, Palladium and Rhodium, in incremental
lots for material which we expect to purchase within an average 2 to 3 day time period. However,
these forward sales contracts with PGM substrate processors are not subject to any hedge
designation as they are considered within the normal sales exemption provided by ASC Topic 815.
We have in the past entered into interest rate swaps to manage interest rate risk associated
with our variable-rate borrowings. In connection with the new Credit Agreement entered into on
March 2, 2010, with JP Morgan Chase
Bank, N.A., the Company was required to terminate its $20.0 million interest rate swap contract. As
a result, the
Company paid $760,000 to terminate the interest rate swap contract. With the termination of the
interest rate swap contract, no other interest rate protection agreements are outstanding.
Goodwill
The carrying amount of goodwill is tested annually as of December 31 and whenever events or
circumstances indicate that impairment may have occurred. Judgment is used in assessing whether
goodwill should be tested more frequently for impairment than annually. Factors such as unexpected
adverse economic conditions, competition and other external events may require more frequent
assessments.
The goodwill impairment test follows a two-step process. In the first step, the fair value of
a reporting unit is compared to its carrying value. If the carrying value of a reporting unit
exceeds its fair value, the second step of the impairment test is performed for purposes of
measuring the impairment. In the second step, the fair value of the reporting unit is allocated to
all of the assets and liabilities of the reporting unit to determine an implied goodwill value.
This allocation is similar to a purchase price allocation. If the carrying amount of the reporting
units goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized
in an amount equal to that excess.
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For purposes of this testing, the Company has determined that it has these six reporting
units: Lead Fabricating, New York Scrap Recycling, Pittsburgh Scrap Recycling, Akron Scrap
Recycling, Newark PGM Recycling and Texas PGM Recycling.
In determining the carrying value of each reporting unit, management allocates net deferred
income taxes and certain corporate maintained liabilities specifically allocable to each reporting
unit to the net operating assets of each reporting unit. The carrying amount is further reduced by
any impairment charges made to other intangibles of a reporting unit.
Since market prices of our reporting units are not readily available, we make various
estimates and assumptions in determining the estimated fair values of the reporting units. The
evaluation of impairment involves comparing the current fair value of each reporting unit to its
carrying value, including goodwill. We use a discounted cash flow model (DCF Model) to estimate the
current fair value of our reporting units when testing for impairment. A number of significant
assumptions and estimates are involved in the application of the DCF model to forecast operating
cash flows, including sales volumes, profit margins, tax rates, capital spending, discount rate,
and working capital changes. Forecasts of operating and selling, general and administrative
expenses are generally based on historical relationships of previous years. When applying the DCF
Model, the cash flows expected to be generated are discounted to their present value equivalent
using a rate of return that reflects the relative risk of the investment, as well as the time value
of money. This return is an overall rate based upon the individual rates of return for invested
capital (equity and interest-bearing debt). The return, known as the weighted average cost of
capital (WACC), is calculated by weighting the required returns on interest-bearing debt and common
equity in proportion to their estimated percentages in an expected capital structure. For our 2010
analysis, we arrived at a discount rate of 17.2%. The inputs used in calculating the WACC include
(i) average of capital structure ratios used in previous Metalico acquisition valuations, (ii) an
estimate of combined federal and state tax rates (iii) the cost of Baa rated debt based on Moodys
Seasoned Corporate Bond Yields of 6.10% as of December 1, 2010 and (iv) a 22.0% required return on
equity determined under the Modified Capital Asset Pricing (CAPM) model.
At December 31, 2010, the Company performed its annual impairment testing. As of that date,
the fair value of each reporting unit exceeded its carrying value and no impairment charge was
required. Through March 31, 2011, no indicators of impairment were identified. At March 31, 2011,
the Companys market capitalization was in excess of the reported book value of its equity by
$113.5 million.
Intangible Assets and Other Long-lived Assets
The Company tests indefinite-lived intangibles such as trademarks and trade names for
impairment at least annually by comparing the carrying value of the intangible asset to the
projected discounted cash flows produced from the intangible asset. Such estimated cash flows are
subject to similar management estimates and assumptions about future performance as those used in
evaluating the fair value of the Companys reporting units. If the carrying value exceeds the
projected discounted cash flows attributed to the intangible asset, the carrying value is no longer
considered recoverable and the Company will record impairment.
