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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

or

 

¨ 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)   (Registrant’s 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  x    NO  ¨

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  x    NO  ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   x    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  ¨    NO  x

Number of shares of Common stock, par value $.001, outstanding as of August 7, 2014: 48,219,782

 

 

 


Table of Contents

METALICO, INC.

Form 10-Q Quarterly Report

Table of Contents

 

PART I   
Item 1.  

Financial Statements.

     Page 3   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     Page 19   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk.

     Page 31   
Item 4.  

Controls and Procedures.

     Page 32   
PART II   
Item 1.  

Legal Proceedings.

     Page 33   
Item 1A.  

Risk Factors.

     Page 33   
Item 3.  

Defaults Upon Senior Securities.

     Page 33   
Item 6.  

Exhibits.

     Page 34   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

METALICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2014 and December 31, 2013

 

     2014     2013  
     (Unaudited)     (Note 1)  
     ($ thousands)  

ASSETS

    

Current Assets

    

Cash

   $ 4,784      $ 7,056   

Trade receivables, less allowance for doubtful accounts 2014 — $544; 2013 — $524

     67,260        53,417   

Inventories

     63,769        69,683   

Prepaid expenses and other current assets

     5,353        5,660   

Income taxes receivable

     258        2,050   

Deferred income taxes

     2,507        2,607   
  

 

 

   

 

 

 

Total current assets

     143,931        140,473   

Property and equipment, net

     95,178        98,748   

Goodwill

     22,443        22,443   

Other intangibles, net

     30,139        31,450   

Other assets, net

     7,364        7,899   
  

 

 

   

 

 

 

Total assets

   $ 299,055      $ 301,013   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current Liabilities

    

Current maturities of other long-term debt

   $ 120,765      $ 6,327   

Accounts payable

     20,484        17,956   

Accrued expenses and other current liabilities

     4,705        3,845   
  

 

 

   

 

 

 

Total current liabilities

     145,954        28,128   
  

 

 

   

 

 

 

Long-Term Liabilities

    

Senior unsecured convertible notes payable

     —          23,172   

Other long-term debt, less current maturities

     5,188        97,919   

Deferred income taxes

     2,195        2,295   

Accrued expenses and other long-term liabilities

     1,250        1,267   
  

 

 

   

 

 

 

Total long-term liabilities

     8,633        124,653   
  

 

 

   

 

 

 

Total liabilities

     154,587        152,781   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 11)

    

Equity

    

Common stock

     48        48   

Additional paid-in capital

     185,690        185,520   

Accumulated deficit

     (41,636     (38,017

Accumulated other comprehensive loss

     (372     (372
  

 

 

   

 

 

 

Total Metalico, Inc. and Subsidiaries equity

     143,730        147,179   

Noncontrolling interest

     738        1,053   
  

 

 

   

 

 

 

Total equity

     144,468        148,232   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 299,055      $ 301,013   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

3


Table of Contents

METALICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three and Six Months Ended June 30, 2014 and 2013

 

     Three months ended     Six months ended  
         June 30, 2014             June 30, 2013             June 30, 2014             June 30, 2013      
     (Unaudited)  
     ($ thousands, except per share data)  

Revenue

   $ 142,311      $ 129,897      $ 277,499      $ 267,592   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

        

Operating expenses

     129,296        121,060        255,743        247,056   

Selling, general, and administrative expenses

     6,059        6,337        12,407        12,940   

Depreciation and amortization

     4,234        4,459        8,626        8,944   
  

 

 

   

 

 

   

 

 

   

 

 

 
     139,589        131,856        276,776        268,940   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     2,722        (1,959     723        (1,348
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial and other income (expense)

        

Interest expense

     (2,364     (2,136     (4,683     (4,439

Equity in loss of unconsolidated investee

     —          (49     —          (120

Other

     21        5        28        12   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (2,343     (2,180     (4,655     (4,547
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     379        (4,139     (3,932     (5,895

Provision (benefit) for federal and state income taxes

     102        (1,410     2        (1,934
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     277        (2,729     (3,934     (3,961

Net loss (income) attributable to noncontrolling interest

     22        (3     315        50   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Metalico, Inc.

   $ 299      $ (2,732   $ (3,619   $ (3,911
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share:

        

Basic

   $ 0.01      $ (0.06   $ (0.08   $ (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.01      $ (0.06   $ (0.08   $ (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Common Shares Outstanding:

        

Basic

     48,213,051        47,937,871        48,189,759        47,846,120   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     48,213,051        47,937,871        48,189,759        47,846,120   
  

 

 

   

 

 

   

 

 

   

 

 

 

METALICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three and Six Months Ended June 30, 2014 and 2013

 

     Three Months Ended     Six Months Ended  
         June 30, 2014              June 30, 2013             June 30, 2014             June 30, 2013      
     (Unaudited)  
     ($ thousands, except per share data)  

Net income (loss)

   $ 299       $ (2,732   $ (3,619   $ (3,911

Other comprehensive income (loss), net of tax

     —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 299       $ (2,732   $ (3,619   $ (3,911
  

 

 

    

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

4


Table of Contents

METALICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2014 and 2013

 

     2014     2013  
     (Unaudited)  
     ($ thousands)  

Cash Flows from Operating Activities

    

Consolidated net loss

   $ (3,934   $ (3,961

Adjustments to reconcile consolidated net loss to net cash provided by operating activities:

    

Depreciation and amortization

     9,363        9,406   

Deferred income tax expense

     —          97   

Provision for doubtful accounts receivable

     26        —     

Financial instruments fair value adjustments

     —          (3

Net (gain) loss on sale of property and equipment

     (178     49   

Equity in loss of unconsolidated investee

     —          120   

Compensation expense on restricted stock and stock options issued

     179        585   

Change in assets and liabilities, net of acquisition:

    

Trade receivables

     (13,869     2,954   

Inventories

     5,914        6,243   

Income taxes receivable, prepaid expenses and other

     2,099        (4,010

Accounts payable, accrued expenses and other liabilities

     3,361        1,379   
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,961        12,859   
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Proceeds from sale of property and equipment

     307        65   

Purchases of property and equipment

     (4,052     (5,239

Cash paid for business acquisitions, less cash acquired

     —          (700

(Increase) decrease in other assets

     131        (1
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,614     (5,875
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Net borrowings (payments) under revolving lines-of-credit

     2,997        (5,463

Proceeds from other borrowings

     614        1,639   

Principal payments on other borrowings

     (5,086     (3,079

Debt issuance costs paid

     (144     (275
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,619     (7,178
  

 

 

   

 

 

 

Net decrease in cash

     (2,272     (194

Cash:

    

Beginning of period

     7,056        5,418   
  

 

 

   

 

 

 

End of period

   $ 4,784      $ 5,224   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

5


Table of Contents

METALICO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

($ thousands, except per share data)

(Unaudited)

Note 1 — General

Business

Metalico, Inc. and subsidiaries (the “Company”) operates in two distinct business segments: (a) scrap metal recycling (“Scrap Metal Recycling”) and (b) lead metal product fabricating (“Lead Fabricating”). Its operating facilities as of June 30, 2014 include thirty-one scrap metal recycling facilities, including a combined aluminum de-oxidizing plant, and four lead product manufacturing and fabricating plants. 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”). The consolidated financial statements include the accounts of Metalico, Inc., a Delaware corporation, its wholly-owned subsidiaries, subsidiaries in which it has a controlling interest, consolidated entities in which it has made equity investments, or has other interests through which it has majority-voting control or it exercises the right to direct the activities that most significantly impact the entity’s performance. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries and other consolidated entities have been eliminated in consolidation. Certain information related to the Company’s organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with U.S. 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 Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2013, included in the Company’s Annual Report on Form 10-K as filed with the SEC. The accompanying condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited balance sheet as of that date included in the Form 10-K.

Liquidity and Risk

The Company expects to fund current working capital needs, interest payments and capital expenditures through the next twelve months with cash on hand and cash generated from operations, supplemented by borrowings available under the current senior credit agreement and potentially available elsewhere, such as vendor financing or other equipment lines of credit. On November 21, 2013, the Company entered into a six-year senior credit facility (as further described below in Note 7, the “Financing Agreement”) with revolving and term loan components to replace its former revolving credit facility, repurchase a significant portion of the Company’s outstanding 7% Convertible Notes (the “Notes”) and provide liquidity to retire any Notes subject to an optional repurchase right effective on June 30, 2014 described below. At June 30, 2014, the outstanding balance of the notes was $23,469. The Company’s ability to draw funds under the Financing Agreement to redeem Convertible Notes was contingent upon its compliance with covenants set forth in the Financing Agreement.

On June 30, 2014, the Company announced an agreement in principle to restructure the principal balance of its outstanding Convertible Notes that would defer the Note holders’ put right to December 31, 2015 using funds made available by its senior lenders pursuant to an amendment under the Financing Agreement and other consideration. Terms of the amendment to the Financing Agreement as subsequently drafted conflicted with the terms agreed upon with the Note holders and an amendment to the Financing Agreement has not been completed.

 

6


Table of Contents

Under the terms of the Notes the Holders were entitled to deliver notices of redemption on or before June 30, 2014, requiring the Company to redeem the Notes, at par, plus any accrued but unpaid interest through the date of redemption. Such notices were held in abeyance following the agreement in principle announced June 30, 2014, At March 31, 2014 and June 30, 2014, the Company was not in compliance with the Maximum Leverage Ratio covenant under the Financing Agreement. The March 31 noncompliance was waived by the senior lenders but availability under the term portion of the Financing Agreement was made subject to the discretion of the lenders and the Company is currently unable to redeem the Notes. The Company’s inability to redeem the Notes is a default under the terms of the Notes and its failure to redeem the Notes is a default under the terms of the Financing Agreement. As a result of such defaults, on August 4, 2014, the lenders party to the Financing Agreement delivered a Payment Blockage Notice to the Note holders triggering a 210-day standstill period under the Subordination Agreement dated May 1, 2008 between the Company’s senior secured lenders and the holders of its 7% Convertible Notes and their respective successors and assigns. The primary effect of the Payment Blockage Notice is to bar any payments of principal or interest to the Note holders. On August 13, 2014, the Company was informed the lenders were invoking their right to charge interest at the default rate that is 3.0% per annum in excess of the interest rate otherwise payable under the Financing Agreement. The Company continues to negotiate with the Note holders and the senior lenders to reach an agreement that will satisfy the holders’ repurchase right, which may include an extension of such right, the issuance of new debt or equity or a combination of both, or a restructuring of the Company’s debt. Metalico has retained Imperial Capital to advise it in its negotiations and to assist in proposed asset sales, also previously announced, intended to generate proceeds to de-leverage the Company. No assurance can be given that the Company will return to compliance in forthcoming quarters or that the lenders will continue to waive noncompliance. The Company also continues discussion with the senior lenders to amend the Financing Agreement. No assurance can be given that the Company will be able to secure additional financing to redeem the Convertible Notes.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue From Contracts With Customers, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU becomes effective for the Company at the beginning of its 2017 fiscal year; early adoption is not permitted. The Company is currently assessing the impact that this standard will have on its condensed consolidated financial statements.

