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EX-31.1 - EX-31.1 - Real Industry, Inc.rely-ex311_6.htm
EX-32.2 - EX-32.2 - Real Industry, Inc.rely-ex322_9.htm
EX-32.1 - EX-32.1 - Real Industry, Inc.rely-ex321_8.htm
EX-31.2 - EX-31.2 - Real Industry, Inc.rely-ex312_7.htm
EX-4.3 - EX-4.3 - Real Industry, Inc.rely-ex43_19.htm
EX-4.2 - EX-4.2 - Real Industry, Inc.rely-ex42_18.htm
EX-4.4 - EX-4.4 - Real Industry, Inc.rely-ex44_20.htm
EX-4.1 - EX-4.1 - Real Industry, Inc.rely-ex41_17.htm
EX-4.5 - EX-4.5 - Real Industry, Inc.rely-ex45_21.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ

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

For the Quarterly Period Ended June 30, 2015

or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission File Number 001-08007

 

REAL INDUSTRY, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

46-3783818

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification Number)

 

 

15301 Ventura Boulevard, Suite 400

Sherman Oaks, California 91403

(805) 435-1255

(Address of Principal Executive Offices)(Zip Code)

(Registrant’s Telephone Number, including Area Code)

 

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.    þ  Yes     ¨  No

Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    þ  Yes    ¨  No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

 

Large Accelerated Filer

¨

 

Accelerated Filer

þ

 

 

 

 

 

Non-Accelerated Filer

¨

(Do not check if a smaller reporting company)

Smaller Reporting Company

¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    ¨  Yes    þ  No

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    þ  Yes    ¨  No

As of August 1, 2015, there were 28,856,955 shares of the Registrant’s common stock outstanding.

 

 

 


REAL INDUSTRY, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Period Ended June 30, 2015

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

1

Unaudited Condensed Consolidated Balance Sheets

1

Unaudited Condensed Consolidated Statements of Operations

2

Unaudited Condensed Consolidated Statements of Comprehensive Loss

3

Unaudited Condensed Consolidated Statements of Cash Flows

4

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3. Quantitative and Qualitative Disclosures About Market Risk

43

Item 4. Controls and Procedures

45

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

47

Item 1A. Risk Factors

47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3. Defaults Upon Senior Securities

47

Item 4. Mine Safety Disclosures

47

Item 5. Other Information

47

Item 6. Exhibits

48

 

 

 

 


PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

REAL INDUSTRY, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

June 30,

 

 

December 31,

 

(In millions, except share and per share amounts)

 

2015

 

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

38.5

 

 

$

62.0

 

Trade accounts receivable, net

 

106.0

 

 

 

 

Financing receivable

 

52.2

 

 

 

 

Inventories

 

123.2

 

 

 

 

Deferred income taxes

 

 

 

 

5.1

 

Other current assets

 

13.1

 

 

 

1.0

 

Current assets of discontinued operations

 

0.1

 

 

 

18.0

 

Total current assets

 

333.1

 

 

 

86.1

 

Debt and equity offering costs

 

 

 

 

14.5

 

Property, plant and equipment, net

 

324.9

 

 

 

0.1

 

Intangible assets, net

 

20.8

 

 

 

0.1

 

Goodwill

 

84.5

 

 

 

 

Deferred income taxes

 

3.0

 

 

 

 

Other noncurrent assets

 

6.9

 

 

 

1.1

 

Noncurrent assets of discontinued operations

 

 

 

 

20.0

 

TOTAL ASSETS

$

773.2

 

 

$

121.9

 

LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Trade payables

$

128.0

 

 

$

 

Accrued liabilities

 

51.3

 

 

 

7.1

 

Long-term debt due within one year

 

1.5

 

 

 

 

Deferred income taxes

 

0.4

 

 

 

 

Current liabilities of discontinued operations

 

0.3

 

 

 

8.1

 

Total current liabilities

 

181.5

 

 

 

15.2

 

Accrued pension benefits

 

45.7

 

 

 

 

Environmental liabilities

 

18.4

 

 

 

 

Long-term debt, net

 

339.8

 

 

 

 

Common stock warrant liability

 

11.1

 

 

 

5.6

 

Deferred income taxes

 

6.2

 

 

 

 

Other noncurrent liabilities

 

8.9

 

 

 

0.3

 

Noncurrent liabilities of discontinued operations

 

0.7

 

 

 

15.2

 

TOTAL LIABILITIES

 

612.3

 

 

 

36.3

 

Redeemable Preferred Stock, Series B, $1,000 liquidation preference per share;

   100,000 and zero shares designated; 25,598 and zero shares issued and

   outstanding as of June 30, 2015 and December 31, 2014, respectively

 

20.5

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, Series A Junior Participating; $0.001 par value; 665,000 shares

    designated; none issued or outstanding

 

 

 

 

 

Common stock, $0.001 par value; 66,500,000 shares authorized;

   28,367,055 and 17,099,882 shares issued and outstanding as of

   June 30, 2015 and December 31, 2014, respectively

 

 

 

 

 

Additional paid-in capital

 

542.1

 

 

 

482.0

 

Accumulated deficit

 

(401.7

)

 

 

(396.3

)

Accumulated other comprehensive loss

 

(0.9

)

 

 

 

Total stockholders’ equity Real Industry, Inc.