The Company tests all finite-lived intangible assets and other long-lived assets, such as
property and equipment, for impairment only if circumstances indicate that possible impairment
exists. The carrying value of the asset (or asset group) is compared to the estimated undiscounted
cash flows attributable to the asset (or asset group) and, if the carrying value is higher, an
impairment is recognized for the excess carrying value above the estimated fair value of the asset
(or asset group). Fair value is typically determined by discounting estimated cash flows using an
appropriate risk-adjusted discount rate. To the extent actual useful lives of our intangible assets
are less than our previously estimated lives, we will increase our amortization expense on a
prospective basis. We estimate useful lives of our intangible assets by reference to both
contractual arrangements such as non-compete covenants and current and projected cash flows for
supplier and customer lists. Through March 31, 2011, no indicators of impairment were identified
and no adjustments were made to the estimated lives of finite-lived assets.
Stock-based Compensation
Stock-based compensation cost is estimated at the grant date based on the awards fair value
as calculated by the Black-Scholes option-pricing model and is recognized as expense ratably on a
straight-line basis over the option vesting period for those options expected to vest. The
Black-Scholes option-pricing model requires various judgmental assumptions including expected
volatility and expected option life. These factors are determined at the date of each
individual or group grant. Significant changes in any of these assumptions could materially
affect the fair value of stock-based awards granted in the future.
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Income taxes
Our provision for income taxes reflects income taxes paid or payable (or received or
receivable) for the current year plus the change in deferred income taxes during the period.
Deferred income taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid, and result from differences between the
financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and
tax laws when enacted. Valuation allowances are recorded to reduce deferred income tax assets when
it is more likely than not that a tax benefit will not be realized and uncertain tax benefit
liabilities are recognized for tax positions taken in returns that are subject to some uncertainty.
Such valuation allowances and liabilities are subject to managements estimates about future
performance of the Company and strength of its tax positions.
RESULTS OF OPERATIONS
The Company is divided into three industry segments: Scrap Metal Recycling, which includes
three general product categories, ferrous, non-ferrous and other scrap services; PGM and Minor
Metals Recycling which includes two general product recycling categories, Platinum Group Metals
(PGMs) and Minor Metals including the Refractory Metals Molybdenum, Tungsten, Tantalum and
Niobium; and the Lead Fabricating segment.
The following table sets forth information regarding revenues in each segment
Revenues | ||||||||||||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||
($,and weights in thousands) | ||||||||||||||||||||||||
Net | Net | |||||||||||||||||||||||
Weight | Sales | % | Weight | Sales | % | |||||||||||||||||||
Scrap Metal Recycling |
||||||||||||||||||||||||
Ferrous metals (weight in tons) |
147.1 | $ | 65,493 | 36.0 | 127.1 | $ | 44,861 | 33.5 | ||||||||||||||||
Non-ferrous metals (weight in lbs.) |
38,066 | 42,889 | 23.6 | 35,577 | 31,625 | 23.6 | ||||||||||||||||||
Other |
| 1,084 | 0.6 | | 567 | 0.4 | ||||||||||||||||||
Total Scrap Metal Recycling |
109,466 | 60.2 | 77,053 | 57.5 | ||||||||||||||||||||
PGM and Minor Metals Recycling |
||||||||||||||||||||||||
Platinum Group Metals (weight in
troy oz.) |
34.7 | 44,732 | 24.6 | 35.7 | 36,535 | 27.2 | ||||||||||||||||||
Minor metals (weight in lbs) |
508 | 11,632 | 6.4 | 436 | 6,296 | 4.7 | ||||||||||||||||||
Total PGM and Minor Metals Recycling |
56,364 | 31.0 | 42,831 | 31.9 | ||||||||||||||||||||
Lead Fabrication (lbs.) |
10,277 | 16,137 | 8.8 | 9,752 | 14,195 | 10.6 | ||||||||||||||||||
Total Revenue |
$ | 181,967 | 100.0 | $ | 134,079 | 100.0 | ||||||||||||||||||
The following table sets forth information regarding our average selling prices for the
past five quarters. The fluctuation in pricing is due to many factors including domestic and export
demand and our product mix.