Note 2 — Business Acquisitions

Business acquisition (scrap metal recycling segment): On December 23, 2013, the Company, through its Goodman Services, Inc. subsidiary, acquired substantially all of the operating assets of Furlow’s North East Auto, Inc. an automotive salvage and parts provider in North East, Pennsylvania, in the Greater Erie vicinity. Closing on the real property was completed on March 3, 2014. The Company plans to grow the facility’s salvage car buying capabilities and continue its “pick-and-pull” auto parts business while taking advantage of additional access to scrap metal to feed its shredder in suburban Buffalo, New York. The purchase price was paid using cash provided under the Company’s current credit agreement and notes payable to the sellers. The allocation of the purchase price did not result in any goodwill. Unaudited pro forma results are not presented as they are not material to the Company’s overall consolidated financial statements.

Business acquisition (scrap metal recycling segment): On July 23, 2013, the Company, through its Goodman Services, Inc. subsidiary, acquired substantially all of the assets, including real property, of Segel and Son, Inc. a family-owned scrap iron and metal recycling business with facilities in Warren, Pennsylvania and Olean, New York. The acquisition provides a source of feedstock material for the Company’s shredder facility located nearby in suburban Buffalo. The purchase price was paid using cash provided under the Company’s previous credit agreement. The allocation of the purchase price resulted in a bargain purchase gain of $105 (net of $67 in deferred income taxes) and no goodwill was recorded. The Company also issued common stock valued at $25 to a former Segel officer as an inducement to enter into a one-year employment agreement. Unaudited pro forma results are not presented as they are not material to the Company’s overall consolidated financial statements.

Business acquisition (scrap metal recycling segment): On February 4, 2013, the Company, through its Metalico Pittsburgh, Inc. subsidiary, acquired certain accounts, equipment and a lease of certain real property from Three Rivers Scrap Metal, Inc. to operate a scrap metal recycling facility in the Greater Pittsburgh area in north suburban Conway, Beaver County, Pennsylvania. The acquisition provides a source of feedstock material for the Company’s shredder facility located nearby on Neville Island in Pittsburgh. The purchase price was paid using cash provided under the Company’s previous Credit Agreement. The financial statements include a purchase price allocation which did not result in the recording of goodwill. Unaudited pro forma results are not presented as they are not material to the Company’s overall consolidated financial statements.

 

7


Table of Contents

Note 3 — Inventories

Inventories as of June 30, 2014 and December 31, 2013 were as follows:

 

     June 30,
2014
     December 31,
2013
 

Raw materials

   $ 4,032       $ 5,085   

Work-in-process

     6,351         6,479   

Finished goods

     7,501         7,192   

Ferrous scrap metal

     24,019         27,277   

Non-ferrous scrap metal

     21,866         23,650   
  

 

 

    

 

 

 
   $ 63,769       $ 69,683   
  

 

 

    

 

 

 

Note 4 — Goodwill and Other Intangibles

The Company’s 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. Through the six months ended June 30, 2014, the actual year-to-date operating results of the Company’s Bradford, PA reporting unit differed significantly enough from forecast to determine that impairment to the carrying value of its goodwill was possible. The Company performed an interim goodwill impairment test for its Bradford, PA Scrap Metal Recycling reporting unit at June 30, 2014. Using revised forecasts in a discounted cash flow model, the impairment test indicated the fair value of the reporting unit’s goodwill exceeded its carrying value and no impairment charges were required. Changes in the carrying amount of goodwill by segment for the six months ended June 30, 2014 were as follows:

 

     Scrap
Metal

Recycling
     Lead
Fabrication
     Corporate
and Other
     Consolidated  

December 31, 2013

   $ 17,075       $ 5,368       $ —         $ 22,443   

Acquired during the period

     —           —           —           —     

Impairment charges

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2014

   $ 17,075       $ 5,368       $ —         $ 22,443   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adverse changes in general economic and market conditions and future volatility in the equity and credit markets could have further impact on the Company’s valuation of its reporting units and may require the Company to assess the carrying value of its remaining goodwill and other intangibles prior to normal annual testing dates.

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 June 30, 2014, no adjustments were made to the estimated lives of finite-lived assets. Other intangible assets as of June 30, 2014 and December 31, 2013 consisted of the following:

 

     Gross
Carrying
Amount
     Accumulated
Amortization
    Impairment
Charges
    Net
Carrying
Amount
 

June 30, 2014

         

Covenants not-to-compete

   $ 6,514       $ (2,477   $ —        $ 4,037   

Trademarks and tradenames

     4,875         —          —          4,875   

Supplier relationships

     35,024         (14,194     —          20,830   

Know-how

     397         —          —          397   
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 46,810       $ (16,671   $ —        $ 30,139   
  

 

 

    

 

 

   

 

 

   

 

 

 

December 31, 2013

         

Covenants not-to-compete

   $ 6,514       $ (2,188   $ —        $ 4,326   

Trademarks and trade names

     5,975         —          (1,100     4,875   

Supplier relationships

     40,330         (13,171     (5,307     21,852   

Know-how

     397         —          —          397   
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 53,216       $ (15,359   $ (6,407   $ 31,450   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

8


Table of Contents

The changes in the net carrying amount of amortizable intangible assets by classifications for the six months ended June 30, 2014 were as follows:

 

     Covenants
Not-to-
Compete
    Supplier
Relationships
 

Balance, December 31, 2013

   $ 4,326      $ 21,852   

Acquisitions/additions

     —          —     

Amortization

     (289     (1,022
  

 

 

   

 

 

 

Balance, June 30, 2014

   $ 4,037      $ 20,830   
  

 

 

   

 

 

 

Amortization expense on finite-lived intangible assets for the three and six months ended June 30, 2014 was $655 and $1,311, respectively. Amortization expense on finite-lived intangible assets for the three and six months ended June 30, 2013 was $802 and $1,605, respectively. Estimated aggregate amortization expense on amortized intangible assets for each of the periods listed below is as follows:

 

Years Ending December 31:

   Amount  

Remainder of 2014

   $ 1,311   

2015

     2,834   

2016

     2,828   

2017

     2,441   

2018

     1,885   

Thereafter

     13,569   
  

 

 

 
   $ 24,868   
  

 

 

 

Note 5 — Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities as of June 30, 2014 and December 31, 2013 consisted of the following:

 

     June 30, 2014      December 31, 2013  
     Current      Long-Term      Total      Current      Long-Term      Total  

Environmental monitoring costs

   $ 63       $ 761       $ 824       $ 109       $ 761       $ 870   

Payroll and employee benefits

     1,667         387         2,054         940         387         1,327   

Interest and bank fees

     385         —           385         431         —           431   

Customer obligations

     263         —           263         458         —           458   

Other

     2,327         102         2,429         1,907         119         2,026   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,705       $ 1,250       $ 5,955       $ 3,845       $ 1,267       $ 5,112   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 6 — Stock Options and Stock-Based Compensation

Stock-based compensation expense was $53 and $244 for the three months ended June 30, 2014 and 2013, respectively, and $179 and $585 for the six months ended June 30, 2014 and 2013, respectively. Compensation expense is recognized on a straight-line basis over the employee’s vesting period.

The fair value of the stock options granted in the six months ended June 30, 2013 was estimated on the date of the grant using a Black-Scholes option-pricing model that uses the assumptions noted in the following table and resulted in a weighted average fair value of $0.98 per share. No options were granted during the six months ended June 30, 2014.

 

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Black-Scholes Valuation Assumptions (1)    Six Months Ended
June 30, 2013
 

Weighted average expected life (in years) (2)

     5.0   

Weighted average expected volatility (3)

     81.35

Weighted average risk free interest rates (4)

     1.16

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 Company’s 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 Company’s stock options for the six months ended June 30, 2014 were as follows:

 

     Number of
Stock Options
    Weighted Average
Exercise Price
 

Options outstanding, beginning of period

     1,051,288      $ 4.00   

Options granted

     —          —     

Options exercised

     —          —     

Options forfeited or expired

     (7,300   $ 3.38   
  

 

 

   

Options outstanding, end of period

     1,043,988      $ 4.01   
  

 

 

   

Options exercisable, end of period

     1,042,432      $ 4.01   
  

 

 

   

 

 

 

The weighted average remaining contractual term and the aggregate intrinsic value of both options outstanding and options exercisable as of June 30, 2014 was 0.8 years and $0, respectively.

The weighted average fair value for the stock options granted during the six months ended June 30, 2013 was $0.98. The weighted average remaining contractual term and the aggregate intrinsic value of both options outstanding and options exercisable as of June 30, 2013 was 1.2 years and $0, respectively.

There were no stock options exercised during the six months ended June 30, 2014 and 2013.

As of June 30, 2014, total unrecognized stock-based compensation expense related to stock options was $1, which is expected to be recognized over a weighted average period of 1.8 years.

Deferred Stock

Deferred stock awards granted vest and are issued ratably over a three-year period from the date of grant. Changes in the Company’s deferred stock awards for the six months ended June 30, 2014 were as follows:

 

     Number of
Stock Awards
    Weighted-Average
Grant Date
Fair Value
 

Outstanding at beginning of period

     303,736      $ 2.44   

Stock awards granted

     10,000      $ 1.84   

Stock awards cancelled\forfeited

     (900   $ 1.55   

Stock awards vested and issued

     (82,355   $ 4.80   
  

 

 

   

Outstanding at end of period

     230,481      $ 1.61   
  

 

 

   

 

 

 

As of June 30, 2014, total unrecognized stock-based compensation expense related to stock awards was $258, which is expected to be recognized over a weighted average period of 1.5 years.