 

139.5

 

 

 

85.7

 

Noncontrolling interest

 

0.9

 

 

 

(0.1

)

TOTAL STOCKHOLDERS’ EQUITY

 

140.4

 

 

 

85.6

 

TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND

   STOCKHOLDERS’ EQUITY

$

773.2

 

 

$

121.9

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

1


REAL INDUSTRY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In millions, except per share amounts)

 

2015

 

 

 

2014

 

 

 

2015

 

 

 

2014

 

Revenues

$

368.7

 

 

$

 

 

$

506.5

 

 

$

0.1

 

Cost of sales

 

347.4

 

 

 

 

 

 

480.3

 

 

 

0.5

 

Gross profit (loss)

 

21.3

 

 

 

 

 

 

26.2

 

 

 

(0.4

)

Selling, general and administrative expenses

 

15.7

 

 

 

2.3

 

 

 

23.3

 

 

 

4.8

 

Losses on derivative financial instruments

 

2.1

 

 

 

 

 

 

2.0

 

 

 

 

Amortization of intangibles

 

0.3

 

 

 

0.1

 

 

 

0.4

 

 

 

0.1

 

Other operating expense, net

 

0.4

 

 

 

 

 

 

0.9

 

 

 

 

Operating profit (loss)

 

2.8

 

 

 

(2.4

)

 

 

(0.4

)

 

 

(5.3

)

Nonoperating expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest expense, net

 

9.3

 

 

 

 

 

 

17.4

 

 

 

 

Change in fair value of common stock

   warrant liability

 

6.3

 

 

 

(0.2

)

 

 

5.6

 

 

 

(1.0

)

  Acquisition-related costs and expenses

 

0.4

 

 

 

 

 

 

14.8

 

 

 

 

  Goodwill impairment

 

 

 

 

0.4

 

 

 

 

 

 

0.4

 

  Other, net

 

0.3

 

 

 

 

 

 

0.5

 

 

 

 

  Total nonoperating expense (income)

 

16.3

 

 

 

0.2

 

 

 

38.3

 

 

 

(0.6

)

Loss from continuing operations

   before income taxes

 

(13.5

)

 

 

(2.6

)

 

 

(38.7

)

 

 

(4.7

)

Income tax expense (benefit)

 

0.2

 

 

 

(0.8

)

 

 

(7.2

)

 

 

(1.2

)

Loss from continuing operations

 

(13.7

)

 

 

(1.8

)

 

 

(31.5

)

 

 

(3.5

)

Earnings from discontinued operations,

   net of income taxes

 

2.9

 

 

 

1.3

 

 

 

27.2

 

 

 

3.1

 

Net loss

 

(10.8

)

 

 

(0.5

)

 

 

(4.3

)

 

 

(0.4

)

Earnings attributable to noncontrolling interest

 

0.1

 

 

 

 

 

 

0.2

 

 

 

 

Net loss attributable to Real Industry, Inc.

$

(10.9

)

 

$

(0.5

)

 

$

(4.5

)

 

$

(0.4

)

EARNINGS (LOSS) PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(0.53

)

 

$

(0.14

)

 

$

(1.32

)

 

$

(0.27

)

Discontinued operations

 

0.11

 

 

 

0.10

 

 

 

1.10

 

 

 

0.24

 

Basic and diluted loss per share

$

(0.42

)

 

$

(0.04

)

 

$

(0.22

)

 

$

(0.03

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2


REAL INDUSTRY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In millions)

 

2015

 

 

 

2014

 

 

 

2015

 

 

 

2014

 

Net loss

$

(10.8

)

 

$

(0.5

)

 

$

(4.3

)

 

$

(0.4

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current period currency translation adjustments

 

(1.2

)

 

 

 

 

 

(0.9

)

 

 

 

Comprehensive loss

 

(12.0

)

 

 

(0.5

)

 

 

(5.2

)

 

 

(0.4

)

Comprehensive income attributable to

   noncontrolling interest

 

0.1

 

 

 

 

 

 

0.2

 

 

 

 

Comprehensive loss attributable to

   Real Industry, Inc.