Average | ||||||||||||||||||||
Average | Average | PGM Price | Average | Average | ||||||||||||||||
Ferrous | Non-Ferrous | per troy oz. | Minor Metal | Lead | ||||||||||||||||
For the quarter ended: | Price per ton | Price per lb. | (1) | Price per lb. (2) | Price per lb. | |||||||||||||||
March 31, 2011 |
$ | 445 | $ | 1.13 | $ | 1,229 | $ | 22.90 | $ | 1.57 | ||||||||||
December 31, 2010 |
$ | 368 | $ | 0.95 | $ | 1,117 | $ | 18.29 | $ | 1.51 | ||||||||||
September 30, 2010 |
$ | 355 | $ | 0.99 | $ | 986 | $ | 17.73 | $ | 1.33 | ||||||||||
June 30, 2010 |
$ | 383 | $ | 0.91 | $ | 1,122 | $ | 17.36 | $ | 1.42 | ||||||||||
March 31, 2010 |
$ | 353 | $ | 0.89 | $ | 966 | $ | 14.44 | $ | 1.46 |
(1) | Average PGM prices are comprised of combined troy ounces of Platinum, Palladium and Rhodium. | |
(2) | Average Minor Metal prices are comprised of combined weights of Tungsten, Tantalum, Molybdenum, Niobium, Rhenium and Chrome. |
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Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Consolidated net sales increased by $47.9 million, or 35.7%, to $182.0 million for the three
months ended March 31, 2011 compared to consolidated net sales of $134.1 million for the three
months ended March 31, 2010. Acquisitions added $4.0 million to consolidated net sales for the
quarter ended March 31, 2011. Excluding acquisitions, sales increased by $43.9 million. The Company
reported increases in average metal selling prices in all segments of the business representing
$38.3 million. The Company also reported higher selling volumes amounting to $5.6 million.
Scrap Metal Recycling
Ferrous Sales
Ferrous sales increased by $20.6 million, or 45.9%, to $65.5 million for the three months
ended March 31, 2011, compared to $44.9 million for the three months ended March 31, 2010.
Acquisitions added $2.2 million to ferrous sales for the first quarter of 2011. Excluding
acquisitions, the increase in ferrous sales was attributable to higher volume sold of 14,500 tons,
or 11.4%, amounting to $5.1 million and higher average selling prices totaling $13.3 million. The
average selling price for ferrous products was approximately $445 per ton for the three months
ended March 31, 2011 compared to $353 per ton for the three months ended March 31, 2010, an
increase of approximately 26.1%.
Non-Ferrous Sales
Non-ferrous sales increased by $11.3 million, or 35.8%, to $42.9 million for the three months
ended March 31, 2011, compared to $31.6 million for the three months ended March 31, 2010.
Acquisitions added $1.2 million to non-ferrous sales for the first quarter of 2011. Excluding
acquisitions, the increase in non-ferrous sales was due to higher sales volumes amounting to $1.6
million and higher average selling prices totaling $8.4 million. The average selling price for
non-ferrous products was approximately $1.13 per pound for the three months ended March 31, 2011
compared to $.89 per pound for the three months ended March 31, 2010, an increase of approximately
27.0%.
PGM and Minor Metal Recycling
Platinum Group Metals
Platinum Group Metal (PGM) recycling sales increased $8.2 million, or 22.5%, to $44.7
million for the three months ended March 31, 2011, compared to $36.5 million for the three months
ended March 31, 2010. The increase in sales was due to higher selling prices amounting to $11.2
million but was offset by lower volumes sold totaling $3.0 million. The average combined selling
price for PGM metal was approximately $1,229 per troy ounce for the three months ended March 31,
2011 compared to $966 per troy ounce for the three months ended March 31, 2010, an increase of
27.2%.
Minor Metals
Minor Metal recycling sales, which include metals such as Molybdenum, Tungsten, Tantalum,
Niobium, Rhenium and Chrome, increased $5.3 million, or 84.1%, to $11.6 million for the three
months ended March 31, 2011, compared to $6.3 million for the three months ended March 31, 2010.
The increase in sales was due to higher selling prices amounting to $4.3 million and higher volumes
sold totaling $1.0 million. The average combined selling price for minor
metals was approximately $22.90 per pound for the three months ended March 31, 2011 compared
to $14.44 per pound for the three months ended March 31, 2010, an increase of 58.5%.
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Lead Fabrication
Lead Fabrication sales increased by $1.9 million, or 13.4%, to $16.1 million for the three
months ended March 31, 2011 compared to $14.2 million for the three months ended March 31, 2010.
The increase in sales was due to higher average selling prices amounting to $1.1 million and by
higher volume sold totaling $809,000. The average selling price of our lead fabricated products was
approximately $1.57 per pound for the three months ended March 31, 2011, compared to $1.46 per
pound for the three months ended March 31, 2010. Sales volume increased to 10.3 million pounds for
the three months ended March 31, 2011 from 9.8 million pounds for the three months ended March 31,
2010, an increase of 5.1%.