Note 7 — Long-Term Debt

On November 21, 2013, the Company entered into a Financing Agreement (the “Financing Agreement”) with a syndicate of lenders led by TPG Specialty Lending, Inc. (“TPG”), as agent. The six-year agreement consists of senior secured credit facilities in the aggregate amount of $125,000, including a $65,000 revolving line of credit and two

 

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term loan facilities totaling $60,000. The revolving line of credit provides for revolving loans that, in the aggregate, are not to exceed the lesser of $65,000 and a “Borrowing Base” amount based on specified percentages of eligible accounts receivable and inventory. Revolving loans bear interest at the “Base Rate” (a rate determined by reference to the prime rate but in any event not less than 3.00%) plus 2.00% or, at the Company’s election, a LIBOR-based rate (the current LIBOR rate but in any event not less than 1.00%) plus 3.00% (an aggregate effective rate of 4.13% at June 30, 2014). The term loans bear interest at the Base Rate plus 7.50% or, at the Company’s election, the LIBOR-based rate plus 8.50% (an aggregate effective rate of 9.50% at June 30, 2014) and related deferred financing costs are being amortized over the term of the Financing Agreement. The Company is subject to certain financial covenants, including maximum leverage, maximum capital expenditures and minimum availability, 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. Obligations under the Financing Agreement are secured by substantially all of the Company’s assets. The proceeds of the Financing Agreement were used to retire the Company’s revolving credit agreement with JPMorgan Chase Bank, NA, Inc., as agent and other lenders party thereto, and to repurchase $36,741 of the Company’s 7% Convertible Notes ( the “Notes”). Outstanding balances under the revolving line of credit and term loans were $51,214 and $33,405, respectively as of June 30, 2014. The remaining availability under the revolving portion of the Financing Agreement will be used for working capital and for general corporate purposes. At June 30, 2014, availability under the revolving portion of the Financing Agreement was $10,897 but is subject to the lender’s discretion.

At June 30, 2014, the Company was not in compliance with the maximum leverage ratio covenant prescribed by the Financing Agreement. The Company’s failure to redeem its 7% Convertible Notes on June 30, 2014 as described in the next paragraph is a default under the terms of the Financing Agreement. The lenders party to the Financing Agreement have not waived either event of noncompliance. On August 13, 2014, the Company was informed the lenders were invoking their right to charge interest at the default rate that is 3.0% per annum in excess of the interest rate otherwise payable under the Financing Agreement. Availability under the Financing Agreement is subject to the discretion of the lenders. There can be no assurance at this time that the Company will return to compliance in forthcoming quarters or that the lenders will waive noncompliance. Due to this uncertainty, the outstanding balances under the Financing Agreement have been classified as current liabilities.

On or before June 30, 2014, the Company received redemption notices from the holders of its 7% Convertible Notes representing the aggregate principal of $23,469. The redemption notices require the Company to redeem the Notes, at par, plus any accrued but unpaid interest through the date of redemption. Such notices were held in abeyance following the agreement in principle announced June 30, 2014. Availability provided under the Financing Agreement to redeem the Notes has been restricted by the senior lenders due the Company’s noncompliance with the Maximum Leverage Ratio covenant as of March 31, 2014 as prescribed by the Financing Agreement. The Company’s inability to redeem the Notes is a default under the terms of the Notes and its failure to redeem the Notes is a default under the terms of the Financing Agreement. As a result of such defaults, the senior lenders delivered a Payment Blockage Notice to the Note holders on August 4, 2014, triggering a 210-day standstill period under the Subordination Agreement dated May 1, 2008 between the Company’s senior secured lenders and the holders of its 7% Convertible Notes and their respective successors and assigns. The primary effect of the Payment Blockage Notice is to bar any payments of principal or interest to the Note holders. Together with accrued interest, the balance owed to the Note holders as of the date of this filing is $24,087.

The Company is negotiating with the Note holders and the senior lenders to reach an agreement that will satisfy the holders’ repurchase right which may include an extension of such right, the issuance of new debt or equity or a combination of both or a restructuring of the Company’s debt. No assurance can be provided that the Company will be able to reach an agreement with the Note holders or that the terms of a new agreement will be as favorable as the current terms of the Notes or the terms agreed to in principle at June 30, 2014. The Company may also seek new financing alternatives to provide for the redemption of the Notes. These alternatives may include accessing the capital markets with a new debt or equity offering. No assurance can be given that the Company will be able to secure the financing to redeem the Notes.

Listed below are the material debt covenants as prescribed by the Financing Agreement.

Maximum Leverage Ratio — ratio of total debt to trailing four-quarter EBITDA at June 30, 2014 must not exceed covenant:

 

Covenant

     5.50 to 1.00   

Actual

     6.29 to 1.00   

Maximum Leverage Ratios under the Financing Agreement for the next four quarterly periods are as follows:

 

For the quarterly period ending:

   Covenant Ratio  

September 30, 2014

     5.25 to 1.0   

December 31, 2014

     5.00 to 1.0   

March 31, 2015

     4.75 to 1.0   

June 30, 2015

     4.50 to 1.0   

 

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Maximum Consolidated Capital Expenditures — capital expenditures for the six months ended June 30, 2014 must not exceed covenant

 

Covenant

   $ 6,000   

Actual

   $ 4,052   

On December 12, 2011, the Company entered into an Equipment Finance Agreement (the “Equipment Finance Agreement”) with First Niagara Leasing, Inc. (“First Niagara”) providing up to $10,418. The Company used $6,585 to repay a term loan provided under the Company’s previous credit agreement with JPMorgan Chase Bank, NA, Inc., as agent, and other lenders party thereto. The loan is secured by the Buffalo, New York shredder and related equipment. Upon entering the Financing Agreement with the TPG lending group, the Company and First Niagara entered into an amendment adopting the covenants prescribed by the Financing Agreement and modifying the maturity and repayment terms. The loan modification shortened the First Niagara maturity to coincide with the maturity of the Financing Agreement in November 2019 and accordingly increased the required monthly payments from $110 to $141. The interest rate under the loan remains unchanged at 4.77% per annum. The Company notified First Niagara of its non-compliance with a certain covenant under the Financing Agreement as of June 30, 2014, which noncompliance has not yet been waived pending the outcome of global negotiations with the Company’s senior secured lenders. As of June 30, 2014 and December 31, 2013, the outstanding balance under the loan was $8,063 and $8,708, respectively. Due to cross defaults, all amounts owed under the loan together with other amounts owed under certain equipment loans due First Niagara have been classified as current liabilities.

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 $100,000 of Senior Unsecured Convertible Notes (the “Notes”) convertible into shares of the Company’s 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 an optional repurchase right which was exercised by the Note holders on June 30, 2014 requiring the Company to redeem the Notes at par. As described above, availability under the term portion of the Financing Agreement to redeem the Notes was subject to the discretion of the lenders party to the Financing Agreement and the Company is currently unable to redeem the Notes. On June 30, 2014, the Company announced an agreement in principle to restructure the outstanding principal balance of the Notes that would defer the Note holders’ put right to December 31, 2015 using funds made available by its senior lenders pursuant to an amendment under the Financing Agreement. However, proposed terms of the amendment to the Financing Agreement as subsequently drafted conflicted with the terms agreed upon with the Note holders and neither an amendment to the Financing Agreement nor an agreement with the Note holders has been completed.

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 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 test which limits the ability of the Company to incur additional debt, under certain circumstances.

Listed below is the material debt limit as prescribed by the Notes.

Consolidated Funded Indebtedness to trailing twelve month EBITDA must not exceed covenant,

 

Covenant

     3.5 to 1.0   

Actual

     5.1 to 1.0   

The occurrence of a Consolidated Funded Indebtedness ratio in excess of 3.5 to 1.0 is not a default under the Notes. However, until such time as the Consolidated Funded Indebtedness ratio falls below 3.5 to 1.0, the Company will be restricted from directly or indirectly incurring, guaranteeing or assuming any indebtedness other than “Permitted Indebtedness” (as described under the Notes). “Permitted Indebtedness” includes indebtedness under the Financing Agreement, capital leases, equipment notes secured by the underlying equipment leased or purchased, and indebtedness subordinated to the Convertible Notes.

 

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As of June 30, 2014 and December 31, 2013, the outstanding balance on the Notes was $23,182 and $23,172, respectively (net of $287 and $297, respectively, in unamortized discount related to the original fair value of warrants issued with the Notes). Due to repurchase right exercisable by the Note holders that became effective on June 30, 2014, the Notes have been classified as current liabilities. The Company is negotiating with Note holders and its senior lenders to reach an agreement that will satisfy the holders’ repurchase right which may include an extension of such right or the issuance of new debt or equity or a combination of both. Under the proposed agreement with the Note holders, the Company is scheduled to deliver a cash payment of $7,000 and a number of shares of Metalico common stock having a value of $5,000 upon closing of the contemplated transaction. The Company would retire the remainder of the existing Notes by issuing new notes in the aggregate principal amount of the $11,469 balance. The new notes would be paid from proceeds of planned divestiture of non-core assets. Two thirds of the new note balance could be prepaid without penalty if retired by November 30, 2014 and February 28, 2015, respectively, and thereafter would incur an early payment stock premium if paid from proceeds of asset sales and cash premium if paid from sources other than asset sale proceeds. The remaining third could not be called for three years, would be subject to early payment costs determined by sources of payment, and would be convertible into shares of Metalico common stock at any time after issuance at a slight premium to a volume weighted average price of the Company’s common stock determined as of July 1. The other two thirds would become convertible according to a similar formula as of November 30, 2014 and February 28, 2015, respectively. The new notes would mature on July 1, 2024 but may be put by the holders at par on December 31, 2015. The proposed agreement is subject to securing available funding. The Company can provide no assurance that it will be able to secure such funding or that the Note holders will not withdraw their support for the proposed agreement.

Aggregate annual maturities, excluding discounts, required on all debt outstanding as of June 30, 2014, are as follows:

 

Twelve months ending June 30,:

   Amount  

2015

   $ 121,053   

2016

     2,616   

2017

     1,282   

2018

     801   

2019

     250   

Thereafter

     238   
  

 

 

 
   $ 126,240   
  

 

 

 

Note 8 — Stockholders’ Equity

A reconciliation of the activity in Stockholders’ Equity accounts for the six months ended June 30, 2014 is as follows:

 

     Common
Stock
     Additional
Paid-in
Capital
    (Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interest
    Total
Equity
 

Balance December 31, 2013

   $ 48       $ 185,520      $ (38,017   $ (372   $ 1,053      $ 148,232   

Net loss

     —           —          (3,619     —          (315     (3,934

Issuance of 73,070 shares of common stock on deferred stock vesting, net of tax withholding repurchase

     —           (9     —          —          —          (9

Stock-based compensation expense

     —           179        —          —          —          179   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2014

   $ 48       $ 185,690      $ (41,636   $ (372   $ 738      $ 144,468   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock Purchase Warrants:

In connection with the Notes issued on May 1, 2008, the Company issued 250,000 Put Warrants. The Company also issued 1,169,231 Put Warrants in connection with an 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 other income in the condensed consolidated statements of operations. The warrants expired on July 17, 2014.

 

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The estimated fair value of warrants outstanding was $0 as of June 30, 2014 and December 31, 2013. The change in fair value of the Put Warrants resulted in income of $0 for the three months ended June 30, 2014 and 2013 and $0 and $3 for the six months ended June 30, 2014 and 2013, respectively.