$

(12.1

)

 

$

(0.5

)

 

$

(5.4

)

 

$

(0.4

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


REAL INDUSTRY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Six Months Ended June 30,

 

(In millions)

 

2015

 

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(4.3

)

 

$

(0.4

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Earnings from discontinued operations, net of income taxes

 

(27.2

)

 

 

(3.1

)

Depreciation and amortization

 

13.9

 

 

 

0.1

 

Deferred income tax benefit

 

(7.2

)

 

 

 

Change in fair value of common stock warrant liability

 

5.6

 

 

 

(1.0

)

Share-based compensation expense

 

0.6

 

 

 

0.8

 

Amortization of debt issuance costs

 

2.4

 

 

 

 

Unrealized losses on derivative financial instruments

 

1.3

 

 

 

 

Amortization of the fair value adjustment of acquired inventory

 

7.2

 

 

 

 

Goodwill impairment

 

 

 

 

0.4

 

Inventory impairment

 

 

 

 

0.4

 

Other

 

0.6

 

 

 

 

Changes in operating assets and liabilities, net of the effects of acquisition

 

62.6

 

 

 

2.0

 

Net cash used in operating activities of discontinued operations

 

(0.6

)

 

 

(0.6

)

Net cash provided by (used in) operating activities

 

54.9

 

 

 

(1.4

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisition of business, net of cash

 

(522.3

)

 

 

 

Proceeds from sale of NABCO, net of $3.9 million held in escrow

 

74.1

 

 

 

 

Purchases of property and equipment

 

(10.0

)

 

 

(0.1

)

Other

 

(0.2

)

 

 

 

Net cash used in investing activities of discontinued operations

 

 

 

 

(0.1

)

Net cash used in investing activities

 

(458.4

)

 

 

(0.2

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Payment of NABCO outstanding debt

 

(14.3

)

 

 

 

Proceeds from Asset-Based Facility, net of issuance costs

 

92.4

 

 

 

 

Payments on capital leases and the Asset-Based Facility

 

(45.3

)

 

 

 

Proceeds from issuance of Senior Secured Note, net of debt issuance costs

 

287.1

 

 

 

 

Proceeds from exercise of common stock options

 

1.1

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

58.2

 

 

 

 

Proceeds from exercise of Warrants

 

0.1

 

 

 

 

Other

 

 

 

 

(0.1

)

Net cash used in financing activities of discontinued operations

 

(0.4

)

 

 

(1.4

)

Net cash provided by (used in) financing activities

 

378.9

 

 

 

(1.5

)

Effect of exchange rate differences on cash and cash equivalents

 

0.2

 

 

 

 

Decrease in cash and cash equivalents

 

(24.4

)

 

 

(3.1

)

Cash and cash equivalents, beginning of period

 

63.0

 

 

 

48.0

 

Cash and cash equivalents, end of period

$

38.6

 

 

$

44.9

 

Cash and cash equivalents, end of period - continuing operations

 

38.5

 

 

$

44.5

 

Cash and cash equivalents, end of period - discontinued operations

 

0.1

 

 

 

0.4

 

Cash and cash equivalents, end of period

$

38.6

 

 

$

44.9

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4


REAL INDUSTRY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1—BUSINESS AND OPERATIONS

Real Industry, Inc. (“Real Industry,” the “Company,” “we,” “us” or “our”), formerly known as Signature Group Holding, Inc., is a holding company that owns all of the outstanding interests of its two primary operating companies, Real Alloy Intermediate Holding, LLC (“Real Alloy Parent”) and SGGH, LLC (“SGGH”). Management expects to grow the Company through acquisitions, as well as through organic efforts within existing operations described below. Our current business strategy seeks to leverage our public company status, considerable federal and California net operating tax loss carryforwards (“NOLs”) and the experience of our executive management team to acquire operating businesses at prices and on terms that are aligned with our growth plans.

During the first quarter of 2015, the Company underwent a considerable transformation. On January 9, 2015, we completed the sale of North American Breaker Co., LLC (“NABCO”), previously the primary business within SGGH. On February 27, 2015, we acquired the global recycling and specification alloys business (the “Real Alloy Business”) of Aleris Corporation (“Aleris”) (the “Real Alloy Acquisition”). A portion of the proceeds of the sale of NABCO were used to fund the Real Alloy Acquisition.