Operating Expenses
Operating expenses increased by $43.7 million, or 39.8%, to $153.6 million for the three
months ended March 31, 2011 compared to $109.9 million for the three months ended March 31, 2010.
Acquisitions added $4.2 million to operating expense for the quarter ended March 31, 2011.
Excluding acquisitions, operating expenses increased by $39.5 million. The increase in operating
expense was due to a $37.3 million increase in the cost of purchased metals due to higher sales
volumes and commodity prices and a $2.2 million increase in other operating expenses. These
operating expense increases include wages and benefits of $1.2 million, freight charges of
$576,000, energy and utility expenses of $475,000 and production and fabricating supplies of
$204,000. These increases in operating expenses were offset by reductions in other miscellaneous
operating expenses of $298,000.
Selling, General, and Administrative
Selling, general, and administrative expenses increased $839,000, or 11.7%, to $8.0 million,
or 4.4% of sales, for three months ended March 31, 2011, compared to $7.2 million, or 5.4% of
sales, for three months ended March 31, 2010. Acquisitions added $248,000 to selling, general and
administrative expenses for the quarter ended March 31, 2011. Excluding acquisitions, selling,
general and administrative expenses increased by $591,000. The increases include $222,000 in
consulting and professional fees, $187,000 for wages and benefits, $158,000 in insurance costs and
$45,000 in advertising and promotional expenses. These increases were offset by reductions in and
other expenses of $21,000.
Depreciation and Amortization
Depreciation and amortization decreased to $3.3 million, or 1.8% of sales, for the three
months ended March 31, 2011 compared to $3.4 million, or 2.5% of sales for the three months ended
March 31, 2010. The decrease as a percentage of sales was primarily attributable to higher sales.
Acquisitions added $280,000 to depreciation and amortization expense. Excluding acquisitions,
depreciation and amortization expense decreased by $360,000.
Operating Income
Operating income for three months ended March 31, 2011 increased by $3.4 million to $17.0 for
three months ended March 31, 2011 from $13.6 million for the three months ended March 31, 2010 and
was a result of the factors discussed above.
Financial and Other Income/(Expense)
Interest expense was $2.5 million, or 1.3% of sales, for the three months ended March 31, 2011
compared to $2.9 million or 2.2% of sales, for the three months ended March 31, 2010. The $495,000
decrease in interest expense was attributable to lower interest rates on a significant portion of
our outstanding debt. As described in Note 8 of the accompanying financial statements, on March 2,
2010, we entered into a new senior secured credit facility (Credit Agreement) with a syndicate of
lenders led by JPMorgan Chase Bank, N.A. (JPMChase) that includes revolving and term features. In
doing so, we terminated our senior revolving credit facility with Wells Fargo Foothill, Inc. and
retired outstanding term notes to benefit from lower interest rates.
Term notes payable of $30.6 million under the Financing Agreement with Ableco Finance, LLC,
accrued interest at the lenders base rate plus a margin with a minimum rate of 14.00% during the
first quarter of 2010 through March 2,
2010. On that date, the Term Notes were replaced by the Credit Facility with an average
interest rate of 4.26% for the balance of the first quarter of 2010.
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Other expense for the three months ended March 31, 2010, included $3.0 million in charges
related to the refinancing of our senior credit facilities. The items comprising this amount
included $2.1 million in unamortized deferred financing costs expensed as a result the termination
of our Loan and Financing agreements with Wells Fargo Foothill and Ableco. We also incurred credit
facility termination fees and charges of $341,000 and $598,000 from the reclassification of other
comprehensive loss related to the interest rate swap that we terminated upon entering into the
Credit Agreement with JPMChase. No similar expense was incurred in the three months ended March 31,
2011.
Other expense for the three months ended March 31, 2011, includes expense of $81,000 to adjust
the Put Warrant liability to its fair value as compared to expense of $948,000 for the quarter
ended March 31, 2010. The warrants were issued in connection with common stock offering in April
2008 and the $100 million 7% convertible note offering in May 2008.