Accumulated Other Comprehensive Loss:

There were no additions to or reclassifications out of accumulated other comprehensive loss attributable to the Company for the three and six months ended June 30, 2014 and 2013. The components of accumulated other comprehensive loss, net of tax benefit of $256, are as follows:

 

     June 30,
2014
    December 31,
2013
 

Unrecognized actuarial losses of defined benefit pension plan

   $ (372   $ (372
  

 

 

   

 

 

 

Note 9 — Statements of Cash Flows Information

The following describes the Company’s noncash investing and financing activities:

 

     Six Months
Ended
June 30, 2014
     Six Months
Ended
June 30, 2013
 

Issuance of common stock for business acquisitions

   $ —         $ 500   

The Company paid $4,148 and $3,974 in cash for interest expense in the six months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014, the Company made cash income tax payments of $147 and received cash refunds of $1,939. For the six months ended June 30, 2013, the Company made cash income tax payments of $133 and received cash refunds of $22.

Note 10 — Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) 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 and six months ended June 31, 2014 and 2013.

 

     Three Months Ended
June 30, 2014
     Three Months Ended
June 30, 2013
 
     Income
(Numerator)
     Shares
(Denominator)
     Per Share
Amount
     Loss
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 

Basic and Diluted EPS

                

Net income (loss) attributable to Metalico, Inc

   $ 299         48,213,051       $ 0.01       $ (2,732     47,937,871       $ (0.06
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

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. As of June 30, 2014, there were 1,419,231 warrants, 1,043,988 options, 230,481 deferred shares and 1,676,358 shares issuable upon conversion of Notes excluded from the computation of diluted net income per share because their effect would have been anti-dilutive. As of June 30, 2013, there were 1,419,231 warrants, 1,625,371 options, 422,919 deferred shares and 4,914,990 shares issuable upon conversion of Notes excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive.

 

     Six Months Ended
June 30, 2014
    Six Months Ended
June 30, 2013
 
     Loss
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
    Loss
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 

Basic and Diluted EPS

              

Net loss attributable to Metalico, Inc

   $ (3,619     48,189,759       $ (0.08   $ (3,911     47,846,120       $ (0.08
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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As of June 30, 2014, there were 1,419,231 warrants, 1,043,988 options, 230,481 deferred shares and 1,676,358 shares issuable upon conversion of Notes excluded in the computation of diluted EPS because their effect would have been anti-dilutive. As of June 30, 2013, there were 1,419,231 warrants, 1,625,371 options, 422,919 deferred shares and 4,914,990 shares issuable upon conversion of Notes excluded in the computation of diluted EPS because their effect would have been anti-dilutive.

Note 11 — Commitments and Contingencies

Environmental Remediation Matters

The Company formerly conducted secondary lead smelting and refining operations in Tennessee. Those operations ceased in 2003. The Company also sold substantially all of the lead smelting assets of its Gulf Coast Recycling (“GCR”) subsidiary, in Tampa, Florida in 2006.

As of June 30, 2014 and December 31, 2013, estimated remaining environmental monitoring costs reported as a component of accrued expenses were $824 and $870, respectively. No further remediation is anticipated. Of the $824 accrued as of June 30, 2014, $63 is reported as a current liability and the remaining $761 is estimated to be paid as follows: $70 from 2015 through 2017, $75 from 2018 through 2019 and $616 thereafter. These costs primarily include the post-closure monitoring and maintenance of the landfills at the former lead facilities in College Grove, Tennessee and Tampa, Florida. While changing environmental regulations might alter the accrued costs, management does not currently anticipate a material adverse effect on estimated accrued costs. The Company and its subsidiaries are at this time in material compliance with all of their obligations under all pending consent orders in College Grove, Tennessee and the greater Tampa area.

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.

The Company does not believe compliance with environmental regulations will have a material impact on earnings or its competitive position.

Employee Matters

As of June 30, 2014, approximately 8% of the Company’s workforce was covered by collective bargaining agreements at two of the Company’s operating facilities. Forty-five employees located at the Company’s facility in Granite City, Illinois were represented by the United Steelworkers of America and twenty employees located at the scrap processing facility in Akron, Ohio were represented by the Chicago and Midwest Regional Joint Board. On May 23, 2014, the members of the United Steelworkers ratified a new 3 year contract that expires on March 15, 2017. On June 26, 2014, the members of the Joint Board ratified a new 3 year contract that expires on June 25, 2017.

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 Company’s financial position, results of operations, or cash flows.

Note 12 — Segment Reporting

The Company has defined two reportable segments: Scrap Metal Recycling and Lead Fabricating. 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

 

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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 for the three and six months ended June 30, 2014 and 2013 for these segments:

 

     Scrap Metal
Recycling
    Lead
Fabricating
     Corporate
and Other
    Consolidated  
     For the three months ended June 30, 2014  

Revenues from external customers

   $ 125,865      $ 16,446       $ —        $ 142,311   

Operating income (loss)

     2,195        657         (130     2,722   
     For the three months ended June 30, 2013  

Revenues from external customers

   $ 110,206      $ 19,691       $ —        $ 129,897   

Operating (loss) income

     (3,299     1,246         94        (1,959

 

     Scrap Metal
Recycling
    Lead
Fabricating
     Corporate
and Other
    Consolidated  
     As of and for the six months ended June 30, 2014  

Revenues from external customers

   $ 244,405      $ 33,094       $ —        $ 277,499   

Operating (loss) income

     (788     1,526         (15     723   

Total assets

     245,511        42,859         10,685        299,055   
     As of and for the six months ended June 30, 2013  

Revenues from external customers

   $ 230,516      $ 37,076       $ —        $ 267,592   

Operating (loss) income

     (3,986     2,579         59        (1,348

Total assets

     290,115        42,155         10,930        343,200   

Note 13 — Income Taxes

The Company files income tax returns in the federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to federal or state income tax examinations by tax authorities for years before 2009. The Company’s 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 Company’s effective income tax rate for the three months ended June 30, 2014 and 2013 was 27% and 34%, respectively. The Company’s effective income tax rate for the six months ended June 30, 2014 and 2013 was 0% and 33%, respectively. On March 31, 2014, the State of New York enacted significant changes to its Corporate Franchise Tax provisions for taxable years beginning on or after January 1, 2015. As part of the New York tax law reform, companies meeting the definition of a ‘qualified New York manufacturer’ will effectively have a 0% tax rate for corporate income tax. Prior to enactment, the Company had maintained deferred state tax assets consisting primarily of tax credits and loss carryforwards in New York which now have no future economic benefit. As a result, $1,495 in net deferred tax assets were charged to income tax expense during the six months ended June 30, 2014. The Company’s effective rate may also differ from the blended expected statutory income tax rate of 35% due to permanent differences between income for tax purposes and income for book purposes. These permanent differences include stock-based compensation and certain other non-deductible expenses.

Note 14 — 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, 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 value of notes payable and long-term debt reported in the accompanying condensed consolidated balance sheets approximates fair value as substantially all of this debt bears interest based on prevailing market rates currently available.

Put Warrants: The carrying amounts are equal to fair value based upon the Black-Scholes method calculation.

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.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:

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).

Following is a description of valuation methodologies used for liabilities recorded at fair value:

Put Warrants: Due to the near term expiration of the outstanding warrants on July 17, 2014 and the amount by which the exercise price of the warrants exceeds the current market price of the Company’s common stock, the fair value of the Put Warrant liability at June 30, 2014 and December 31, 2013 is $0. An increase or decrease in the market price of the Company’s common stock has a corresponding effect on the fair value of this liability.

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

June 30,
2014
     Three Months
Ended

June 30,
2013
 
     Put Warrants      Put Warrants  

Beginning balance

   $ —         $ —     

Total unrealized (gains) losses included in earnings

     —           —     
  

 

 

    

 

 

 

Ending balance

   $ —         $ —     
  

 

 

    

 

 

 

The amount of gain for the period included in earnings attributable to the change in unrealized losses relating to liabilities still held at the reporting date

   $ —         $ —     
  

 

 

    

 

 

 

 

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     Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)
 
     Six Months
Ended
June 30,
2014
     Six Months
Ended

June 30,
2013
 
     Put Warrants      Put Warrants  

Beginning balance

   $ —         $ 3   

Total unrealized gains included in earnings

     —           (3
  

 

 

    

 

 

 

Ending balance

   $ —         $ —     
  

 

 

    

 

 

 

The amount of (gain) loss for the period included in earnings attributable to the change in unrealized losses relating to liabilities still held at the reporting date

   $ —         $ (3
  

 

 

    

 

 

 

 

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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, 2013 (“Annual Report”), as the same may be amended from time to time.

Item 2. Management’s 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2013 Annual Report. Amounts reported in the following discussions are not reported in thousands unless otherwise specified.

General

We operate in two distinct business segments: (a) scrap metal recycling (“Scrap Metal Recycling”), and (b) lead metal product fabricating (“Lead Fabricating”). Our operating facilities as of June 30, 2014 included thirty-one scrap metal recycling facilities located in Buffalo, Rochester, Niagara Falls, Lackawanna, Olean, Syracuse and Jamestown, New York; Akron, Youngstown and Warren, Ohio: Elizabeth, New Jersey; Buda, Texas; Gulfport, Mississippi; Pittsburgh, Brownsville, Sharon, Conway, West Chester, Quarryville, Warren and Bradford, Pennsylvania; and Colliers, West Virginia; an aluminum de-ox plant co-located with our scrap yard 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.

Overview of Quarterly Results

The following items represent a summary of financial information for the three months ended June 30, 2014 compared with the three months ended June 30, 2013:

 

    Sales increased to $142.3 million, compared to $129.9 million.

 

    Operating income increased to $2.7 million, compared to an operating loss of $2.0 million.

 

    Net income of $299,000, compared to a net loss of $2.7 million.

 

    Net income of $0.01 per diluted share, compared to a net loss of $0.06 per diluted share.

The following items represent a summary of financial information for the six months ended June 30, 2014 compared with the six months ended June 30, 2013:

 

    Sales increased to $277.5 million, compared to $267.6 million.

 

    Operating income increased to $723,000, compared to operating loss of $1.3 million.

 

    Net loss of $3.6 million, compared to a net loss of $3.9 million.

 

    Net loss of $0.08 per diluted share, compared to a net loss of $0.08 per diluted share.

Market Conditions and Outlook

The scrap recycling industry is highly cyclical and commodity metal prices can be volatile and fluctuate widely. Such volatility can be due to numerous factors beyond our control, including but not limited to general domestic and global economic conditions, including metal market conditions, competition, the financial condition of our major suppliers and consumers and international demand for domestically produced scrap.

 

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Although we seek to turn over our inventory of raw or processed scrap metals as rapidly as markets dictate, we are exposed to commodity price risk during the period that we have title to products that are held in inventory for processing and/or resale. Our estimates of future earnings could prove to be unreliable because of the unpredictability and potential magnitude of commodity price swings and the related effect on scrap volume purchases and shipments.