Income Taxes
For the three months ended March 31, 2011, the Company recognized income tax expense of $5.7
million, resulting in an effective tax rate of 39%. For the three months ended March 31, 2010, the
Company recognized an income tax expense of $3.1 million, resulting in an effective tax rate of
46%. Our interim period income tax provisions (benefits) are recognized based upon our projected
effective income tax rates for the fiscal year in its entirety and, therefore, requires management
of the Company to make estimates of future income, expense and differences between financial
accounting and income tax requirements in the jurisdictions in which the Company is taxed. Our
effective rate may differ from the blended expected statutory income tax rate of 39% due to
permanent differences between income for tax purposes and income for book purposes. These permanent
differences include fair value adjustments to financial instruments, stock based compensation,
amortization of certain intangibles and certain non-deductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
During the three months ended March 31, 2011, we generated $9.1 million of cash for operating
activities compared to $7.5 million of operating cash used for the three months ended March 31,
2010. For the three months ended March 31, 2011, the Companys net income of $8.8 million and
non-cash net expense of depreciation and amortization of $3.9 million and other non-cash items of
$383,000 was offset by a $3.9 million change in working capital components. The changes in working
capital components include an increase in accounts receivable of $19.4 million due to higher sales.
These items were offset by a $7.0 million increase to accounts payable, accrued expenses, income
taxes payable and other liabilities, a decrease in inventory of $6.3 million and a $2.2 million
decrease in income taxes receivable, prepaid expenses and other current assets. For the three
months ended March 31, 2010, the Companys net income of $3.5 million and non-cash items of
depreciation and amortization of $3.6 million and other non-cash net expense of $7.1 million was
offset by a $21.7 million change in working capital components. The changes in working capital
components include an increase in accounts receivable of $26.6 million and a $1.1 million increase
in prepaid expenses and other current assets. These items were offset by a decrease in inventory
balances of $1.3 million and a $4.7 million increase to accounts payable, accrued expenses and
income taxes payable. The increase in prepaid expenses includes a $1.0 million increase in
unsecured vendor advances. Vendor advances as of March 31, 2011
and 2010 totaled $1.7 million and $1.9 million, respectively.
We used $7.3 million in net cash for investing activities for the three months ended March 31,
2011 compared to using net cash of $1.0 million in the three months ended March 31, 2010. During
three months ended March 31, 2011, we purchased $6.0 million in equipment and capital improvements
which included $3.0 million for the purchase of the land and building in Western, New York that
will be used to house our new shredding operation. We also used $1.8 million in cash to fund a
portion of our acquisition of Goodman Services, Inc. These items were offset by $558,000 in
proceeds from the disposal of capital equipment. During the three months ended March 31, 2010, we
purchased $1.1 million in equipment and capital improvements.
During the three months ended March 31, 2011, we generated $215,000 of net cash from financing
activities compared to $9.1 million of net cash generated during the three months ended March 31,
2010. For the three months ended March 31, 2011, total new borrowings were $1.3 million and net
borrowings under our revolving credit facility
amounted to $337,000. These borrowings were offset
by debt repayments of $1.3 million and the payment of $196,000
in debt issuance costs related to credit facility amendment with JPMChase. We also received
$146,000 in proceeds from the exercise of stock options. For the three months ended March 31, 2010,
total new borrowings were $8.1 million and net borrowings under our revolving credit facility
amounted to $2.9 million. These borrowings were offset by debt repayments of $710,000 and the
payment of $1.2 million in debt issue costs related to agreement entered into with JPMChase.
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Financing and Capitalization
On March 2, 2010, we entered into a Credit Agreement (the Credit Agreement) with a
syndicate of lenders led by JPMorgan Chase Bank, N.A and including RBS Business Capital and Capital
One Leverage Finance Corp. The three-year facility consisted of senior secured credit facilities in
the aggregate amount of $65.0 million, including a $57.0 million revolving line of credit (the
Revolver) and an $8.0 million machinery and equipment term loan facility. The Revolver provides
for revolving loans which, in the aggregate, were not to exceed the lesser of $57.0 million or a
Borrowing Base amount based on specified percentages of eligible accounts receivable and
inventory and bears interest at the Base Rate (a rate determined by reference to the prime rate)
plus 1.25% or, at our election, the current LIBOR rate plus 3.5%. The term loan accrued interest at
the Base Rate plus 2% or, at our election, the current LIBOR rate plus 4.25%. Under the Credit
Agreement, we are subject to certain operating covenants and are restricted from, among other
things, paying cash dividends, repurchasing its common stock over certain stated thresholds, and
entering into certain transactions without the prior consent of the lenders. In addition, the
Credit Agreement contains certain financial covenants, including minimum fixed charge coverage
ratios, and maximum capital expenditures covenants. Obligations under the Credit Agreement are
secured by substantially all of the Companys assets other than real property, which is subject to
a negative pledge. The proceeds of the Credit Agreement are used for present and future
acquisitions, working capital, and general corporate purposes.
Upon the effectiveness of the Credit Agreement described in the preceding paragraph, we
terminated the Amended and Restated Loan and Security Agreement with Wells Fargo Foothill, Inc.
dated July 3, 2007, as amended (the Loan Agreement) and repaid outstanding indebtedness under the
Loan Agreement in the aggregate principal amount of approximately $13.5 million. We also terminated
the Financing Agreement with Ableco Finance LLC dated July 3, 2007, as amended (the Financing
Agreement) and repaid outstanding indebtedness under the Financing Agreement in the aggregate
principal amount of approximately $30.6 million. Outstanding balances under the Loan Agreement and
the Financing Agreement were paid with borrowings under the Credit Agreement and available cash.
As of March 31, 2011, we had $32.1 million of borrowing availability under the Credit
Agreement.
On January 27, 2011, we entered into a Second Amendment (the Amendment) to the Credit
Agreement. The Amendment provides for an increase in the maximum amount available under the Credit
Agreement to $85.0 million, including $70.0 million under the Revolver (up from $57.0 million) and
an additional term loan to be available in multiple draws in the aggregate amount of $9.0 million
earmarked for contemplated capital expenditures. The term loan funded at the closing of the Credit
Agreement continues to amortize. The Amendment increases the advance rate for inventory under the
revolving facilitys borrowing base formula. LIBOR-based interest rates have been reduced to the
current LIBOR rate plus 3.25% (an effective rate of 3.66% as of March 31, 2011) for revolving loans
and the current LIBOR rate plus 3.75% (an effective rate of 3.98% as of March 31, 2011) for term
loans. The Amendment also adjusts the definition of Fixed Charges and several covenants, allowing
for increases in permitted indebtedness, capital expenditures, and permitted acquisition baskets,
and extends the Credit Agreements maturity date from March 1, 2013 to January 23, 2014. The
remaining material terms of the Credit Agreement remain unchanged by the Amendment.
On April 23, 2008, we entered into a Securities Purchase Agreement with accredited
investors (Note Holders) which provided for the sale of $100.0 million of Senior Unsecured
Convertible Notes (the Notes) convertible into shares of our common stock (Note Shares). The
initial and current conversion price of the Notes is $14.00 per share. The Notes bear interest at
7% per annum, payable in cash, and will mature in April 2028. In addition, the Notes contain (i) an
optional repurchase right exercisable by the Note Holders on the sixth, eighth and twelfth
anniversaries of the date of issuance of the Notes, whereby each Note Holder will have the right to
require the Company to redeem the Notes at par and (ii) an optional redemption right exercisable by
the Company beginning on May 1, 2011, the third anniversary of the date of issuance of the Notes,
and ending on the day immediately prior to the sixth anniversary of the date of issuance of the
Notes, whereby the Company shall have the option but not the obligation to redeem the Notes at a
redemption price equal to 150% of the principal amount of the Notes to be redeemed plus any accrued
and unpaid interest thereon,
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limited to 30% of the aggregate principal amount of the Notes as of
the issuance date, and from and after the sixth
anniversary of the date of issuance of the Notes, the Company shall have the option to redeem
any or all of the Notes at a redemption price equal to 100% of the principal amount of the Notes to
be redeemed plus any accrued and unpaid interest thereon.
As of March 31, 2011, the outstanding balance on the Notes was $80.0 million (net of $1.2
million in unamortized discount related to the original fair value warrants issued with the Notes).
The Notes also contain (i) certain repurchase requirements upon a change of control, (ii)
make-whole provisions upon a change of control, (iii) weighted average anti-dilution protection,
subject to certain exceptions, (iv) an interest make-whole provision in the event that the Note
Purchasers are forced to convert their Notes between the third and sixth anniversaries of the date
of issuance of the Notes whereby the Note Purchasers would receive the present value (using a 3.5%
discount rate) of the interest they would have earned had their Notes so converted been outstanding
from such forced conversion date through the sixth anniversary of the date of issuance of the
Notes, and (v) a debt incurrence covenant which limits our ability to incur debt under certain
circumstances.