The volatile nature of metal commodity prices makes it difficult for us to predict future revenue trends as shifting international and domestic demand can significantly impact the prices of our products, supply and demand for our products and affect anticipated future results. However, looking ahead we expect continued moderate economic improvement in the manufacturing and industrial sectors.

Export demand for ferrous scrap, particularly off the east coast of the U.S. to Turkey has modestly recovered from first quarter levels. Higher export prices have drawn ferrous scrap tonnage out of U.S. domestic markets and provided pricing stability. US domestic steel production remains strong with a capacity utilization rate hovering around 76%. Little change is expected in the coming months to both scrap demand and pricing. Scrap availability has improved modestly with the onset of improved weather; however, significant competition for scrap supply is expected to continue in the months ahead.

Pricing for non-ferrous metals have firmed into the second quarter as expectations of global growth rates have increased. Auto manufacturers have introduced plans to increase the use of aluminum in vehicle production and we expect selling prices for aluminum to remain firm due to the strong demand from the automotive sector. Increases in economic growth forecasts have also supported copper pricing. After a sharp decline in copper prices in early March 2014 to a four year low to around $2.92 per pound, spot copper prices have risen back above $3.20 per pound into July 2014.

We expect the financial performance of our Lead Fabricating segment to reflect seasonal weakness in the latter half of the year. Selling volumes of lead shot may increase with an improvement in cartridge component availability. Favorable product mix that includes higher margin value added products and custom projects will help to counter traditional seasonal weakness in the months ahead.

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.

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 as goods are shipped, which generally is when title transfers and the risks and rewards of ownership have passed to customers, based on free on board (“FOB”) terms. 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 of amounts due from customers from product sales. The allowance for uncollectible accounts receivable totaled $544,000 at June 30, 2014 and $524,000 at December 31, 2013. 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.

 

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While we believe our allowance for uncollectible accounts is adequate, changes in economic conditions or 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. 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.

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.

We assess qualitative factors to determine whether it is more likely than not that the fair value of any of our reporting units is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. 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 unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess.

Management believes a significant factor behind the Company’s weak first quarter operating results were temporary resulting from unusually severe weather conditions producing lower than anticipated selling volumes due to reduced scrap production and disruptions in inbound and outbound material flows due to transportation delays. In the three months ended June 30, 2014, better weather, improvements in transportation as well as increased scrap material flows from improving economic activity resulted in higher scrap metal volumes processed and sold. However, through the six months ended June 30, 2014, the actual year-to-date operating results of our Bradford, PA reporting unit differed significantly enough from forecast to determine that impairment to the carrying value of its goodwill was possible and we performed an interim goodwill impairment test for our Bradford, PA Scrap Metal Recycling reporting unit at June 30, 2014. Based on management’s assessment of future operating results for our Bradford, PA reporting unit, we have determined the fair value of this reporting unit, calculated using discounted cash flow analyses as more fully described below, still exceeded its carrying value as of June 30, 2014 and did not result in an impairment charge.

At June 30, 2014, four of our reporting units have recorded goodwill. A list of these reporting units and the amount of goodwill remaining in each as of June 30, 2014, is as follows ($ in thousands):

 

Reporting Unit

   Goodwill
Recorded
 

Lead Fabricating

   $ 5,369   

New York State Scrap Recycling

     10,966   

Bradford, PA Scrap Recycling

     3,943   

New Jersey PGM Recycling

     2,165   
  

 

 

 

Total

   $ 22,443   
  

 

 

 

In determining the carrying value of each reporting unit, where appropriate, management allocates net deferred 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 impairment charges, if any, made to other long-lived assets of a reporting unit.

 

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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. We use a discounted cash flow (“DCF”) model of a five-year forecast with terminal values to estimate the current fair value of our reporting units when testing for impairment. The terminal value captures the value of a reporting unit beyond the projection period in a DCF analysis representing growth in perpetuity, and is the present value of all subsequent cash flows.

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 rates, and working capital changes. Forecasts of operating and selling, general and administrative expenses are generally based on historical relationships of previous years. We use an enterprise value approach to determine the carrying and fair values of our reporting units. 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 June 30, 2014 interim analysis, we reduced the expected cash flow of our Bradford, PA Scrap Metal reporting unit by 17% over a five-year forecast period. Using the build-up method under the Modified Capital Asset Pricing (“CAPM”) model, we arrived at a discount rate of 12.96%. The inputs used in calculating the WACC as of June 30, 2014 include a) an after tax cost of Baa-rated debt based on Moody’s Seasoned Corporate Bond Yields of 4.8%, b) a 19.5% required return on equity and c) a weighting of the prior components equal to 40% for debt and 60% for equity based on an average of capital structure ratios of market participants in our industry. The 19.5% required return on equity is based on the following inputs: (a) a 3.08% risk free return rate of a 20 year U.S. Treasury note as of June 30, 2014, (b) a beta-adjusted equity risk premium of 8.94% based on guideline U.S. public company common stocks, (c) a small company risk premium of 5.99% and (d) a Metalico-specific risk premium of 1.50%. The step 1 impairment analysis resulted in a fair value of $102,000, or 0.9%, in excess of its carrying value and no impairment charges were required.

At December 31, 2013, the Company performed its annual impairment testing. Based on our DCF analysis as of that date, we determined the computed fair value of our reporting units exceeded their respective carrying values and no impairment charges were required. Falling demand from export markets or other factors could reduce scrap selling prices. Tight available scrap supplies competitive buying pressures and their potential for lower profit margins could impact future operating results and lower cash flows. Should these conditions accelerate, goodwill impairment charges to our scrap metal reporting units may be required prior to or upon our 2014 annual year end testing.

Intangible Assets and Other Long-lived Assets

The Company tests finite-lived intangible assets (amortizable) and other long-lived assets, such as property and equipment, for impairment only if circumstances indicate that possible impairment exists. To the extent actual useful lives 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, projected, undiscounted cash flows for supplier and customer lists. Through June 30, 2014, no indicators of impairment were identified and no adjustments were made to the estimated lives of finite-lived assets.

The Company tests indefinite-lived intangibles such as trademarks and trade names for impairment annually by comparing the carrying value of the intangible to its fair value. Fair value of the intangible asset is calculated using the projected discounted cash flows produced from the intangible. 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. Through June 30, 2014, no indicators of impairment were identified and no adjustments were made to the estimated lives of finite-lived assets.

Stock-based Compensation

We recognize expense for equity-based compensation ratably over the requisite service period based on the grant date fair value of the related award. The fair value of deferred stock grants is determined using the average of the high and low trading price for our common stock on the day of grant. For stock option grants, we calculate the fair value of the award on the date of grant using the Black-Scholes method. Determining the fair value of stock options at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility in our stock price, annual forfeiture rates, and exercise behavior. Any assumptions used may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.

 

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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 taxes during the year. Deferred 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 tax assets when it is more likely than not that a tax benefit will not be realized.

RESULTS OF OPERATIONS

The Company is divided into two reportable segments: Scrap Metal Recycling, which includes three general product categories: ferrous, non-ferrous (including the PGM and Minor Metals Recycling operations which had previously been separately reported) and other scrap services; and Lead Fabricating.

The following table sets forth information regarding revenues in each segment

 

     Revenues  
     Three Months Ended
June 30, 2014
     Three Months Ended
June 30, 2013
     Six Months Ended
June 30, 2014
     Six Months Ended
June 30, 2013
 
     ($s, and weights in thousands)  
     Weight      Net
Sales
     %      Weight      Net
Sales
     %      Weight      Net
Sales
     %      Weight      Net
Sales
     %  

Scrap Metal Recycling

                                   

Ferrous metals (tons)

     148.4       $ 57,557         40.4         136.2       $ 50,051         38.5         295.3       $ 116,678         42.0         279.3       $ 103,991         38.9   

Non-ferrous metals (lbs.)

     56,596         67,152         47.2         44,312         59,085         45.5         100,253         125,724         45.3         89,497         124,751         46.6   

Other

     —           1,156         0.8         —           1,070         0.8         —           2,003         0.8         —           1,774         0.6   
     

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 

Total Scrap Metal Recycling

        125,865         88.4            110,206         84.8            244,405         88.1            230,516         86.1   

Lead Fabricating (lbs.)

     9,274         16,446         11.6         11,658         19,691         15.2         19,163         33,094         11.9         22,265         37,076         13.9   
     

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 

Total Revenue

      $ 142,311         100.0          $ 129,897         100.0          $ 277,499         100.0          $ 267,592         100.0   
     

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 

The following table sets forth information regarding our average selling prices for the past six quarters. The fluctuation in pricing is due to many factors including domestic and export demand and our product mix. Average non-ferrous pricing below excludes the affect of PGM and Minor Metals.

 

For the quarter ended:

   Average
Ferrous
Price per ton
     Average
Non-Ferrous
Price per lb.
     Average
Lead
Price per lb.
 

June 30, 2014

   $ 388       $ 0.88       $ 1.77   

March 31, 2014

   $ 402       $ 0.93       $ 1.68   

December 31, 2013

   $ 375       $ 0.88       $ 1.70   

September 30, 2013

   $ 366       $ 0.95       $ 1.74   

June 30, 2013

   $ 368       $ 0.92       $ 1.69   

March 31, 2013

   $ 377       $ 0.98       $ 1.64   

 

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Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Consolidated net sales increased by $12.4 million, or 9.5%, to $142.3 million for the three months ended June 30, 2014 compared to consolidated net sales of $129.9 million for the three months ended June 30, 2013. Acquisitions added $278,000 to consolidated net sales for the three months ended June 30, 2014 and were included in other scrap services. Excluding acquisitions, the Company reported increases in selling volumes amounting to $16.7 million and mixed average metal selling prices resulting in lower sales of $4.6 million.

Operating Income (Loss)

Operating income for the three months ended June 30, 2014 increased by $4.7 million to $2.7 million for three months ended June 30, 2014 compared to an operating loss of $2.0 million for the three months ended June 30, 2013.

Our Scrap Metal Recycling segment reported operating income of $2.2 million for the three months ended June 30, 2014, a $5.5 million increase from an operating loss of $3.3 million for the three months ended June 30, 2013. Our Lead Fabricating segment reported operating income of $657,000 for the three months ended June 30, 2014, a $589,000 decrease from operating income of $1.2 million for the three months ended June 30, 2013. See the Financial Results by Reportable Segment section below for more detailed discussion on factors impacting our results by segment.

Financial and Other Income (Expense)

Interest expense increased by $228,000 to $2.4 million for the three months ended June 30, 2014 compared to $2.1 million for the three months ended June 30, 2013, due primarily to higher average outstanding debt balances.

For the three months ended June 30, 2013, the Company recorded a loss of $49,000 for the Company’s 40% share of loss from its investment in a manufacturer of radiation shielding solutions for the nuclear medicine community. The investment was sold in December of 2013 and has no corresponding amount for the current year period.