On August 26, 2010, the Company repurchased Notes totaling $500,000 for $375,000 using
proceeds of the Revolver described above resulting in a gain of $101,000 net of unamortized warrant
discount in the third quarter of 2010.
Future Capital Requirements
As of March 31, 2011, we had $5.5 million in cash and cash equivalents, availability
under the Credit Agreement of $32.1 million and total working capital of $114.9 million. As of
March 31, 2011, our current liabilities totaled $45.5 million. We expect to fund our current
working capital needs, interest payments, term debt payments and capital expenditures over the next
twelve months with cash on hand and cash generated from operations, supplemented by borrowings
available under the Credit Agreement and potentially available elsewhere, such as vendor financing,
manufacturer financing, operating leases and other equipment lines of credit that are offered to us
from time to time. We may also access equity and debt markets for possible acquisitions, working
capital and to restructure current debt.
Historically, the Company has entered into negotiations with its lenders when it was
reasonably concerned about potential breaches and prior to the occurrences of covenant defaults. A
breach of any of the covenants contained in lending agreements could result in default under such
agreements. In the event of a default, a lender could refuse to make additional advances under the
revolving portion of a credit facility, could require the Company to repay some or all of its
outstanding debt prior to maturity, and/or could declare all amounts borrowed by the Company,
together with accrued interest, to be due and payable. In the event that this occurs, the Company
may be unable to repay all such accelerated indebtedness, which could have a material adverse
impact on its financial position and operating performance.
If necessary, the Company could use its existing cash balances or attempt to access
equity and debt markets or to obtain new financing arrangements with new lenders or investors as
alternative funding sources to restructure current debt. Any issuance of new equity could dilute
current shareholders. Any new debt financing could be on terms less favorable than those of our
existing financing and could subject us to new and additional covenants. Decisions by lenders and
investors to enter into such transactions with the Company would depend upon a number of factors,
such as the Companys historical and projected financial performance, compliance with the terms of
its current or future credit agreements, industry and market trends, internal policies of
prospective lenders and investors, and the availability of capital. No assurance can be had that
the Company would be successful in obtaining funds from alternative sources.
Off-Balance Sheet Arrangements
Other than operating leases, we do not have any significant off-balance sheet
arrangements that are likely to have a current or future effect on our financial condition, result
of operations or cash flows.
Business Acquisitions and Capital Expenditures
On February 18, 2011, we purchased a 44-acre parcel, including a 177,500-square-foot
building, in suburban Buffalo to house an indoor scrap metal shredder. The installation will
include a new state-of-the-art downstream
separation system to maximize the recovery of valuable
non-ferrous products. The Company expects to make a capital
investment of more than $10.0 million for the acquisition of the property, plant and support
equipment and related improvements for the shredder project. The Company will use proceeds from the
Credit Agreement. The facility is expected to be operational by the end of 2011.
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On January 31, 2011, we acquired 100% of the outstanding capital stock of Goodman Services,
Inc., a Bradford, Pennsylvania-based full service recycling company with additional facilities in
Jamestown, New York and Canton, Ohio. The acquisition is consistent with our expansion strategy of
penetrating geographically contiguous markets and benefiting from intercompany and operating
synergies that are available through consolidation. Goodman Services, Inc.s locations complement
our existing facilities in the Great Lakes corridor. Bradford is 160 miles from our Pittsburgh
operations and will become a feed source for the Pittsburgh shredder. Jamestown is 75 miles from
our Buffalo yards. Canton, Ohio is in close proximity to our operations in Akron, Ohio.
Contingencies
We are involved in certain other legal proceedings and litigation arising in the ordinary
course of business. In the opinion of management, the outcome of such other proceedings and
litigation will not materially affect the Companys consolidated financial position, results of
operations, or cash flows.
The Company does not carry, and does not expect to carry for the foreseeable future,
significant insurance coverage for environmental liability because the Company believes that the
cost for such insurance is not economical. However, we continue to monitor products offered by
various insurers that may prove to be practical. Accordingly, if the Company were to incur
liability for environmental damage in excess of accrued environmental remediation liabilities, its
consolidated financial position, results of operations, and cash flows could be materially
adversely affected. The Company and its subsidiaries are at this time in material compliance with
all of their pending remediation obligations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial risk resulting from fluctuations in interest rates and commodity
prices. We seek to minimize these risks through regular operating and financing activities.
However, from time to time, we may use derivative financial instruments when management feels such
hedging activities are beneficial to reducing risk of fluctuating interest rates and commodity
prices.
Interest rate risk
We are exposed to interest rate risk on our floating rate borrowings. As of March 31, 2011,
$40.9 million of our outstanding debt consisted of variable rate borrowings under our senior
secured credit facility with JPMChase Bank and other lenders. Borrowings under the credit facility
bear interest at either the prime rate of interest plus a margin or LIBOR plus a margin. Increases
in either the prime rate or LIBOR may increase interest expense. Assuming our variable borrowings
were to equal the average borrowings under our senior secured credit facility during a fiscal year,
a hypothetical increase or decrease in interest rates by 1% would increase or decrease interest
expense on our variable borrowings by approximately $409,000 per year with a corresponding change
in cash flows. We have no open interest rate protection agreements as of March 31, 2011.
Commodity price risk
We are exposed to risks associated with fluctuations in the market price for both ferrous,
non-ferrous, PGM and lead metals which are at times volatile. See the discussion under the section
entitled Risk Factors The metals recycling industry is highly cyclical and export markets can
be volatile in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.
We attempt to mitigate this risk by seeking to turn our inventories quickly instead of holding
inventories in speculation of higher commodity prices. We use forward sales contracts with PGM
substrate processors to hedge against the extremely volatile PGM metal prices. The Company
estimates that if selling prices decreased by 10% in any of the business units in which we operate,
it would not have a material effect to the carrying value of our inventories. We have no open
commodity price protection agreements as of March 31, 2011.
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Foreign currency risk
International sales account for an immaterial amount of our consolidated net revenues and all
of our international sales are denominated in U.S. dollars. We also purchase a small percentage of
our raw materials from international vendors and these purchases are also denominated in U.S.
dollars. Consequently, we do not enter into any foreign currency swaps to mitigate our exposure to
fluctuations in the currency rates.
Common stock market price risk
We are exposed to risks associated with the market price of our own common stock. The
liability associated with the Put Warrants uses the value of our common stock as an input variable
to determine the fair value of this liability. Increases or decreases in the market price of our
common stock have a corresponding effect on the fair of this liability. For example, if the price
of our common stock was $1.00 higher as of March 31, 2011, the put warrant liability and expense
for financial instruments fair value adjustments would have increased by $951,000.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the
period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of March 31, 2011, our disclosure controls and procedures
were effective to reasonably ensure that the information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
On January 31, 2011, the Company acquired all of the outstanding common stock of Goodman
Services, Inc. We have started to document and analyze the systems of disclosure controls and
procedures and internal control over financial reporting of this acquired company and integrate it
within our broader framework of controls. As we integrate the historical internal controls over
financial reporting of the acquisition into our own internal controls over financial reporting,
certain temporary changes may be made to our internal controls over financial reporting until such
time as this integration is complete. Although we have not yet identified any material weaknesses
in our disclosure controls and procedures or internal control over financial reporting as a result
of this acquisition, there can be no assurance that a material weakness will not be identified in
the course of this review.
(b) Changes in internal controls over financial reporting.
There was no change in the Companys internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our quarter ended March 31, 2011 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in various litigation matters involving ordinary and
routine claims incidental to our business. A significant portion of these matters result from
environmental compliance issues and workers compensation-related claims applicable to our
operations. We are involved in litigation and environmental proceedings as described in Note 12 of
the accompanying financial statements. A description of matters in which we are currently involved
is set forth at Item 3 of our Annual Report on Form 10-K for 2010.
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Item 1A. Risk Factors
There were no material changes in any risk factors previously disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission
on March 14, 2011.
Item 6. Exhibits
The following exhibits are filed herewith:
10.16* |
Form of Employee Deferred Stock Agreement under Metalico, Inc. 2006 Long-Term Incentive Plan | |
31.1 |
Certification of Chief Executive Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended | |
31.2 |
Certification of Chief Financial Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended | |
32.1 |
Certification of Chief Executive Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code | |
32.2 |
Certification of Chief Financial Officer of Metalico, Inc. pursuant to Rule 13a-14(a)promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code |
* |
Management contract or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
METALICO, INC. (Registrant) |
||||
Date: April 28, 2011 | By: | /s/ CARLOS E. AGÜERO | ||
Carlos E. Agüero | ||||
Chairman, President and Chief Executive Officer | ||||
Date: April 28, 2011 | By: | /s/ ERIC W. FINLAYSON | ||
Eric W. Finlayson | ||||
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
||||
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