Income Taxes

For the three months ended June 30, 2014, the Company recognized income tax expense of $102,000, resulting in an effective tax rate of 27%. For the three months ended June 30, 2013, the Company recognized income tax benefit of $1.4 million, resulting in an effective tax rate of 34%. 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 35% 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 and certain non-deductible expenses.

Financial Results by Reportable Segment

Scrap Metal Recycling

Due to the many different ferrous and non-ferrous commodities that we buy, process and sell as well the various grades of material within those commodities and the mix of material sold through each of our locations, sales and margin totals can vary.

Ferrous Sales

Ferrous sales increased by $7.5 million, or 15.0%, to $57.6 million for the three months ended June 30, 2014, compared to $50.1 million for the three months ended June 30, 2013. The increase in ferrous sales was attributable to higher average selling prices amounting to $3.0 million and higher volumes sold amounting to $4.5 million. The average selling price for ferrous products was $388 per ton for the three months ended June 30, 2014 compared to $368 per ton for the three months ended June 30, 2013.

 

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Non-Ferrous Sales

Non-ferrous sales increased by $8.1 million, or 13.7%, to $67.2 million for the three months ended June 30, 2014, compared to $59.1 million for the three months ended June 30, 2013. The increase in non-ferrous sales was due to higher volumes sold totaling $16.2 million but was offset by lower average selling prices amounting to $8.1 million. The most significant volume increases came from Zorba, a non-ferrous by product of the auto shredding process, and aluminum De-ox. The average selling price for non-ferrous products, excluding the effect of PGM and Minor Metals, was $0.88 per pound for the three months ended June 30, 2014 compared to $0.92 per pound for the three months ended June 30, 2013.

Operating Expenses — Scrap Metal Recycling

Operating expenses increased by $10.8 million, or 10.4%, to $115.0 million for the three months ended June 30, 2014 compared to $104.2 million for the three months ended June 30, 2013. The affect of acquisitions was immaterial for the quarter ended June 30, 2014. The increase in operating expense was primarily due to an increase in the cost of material sold totaling $9.8 million consisting of higher volume of material purchased totaling $16.9 million and offset by lower per unit costs in the current period amounting to $7.1 million. Scrap metal margin percent increased 2.6 basis points from the previous year period. Other operating expenses also increased by $845,000. Changes in the components of other operating expense include an increase in wages and benefits of $526,000 due to increased staff and overtime, increased energy costs of $227,000 due to increased production, particularly natural gas for aluminum De-ox production, and a net increase in other miscellaneous operating expenses totaling $92,000.

Selling, General, and Administrative — Scrap Metal Recycling

Selling, general, and administrative expenses increased $80,000, or 5.0%, to $3.5 million, or 2.8% of Scrap Metal Recycling sales, for the three months ended June 30, 2014, compared to $3.4 million, or 3.1% of Scrap Metal Recycling sales, for the three months ended June 30, 2013. The affect of acquisitions was immaterial for the quarter ended June 30, 2014. The increase was comprised of higher wage and benefit costs of $82,000 due to staff pay increases and higher benefit costs, an increase in advertising and promotional costs of $51,000 to increase scrap material inflows and an increase in other miscellaneous expenses of $31,000. These items were offset by an $84,000 decrease in professional fees due primarily to legal costs related to a customer bankruptcy incurred in the previous year.

Depreciation and Amortization — Scrap Metal Recycling

Depreciation and amortization decreased by $176,000 to $3.8 million, or 2.6% of Scrap Metal Recycling sales, for the three months ended June 30, 2014 compared to $4.0 million, or 2.9% of Scrap Metal Recycling sales for the three months ended June 30, 2013. The reduction reflects lower levels of property and equipment in the three months ended June 30, 2014 offsetting depreciation expense.

Lead Fabricating

Lead Fabricating sales decreased by $3.3 million, or 16.8%, to $16.4 million for the three months ended June 30, 2014 compared to $19.7 million for the three months ended June 30, 2013. The decrease in sales was due to lower volume sold amounting to $4.0 million and was offset by higher average selling prices totaling $773,000. The average selling price of our lead fabricated products was $1.77 per pound for the three months ended June 30, 2014, compared to $1.69 per pound for the three months ended June 30, 2013. Sales volume decreased to 9.3 million pounds for the three months ended June 30, 2014 from 11.7 million pounds for the three months ended June 30, 2013, a decrease of 20.5%. Lead shot sales to our primary consumer base, reloaders, have been constrained due to a shortage in black powder, a key component in cartridges. We expect the black powder shortage to improve in the coming months as new production capacity comes on line.

Operating expenses — Lead Fabricating

Operating expenses decreased by $2.6 million, or 15.4%, to $14.3 million for the three months ended June 30, 2014 compared to $16.9 million for the three months ended June 30, 2013. The decrease in operating expense resulted from a $2.7 million decrease in the cost of lead sold. The lower cost of lead is due nearly all to lower sales volumes as the cost per pound fell slightly, by $0.01 per pound. Lead product margins increased by 3.6 basis points due to product mix. The lower cost of lead sold was offset by an increase in other operating expenses of $42,000. Changes in other operating expenses include an increase in wages and benefits of $34,000 due to an increase in headcount, energy costs of $59,000 due to increases in natural gas prices, repairs and maintenance costs of $46,000 and other miscellaneous expenses of $10,000. These items were offset by $108,000 reduction in production and fabricating supplies due to lower production volume.

 

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Selling, General, and Administrative — Lead Fabricating

Selling, general and administrative expenses in our Lead Fabricating segment decreased by $21,000 to $1.0 million for the three months ended June 30, 2014, compared to $1.0 million for the three months ended June 30, 2013. The changes in component expenses of selling, general and administrative costs include higher travel costs of $22,000 due to an increase in trade show attendance and international travel and other miscellaneous expenses totaling $37,000. These were offset by a $38,000 reduction in professional fees due to a change in actuaries used for the union defined benefit pension plan.

Depreciation and Amortization — Lead Fabricating

Depreciation and amortization expenses in our Lead Fabricating segment decreased by $10,000 to $397,000 for the three months ended June 30, 2014, compared to $407,000 for the three months ended June 30, 2013. We expect depreciation and amortization expense to remain relatively stable in the next year as the Company adheres to a lower maintenance capital expenditure budget.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Consolidated net sales increased by $9.9 million, or 3.7%, to $277.5 million for the six months ended June 30, 2014 compared to consolidated net sales of $267.6 million for the six months ended June 30, 2013. Acquisitions added $580,000 to consolidated net sales for the six months ended June 30, 2014 and were included in other scrap services. Excluding acquisitions, sales increased by $9.3 million. The Company reported increases in selling volumes amounting to $15.4 million which was offset by a decrease in average metal selling prices representing $6.1 million.

Operating Income (Loss)

Operating income for the six months ended June 30, 2014 increased by $2.1 million to $723,000 compared to an operating loss of $1.3 million for the six months ended June 30, 2013.

Our Scrap Metal Recycling segment reported an operating loss of $788,000 for the six months ended June 30, 2014, a $3.2 million improvement from an operating loss of $4.0 million for the six months ended June 30, 2013. Our Lead Fabricating segment reported operating income of $1.5 million for the six months ended June 30, 2014, a $1.0 million decrease from operating income of $2.5 million for the six months ended June 30, 2013. See the Financial Results by Reportable Segment section below for more detailed discussion on factors impacting our results by segment.

Financial and Other Income (Expense)

Interest expense was $4.7 million, or 1.7% of sales, for the six months ended June 30, 2014 compared to $4.4 million, or 1.7% of sales, for the six months ended June 30, 2013. The $244,000 increase in interest expense was due primarily to higher average outstanding debt balances.

For the six months ended June 30, 2013, the Company recorded a loss of $120,000 for the Company’s 40% share of loss from its investment in a manufacturer of radiation shielding solutions for the nuclear medicine community. The investment was sold in December 2013 and has no corresponding amount for the current year period.

Income Taxes

For the six months ended June 30, 2014, the Company recognized income tax expense of $2,000, resulting in an effective tax rate of 0%. For the six months ended June 30, 2013, the Company recognized an income tax benefit of $1.9 million, resulting in an effective tax rate of 33%. 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. On March 31, 2014, the State of New York enacted significant changes to its Corporate Franchise Tax provisions for taxable years beginning on or after January 1, 2015. As part of the New York tax law reform, companies meeting the definition of a ‘qualified New York manufacturer’ will effectively have a 0% tax rate for corporate income tax. Prior to enactment, the Company had maintained deferred state tax assets consisting primarily of tax credits and loss carryforwards in New York which now have no future economic

 

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benefit. As a result, $1,495 in net deferred tax assets were charged to income tax expense for the six months ended June 30, 2014. Our effective rate may also differ from the blended expected statutory income tax rate of 35% due to permanent differences between income for tax purposes and income for book purposes. These permanent differences include stock-based compensation and certain non-deductible expenses.

Scrap Metal Recycling

Ferrous Sales

Ferrous sales increased by $12.7 million, or 12.2%, to $116.7 million for the six months ended June 30, 2014, compared to $104.0 million for the six months ended June 30, 2013. The increase was attributable to higher volume sold of 16,000 tons, or 5.7%, amounting to $5.9 million and higher average selling prices totaling $6.8 million. The average selling price for ferrous products was approximately $395 per ton for the six months ended June 30, 2014 compared to $372 per ton for the six months ended June 30, 2013, an increase of 6.2%.

Non-Ferrous Sales

Non-ferrous sales increased by $973,000, or 0.8%, to $125.7 million for the six months ended June 30, 2014, compared to $124.8 million for the six months ended June 30, 2013. The increase in non-ferrous sales was due to higher sales volumes amounting to $14.6 million but was offset by lower average selling prices totaling $13.6 million. The average selling price for non-ferrous products, excluding the effect of PGM and Minor Metals was $0.90 per pound for the six months ended June 30, 2014 compared to $0.95 per pound for the six months ended June 30, 2013, a decrease of 5.3%.

Operating Expenses — Scrap Metal Recycling

Operating expenses increased by $11.7 million, or 5.4%, to $227.3 million for the six months ended June 30, 2014 compared to $215.6 million for the six months ended June 30, 2013. The affect of acquisitions was immaterial for the six months ended June 30, 2014. The increase in operating expense was primarily due to an increase in the cost of material sold totaling $11.4 million and an increase in other operating expenses totaling $316,000. The increase in the cost of material sold was due primarily to a higher volume of material acquired totaling $16.5 million and was offset by lower per unit costs in the current period amounting to $6.0 million. Increased freight charges of $304,000 and capitalized overhead costs of $591,000 also contributed to the increase. Scrap metal margin percentage increased 0.3 basis points from the previous year period. The $316,000 increase in other operating expense include an increase in wages and benefits of $219,000 due to increased staff and overtime, increased energy costs of $502,000 due to combination of factors including increases in electric utility and natural gas rates, usage due to exceptionally cold weather in the first quarter of 2014, increased production, particularly natural gas for aluminum De-ox production. These items were offset by reductions in rent and occupancy costs of $126,000 due to the dissolution of the Ithaca joint venture in March 2013 and a reduction in property taxes in Buda, Texas; $110,000 reduction in repairs and maintenance costs due to expense incurred in the previous year period for repairs to the De-ox smelter in Syracuse, New York and a net decrease in other miscellaneous operating expenses of $169,000.

Selling, General, and Administrative — Scrap Metal Recycling

Selling, general, and administrative expenses decreased $101,000, or 1.4%, to $7.0 million, or 2.8% of Scrap Metal Recycling sales, for the six months ended June 30, 2014, compared to $7.1 million, or 3.1% of Scrap Metal Recycling sales, for the six months ended June 30, 2013. The affect of acquisitions was immaterial for the six months ended June 30, 2014. The decrease was comprised of lower wage and benefit costs of $61,000 and a $108,000 decrease in professional fees due primarily to legal costs related to a customer bankruptcy incurred in the previous year. These items were offset by a net increase in other miscellaneous expenses of $68,000.

Depreciation and Amortization — Scrap Metal Recycling

Depreciation and amortization decreased by $210,000 to $7.8 million, or 2.7% of Scrap Metal Recycling sales, for the six months ended June 30, 2014 compared to $8.0 million, or 2.8% of Scrap Metal Recycling sales for the six months ended June 30, 2013. The reduction lower levels of property and equipment in the six months ended June 30, 2014 offsetting depreciation expense.

 

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Lead Fabricating

Lead Fabricating sales decreased by $4.0 million, or 10.8%, to $33.1 million for the six months ended June 30, 2014 compared to $37.1 million for the six months ended June 30, 2013. The decrease in sales was due to lower volume sold totaling $5.1 million but was offset by higher average selling prices amounting to $1.1 million. Selling volumes of lead shot have been negatively impacted by lower priced shot imported from Turkey. The average selling price of our fabricated lead products was $1.73 per pound for the six months ended June 30, 2014, compared to $1.67 per pound for the six months ended June 30, 2013. Sales volume decreased to 19.2 million pounds for the six months ended June 30, 2014 from 22.3 million pounds for the six months ended June 30, 2013, a decrease of 13.9%. Lead shot sales to our primary consumer base, reloaders, have been constrained due to a shortage in black powder, a key component in cartridges. We expect the black powder shortage to improve in the coming months as new production capacity comes on line.

Operating expenses — Lead Fabricating

Operating expenses decreased by $3.0 million, or 9.6%, to $28.4 million for the six months ended June 30, 2014 compared to $31.4 million for the six months ended June 30, 2013. The decrease in operating expense resulted from a $3.4 million decrease in the cost of lead sold. The lower cost of lead is primarily due to lower sales volume as the purchase price per pound increased slightly, by $0.02 per pound. Lead product margins increased by 1.2 basis points due to product mix. The lower cost of lead sold was offset by a $354,000 increase in other operating expenses. Changes in other operating expenses include an increase in wages and benefits of $154,000 due to an increase in headcount; energy costs of $128,000 due to increases in natural gas prices and repairs and maintenance costs of $144,000 and other miscellaneous expenses of $33,000. These items were offset by $106,000 reduction in production and fabricating supplies due to lower production volume.

Selling, General, and Administrative — Lead Fabricating

Selling, general and administrative expenses in our Lead Fabricating segment increased by $64,000 to $2.0 million for the six months ended June 30, 2014, compared to $1.9 million for the six months ended June 30, 2013. The changes in component expenses of selling, general and administrative costs include a $47,000 increase in wages and benefits and higher travel costs of $15,000 due to an increase in trade show attendance and international travel and other miscellaneous expenses totaling $40,000. These were offset by a $38,000 reduction in professional fees due to a change in actuaries used for the union defined benefit pension plan.

Depreciation and Amortization — Lead Fabricating

Depreciation and amortization expenses in our Lead Fabricating segment decreased by $29,000 to $794,000 for the six months ended June 30, 2014, compared to $823,000 for the six months ended June 30, 2013. We expect depreciation and amortization expense to remain relatively stable in the next year as the Company adheres to a lower maintenance capital expenditure budget.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

For the six months ended June 30, 2014, we generated $3.0 million of cash from operating activities compared to $12.9 million of operating cash generated for the six months ended June 30, 2013. For the six months ended June 30, 2014, the Company’s net loss of $3.9 million and a $2.5 million change in working capital components were offset by depreciation and amortization expense of $9.4 million. The changes in working capital components include an increase in accounts receivable of $13.9 million due to increased sales. This was offset by a $5.9 million decrease to inventory also due to the increase in sales, a $3.4 million increase to accounts payable, accrued expenses, income taxes payable and other liabilities and a $2.1 million decrease to prepaid expenses and other current assets due primarily to timing. For the six months ended June 30, 2013, depreciation and amortization expense of $9.4 million; other net noncash items of $848,000 and a $6.6 million change in working capital components were offset by the Company’s net loss of $4.0 million. The changes in working capital components include a decrease in accounts receivable of $3.0 million due to collections exceeding sales, a $6.2 million decrease to inventory and a $1.4 million increase to accounts payable, accrued expenses, income taxes payable and other liabilities. These items were offset by a $4.0 million increase to prepaid expenses and other current assets due primarily to timing.

 

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We used $3.6 million in net cash for investing activities for the six months ended June 30, 2014 compared to using net cash of $5.9 million in the six months ended June 30, 2013. For the six months ended June 30, 2014, we purchased $4.1 million in equipment and received $307,000 in proceeds on the disposal of property. For the six months ended June 30, 2013, we purchased $5.2 million in equipment and capital improvements and paid $700,000 to acquire a business.

During the six months ended June 30, 2014, we used $1.6 million of net cash from financing activities compared to $7.2 million of net cash used for the six months ended June 30, 2013. For the six months ended June 30, 2014, we increased borrowings on our revolving credit facility by $3.0 million to finance the increase in accounts receivable and borrowed $614,000 to purchase new equipment. These borrowings proceeds were offset by other debt repayments of $5.1 million and the payment of $144,000 in debt issuance costs. For the six months ended June 30, 2013, total new borrowings were $1.6 million. These borrowings proceeds were offset by other debt repayments of $3.1 million, the payment of $275,000 in debt issuance costs related to credit facility amendment with JPMChase and $5.5 million in net repayments of our revolving credit facility.

Financing and Capitalization

Senior Credit Facilities:

On November 21, 2013, we entered into a Financing Agreement (the “Financing Agreement”) with a syndicate of lenders led by TPG Specialty Lending, Inc. (“TPG”), as agent. The six-year agreement consists of senior secured credit facilities in the aggregate amount of $125.0 million, including a $65.0 million revolving line of credit and two term loan facilities totaling $60.0 million. The revolving line of credit provides for revolving loans that, in the aggregate, are not to exceed the lesser of $65.0 million or a “Borrowing Base” amount based on specified percentages of eligible accounts receivable and inventory and bear interest at the “Base Rate” (a rate determined by reference to the prime rate but in any event not less than 3.00%) plus 2.00% or, at our election, a LIBOR-based rate (the current LIBOR rate but in any event not less than 1.00%) plus 3.00% (an aggregate effective rate of 4.13% at June 30, 2014). The term loans bear interest at the Base Rate plus 7.50% or, at our election, the LIBOR-based rate plus 8.50% (an aggregate effective rate of 9.50% at June 30, 2014). We are subject to certain financial covenants, including maximum leverage, maximum capital expenditures and minimum availability, and are restricted from, among other things, paying cash dividends, repurchasing our common stock over certain stated thresholds, and entering into certain transactions without the prior consent of the lenders. Obligations under the Financing Agreement are secured by substantially all of our assets. The proceeds of the Financing Agreement were used to retire our revolving credit agreement with JPMorgan Chase Bank, N.A., and to repurchase $36.7 million in outstanding Notes. Outstanding balances under the revolving line of credit and term loans were $51.2 million and $33.4 million, respectively as of June 30, 2014. The remaining availability under the revolving portion of the Financing Agreement is used for working capital and for general corporate purposes. At June 30, 2014, availability under the revolving portion of the Financing Agreement was $10.9 million but is subject to the lender’s discretion.

Under the terms of the Notes the Holders were entitled to deliver notices of redemption on or before June 30, 2014, requiring the Company to redeem the Notes, at par, plus any accrued but unpaid interest through the date of redemption. Such notices were held in abeyance following the agreement in principle announced June 30, 2014. At March 31, 2014 and June 30, 2014, we were not in compliance with the Maximum Leverage Ratio covenant under the Financing Agreement. The March 31 noncompliance was waived by the senior lenders but availability under the term portion of the Financing Agreement was made subject to the discretion of the lenders and we are currently unable to redeem the Notes. Our inability to redeem the Notes is a default under the terms of the Notes and our failure to redeem the Notes is a default under the terms of the Financing Agreement. As a result of such defaults, on August 4, 2014, the lenders party to the Financing Agreement delivered a Payment Blockage Notice to the Note holders triggering a 210-day standstill period under the Subordination Agreement dated May 1, 2008 between our senior secured lenders and the holders of our 7% Convertible Notes and their respective successors and assigns. The primary effect of the Payment Blockage Notice is to bar any payments of principal or interest to the Note holders. On August 13, 2014, we were informed the lenders were invoking their right to charge interest at the default rate that is 3.0% per annum in excess of the interest rate otherwise payable under the Financing Agreement. We continue to negotiate with the Note holders and the senior lenders to reach an agreement that will satisfy the holders’ repurchase right, which may include an extension of such right, the issuance of new debt or equity or a combination of both, or a restructuring of the Company’s debt. We have retained Imperial Capital to advise us in our negotiations and to assist in proposed asset sales, also previously announced, intended to generate proceeds to de-leverage the Company. No assurance can be given that we will return to compliance in forthcoming quarters or that the lenders will continue to waive noncompliance. We also continue discussions with the senior lenders to amend the Financing Agreement. No assurance can be given that we will be able to secure additional financing to redeem the Convertible Notes.

On December 12, 2011, we entered into an Equipment Finance Agreement (the “Equipment Finance Agreement”) with First Niagara Leasing, Inc. (“First Niagara”) providing up to $10.4 million. We used $6.6 million to repay an additional term loan provided under our previous credit agreement. The First Niagara loan is secured by our Buffalo, New York shredder and related equipment. Upon entering the Financing Agreement with TPG, we amended the Equipment Finance Agreement with First Niagara and adopted the covenants prescribed by the Financing Agreement. We also modified the maturity and repayment terms. The loan modification increased the required monthly payments from $110 to $141 and the maturity was shortened to coincide with the maturity of the Financing Agreement in November 2019. The interest rate under the First Niagara loan remains unchanged at 4.77% per annum. We notified First Niagara of our noncompliance with a certain covenant under the Financing Agreement as of June 30, 2014, which noncompliance has not yet been waived pending the outcome of global negotiations with our senior secured lenders. As of June 30, 2014 and December 31, 2013, the outstanding balance under the loan was $8,063 and $8,708, respectively. Due to cross defaults, all amounts owed under the loan together with other amounts owed under certain equipment loans due First Niagara have been classified as current liabilities.

 

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Senior Unsecured Convertible Notes Payable:

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 June 30, 2014 and the 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 its Note at par and (ii) an optional redemption right exercisable by the Company beginning on June 30, 2011, and ending on June 30, 2014, 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. From July 1, 2014, 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 June 30, 2014, the outstanding balance on the Notes was $23.2 million (net of $287,000 in unamortized discount related to the original fair value warrants issued with the Notes). An optional repurchase right exercised by the Note holders on June 30, 2014 required the Company to redeem the Notes at par. On June 30, 2014, we announced an agreement in principle to restructure the principal balance of its outstanding Convertible Notes that would defer the Note holders’ put right to December 31, 2015 using funds made available by its senior lenders pursuant to an amendment under the Financing Agreement and other consideration. However, proposed terms of the amendment to the Financing Agreement as subsequently drafted conflicted with the terms agreed upon with the Note holders and neither an amendment to the Financing Agreement nor an agreement with the Note holders has been completed.

Under the proposed agreement with the Note holders, we are scheduled to deliver a cash payment of $7.0 million and a number of shares of Metalico common stock having a value of $5.0 million upon closing of the contemplated transaction. The Company would retire the remainder of the existing Notes by issuing new notes in the aggregate principle amount of the $11.5 million balance. The new notes would be paid from proceeds of planned divestiture of non-core assets. Two thirds or $7.7 million of the new note balance could be prepaid without penalty if retired by November 30, 2014 and February 28, 2015, respectively, and thereafter would incur an early payment stock premium if paid from proceeds of asset sales and cash premium if paid from sources other than asset sale proceeds. The remaining one third, or $3.8 million, could not be called for three years, would be subject to early payment costs determined by sources of payment, and would be convertible into shares of Metalico common stock at any time after issuance at a slight premium to a volume weighted average price of the Company’s common stock determined as of July 1. The other two thirds would become convertible according to a similar formula as of November 30, 2014 and February 28, 2015, respectively. The new notes would mature on July 1, 2024 but may be put by the holders at par on December 31, 2015. The proposed agreement is subject to securing available funding. The Company can provide no assurance that it will be able to secure such funding or that the Note holders will not withdraw their support for the proposed agreement.

As described above, we were not in compliance with a certain covenant of the Financing Agreement and the lenders party to the Financing Agreement have restricted our ability to use funds under the term portion of the Financing Agreement to redeem the Notes. Failure to redeem the Convertible Notes on June 30, 2014 is a default under the Financing Agreement. No assurance can be given that we will return to compliance in forthcoming quarters or that the lenders will continue to waive noncompliance or that we will be able to draw funds under the term portion of the Financing Agreement in order to redeem the Notes. We intend to work with the Note holders to reach an agreement that will satisfy the holders’ optional repurchase right which may include an extension of their repurchase right, the issuance of new debt or equity or a combination of both. No assurance can be provided that we will be able to reach an agreement or that the terms of a new agreement will be as favorable as the current terms of the Notes or the terms of the agreement in principle of June 30, 2014. We are also considering financing alternatives to provide a replacement of the term portion our senior credit facility or an entirely new credit facility for the funding of the tentative agreement with the Convertible Note holders. These alternatives may include accessing the capital markets with a new debt or equity offering or a restructuring of our debt. No assurance can be given that we will be able to secure the necessary financing.

Future Capital Requirements

As of June 30, 2014, we had $4.8 million in cash. Availability under the revolver portion of the Financing Agreement of $10.9 million but is subject to the lender’s discretion due to our covenant default. As of June 30, 2014, our current liabilities totaled $146.0 million due to the current classification of a significant portion of our long term debt resulting from the breach of covenants under our loan documents. We expect to fund our current working capital needs, interest payments and capital

 

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expenditures with cash on hand and cash generated from operations, supplemented by borrowings available under the Financing 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. We are currently in discussions with the lenders party to the Financing Agreement about future covenant requirements.

Under the terms of the Notes the Holders were entitled to deliver notices of redemption on or before June 30, 2014, requiring the Company to redeem the Notes, at par, plus any accrued but unpaid interest through the date of redemption. Such notices were held in abeyance following the agreement in principle announced June 30, 2014. At March 31, 2014 and June 30, 2014, we were not in compliance with the Maximum Leverage Ratio covenant under the Financing Agreement. The March 31 noncompliance was waived by the senior lenders but availability under the term portion of the Financing Agreement was made subject to the discretion of the lenders and we are currently unable to redeem the Notes. Our inability to redeem the Notes is a default under the terms of the Notes and our failure to redeem the Notes is a default under the terms of the Financing Agreement. As a result of such defaults, on August 4, 2014, the lenders party to the Financing Agreement delivered a Payment Blockage Notice to the Note holders triggering a 210-day standstill period under the Subordination Agreement dated May 1, 2008 between our senior secured lenders and the holders of our 7% Convertible Notes and their respective successors and assigns. The primary effect of the Payment Blockage Notice is to bar any payments of principal or interest to the Note holders. On August 13, 2014, we were informed the lenders were invoking their right to charge interest at the default rate that is 3.0% per annum in excess of the interest rate otherwise payable under the Financing Agreement. We continue to negotiate with the Note holders and the senior lenders to reach an agreement that will satisfy the holders’ repurchase right, which may include an extension of such right, the issuance of new debt or equity or a combination of both, or a restructuring of the Company’s debt. We have retained Imperial Capital to advise us in our negotiations and to assist in proposed asset sales, also previously announced, intended to generate proceeds to de-leverage the Company. No assurance can be given that we will return to compliance in forthcoming quarters or that the lenders will continue to waive noncompliance. We also continue discussions with the senior lenders to amend the Financing Agreement. No assurance can be given that we will be able to secure additional financing to redeem the Convertible Notes.

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.

Contingencies

We are involved in certain 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 Company’s 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.

 

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Interest rate risk

We are exposed to interest rate risk on our floating rate borrowings. As of June 30, 2014, $84.6 million of our outstanding debt consisted of variable rate borrowings pursuant to the Financing Agreement entered into on November 21, 2013. Borrowings under the Financing Agreement 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 at June 30, 2014 were to equal the average borrowings under our Financing Agreement during a fiscal year, a hypothetical 1% increase or decrease in interest rates would increase or decrease interest expense on our variable borrowings by approximately $187,000 per year due to interest rate floors on our variable rate debt with a corresponding change in cash flows. We have no open interest rate protection agreements as of June 30, 2014.

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 for 2013 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 on the carrying value of our inventories. We have no open commodity price protection agreements as of June 30, 2014.

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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2014 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in internal controls over financial reporting.

There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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. 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 2013.

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, 2013 filed with the Securities and Exchange Commission on March 17, 2014, except for the following.

A portion of our debt is subject to an exercised repurchase right, which requires us to redeem such debt for which we do not currently have sufficient liquidity.

On November 21, 2013, we entered into a new six-year senior credit facility with revolving and term loan components (the “Financing Agreement”) to replace our former revolving credit facility, to repurchase a significant portion of our outstanding Convertible Notes and to provide liquidity to retire any remaining Convertible Notes. The outstanding Convertible Notes are subject to an optional repurchase right which was exercised by the holders on June 30, 2014 requiring us to redeem the Convertible Notes at par. At June 30, 2014, the outstanding balance of the Notes was $23.5 million.

At June 30, 2014, we were not in compliance with the maximum leverage ratio covenant prescribed by the Financing Agreement and we are in default as the lenders parties to the Financing Agreement have not waived noncompliance. Failure to redeem the Convertible Notes on June 30, 2014 is also a default under the Financing Agreement. No assurance can be given that the Company will return to compliance in forthcoming quarters or that the lenders will waive noncompliance. Availability under the Term portion of the Financing Agreement will be subject to the discretion of the lenders and the Company is uncertain whether it will be able to draw funds under the term portion of the Financing Agreement in order to redeem the Notes but we are in discussions with the lenders about future covenant requirements. We intend to work with Note holders to reach an agreement that will satisfy the holders’ optional repurchase right which may include an extension of their repurchase right, the issuance of new debt or equity or a combination of both. No assurance can be provided that the Company will be able to reach an agreement or that the terms of a new agreement will be as favorable as the current terms of the Notes. The Company is also considering financing alternatives to provide for the repurchase of the Convertible Notes prior to or at the time the redemption right may be exercised. These alternatives may include accessing the capital markets with a new debt or equity offering. No assurance can be given that the Company will be able to secure additional financing to redeem the Convertible Notes.

Item 3. Default Upon Senior Securities

On or before June 30, 2014, the Company received redemption notices from all holders of its 7% Convertible Notes representing the aggregate principal of $23.5 million. The redemption notices require the Company to redeem the Notes, at par, plus any accrued but unpaid interest through the date of redemption. Availability provided under the Financing Agreement to redeem the Notes has been restricted by the senior lenders due the Company’s noncompliance with the Maximum Leverage Ratio covenant as of March 31, 2014 as prescribed by the Financing Agreement. The Company’s inability to redeem the Notes is a default under the terms of the Notes and its failure to redeem the Notes is a default under the terms of the Financing Agreement. As a result of such defaults, the senior lenders delivered a Payment Blockage Notice to the Note holders on August 4, 2014, triggering a 210-day standstill period under the Subordination Agreement dated May 1, 2008 between the Company’s senior secured lenders and the holders of its 7% Convertible Notes and their respective successors and assigns. Together with accrued interest, the balance owed to the Note holders as of the date of this filing is $24.1 million.

The Company is negotiating with the Note holders and the senior lenders to reach an agreement that will satisfy the holders’ repurchase right which may include an extension of such right, the issuance of new debt or equity or a combination of both. No assurance can be provided that the Company will be able to reach an agreement with the Note holders or that the terms of a new agreement will be as favorable as the current terms of the Notes.

 

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Item 6. Exhibits

The following exhibits are filed herewith:

 

  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
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

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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: August 13, 2014     By:           /s/ CARLOS E. AGÜERO
              Carlos E. Agüero
              Chairman, President and Chief Executive Officer
Date: August 13, 2014     By:           /s/ KEVIN WHALEN
              Kevin Whalen
              Senior Vice President and Chief Financial Officer
        (Principal Financial Officer and Principal Accounting
        Officer)

 

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