The Real Alloy Business, operating under Real Alloy Parent through its wholly owned subsidiary Real Alloy Holding, Inc. (“Real Alloy”), is a global leader in third-party aluminum recycling, which includes the processing of scrap aluminum and by-products and the manufacturing of wrought, cast and specification or foundry alloys. Real Alloy offers a broad range of products and services to wrought alloy processors, automotive original equipment manufacturers, and foundries and casters. Real Alloy’s customers include companies that participate in or sell to the automotive, consumer packaging, steel and durable goods, aerospace, and building and construction industries. Real Alloy processes scrap aluminum and by-products and delivers recycled metal in liquid or solid form according to customer specifications. Real Alloy’s facilities are capable of processing industrial (new) scrap, post-consumer (old/obsolete) scrap, and various aluminum by-products, giving it a great degree of flexibility in reclaiming high-quality recycled aluminum. Real Alloy currently operates twenty-four facilities strategically located throughout North America and Europe and, as of June 30, 2015, had approximately 1,700 employees.

The closing of the Real Alloy Acquisition was the culmination of a series of equity and debt financing transactions that began in the fourth quarter of 2014 to raise the capital required to fund the Real Alloy Acquisition and pay transaction costs as summarized below (collectively, the “Financings”):

·

In October 2014, Real Industry issued 0.3 million shares of common stock at $10.00 per share to accredited investors in a private placement exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), providing gross proceeds of $3.0 million, which were used to fund a portion of the Real Alloy Acquisition;

·

In December 2014, Real Industry issued approximately 4.4 million shares of common stock at $6.50 per share in an underwritten public offering providing gross proceeds of $28.5 million, which were used to fund a portion of the Real Alloy Acquisition;

·

In January 2015, Real Alloy, as successor to SGH Escrow Corporation (“SGH Escrow”), issued $305.0 million in senior secured notes due January 15, 2019 (the “Senior Secured Notes”) at a price of 97.206% of the principal amount, providing gross proceeds of $296.5 million, which were used to fund a portion of the Real Alloy Acquisition;

·

In February 2015, Real Industry issued approximately 9.8 million shares of common stock to existing common stockholders in a stapled rights offering (the “Rights Offering”), providing gross proceeds of $55.0 million, of which $50.0 million was used to fund a portion of the Real Alloy Acquisition;

·

In February 2015, the U.S., Canadian and German operating subsidiaries of Real Alloy entered into new credit facilities, including a $110.0 million asset-based lending facility (the “Asset-Based Facility”) secured by assets of certain of Real Alloy’s North American subsidiaries, and a €50.0 million factoring facility (the “Factoring Facility”) for the purchase of eligible accounts receivable of Real Alloy’s German operations. The initial draws on the Asset-Based Facility and Factoring Facility provided gross proceeds of $59.5 million and €25.0 million ($28.0 million), respectively, of which $73.5 million was used to fund a portion of the Real Alloy Acquisition and approximately $14.0 million was drawn for operating purposes; and

·

In February 2015, Real Industry issued 25,000 shares, at a $1,000 liquidation preference per share, of a new series of non-participating preferred stock (the “Redeemable Preferred Stock”) to Aleris, as a portion of the purchase price for the Real Alloy Acquisition.

Additionally, in April 2015, Real Industry issued approximately 0.8 million shares of common stock to existing holders of warrants to purchase common stock as the final component of the Rights Offering launched in January 2015, which provided gross proceeds of $4.8 million. In June 2015, Real Industry commenced a controlled equity offering program, pursuant to which it issued approximately 0.2

5


million shares and 0.5 million shares of common stock in June and July, respectively, providing gross proceeds of $2.7 million and $5.5 million, respectively. See Note 16—Subsequent Events for additional information regarding the July equity issuance.

On April 21, 2015, our common stock began trading on the Nasdaq Stock Exchange (“NASDAQ”) under the symbol “RELY” as part of the NASDAQ Global Select Market. On May 28, 2015, our stockholders approved an amendment to our charter to change our name to Real Industry, Inc. In June 2015, Real Industry became a member of the Russell Global®, Russell 3000® and Russell Microcap® indexes.

As a result of the transformative nature of the acquisition, divestiture and financing activities described above, our operations in 2015 will be substantially different from that reported in the previous periods covered by this Quarterly Report on Form 10-Q (the “Report”).

The assets and liabilities and results of operations of NABCO are included in discontinued operations for all periods presented as a result of its sale in the first quarter of 2015. Discontinued operations also includes certain assets and liabilities related to the former businesses of SGGH, then known as Fremont General Corporation (“Fremont”) and its primary operating subsidiary, Fremont Investment & Loan (“FIL”).

See Note 13—Segment Information for additional information about our operating segments.

 

 

NOTE 2—FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements comprise the accounts of Real Industry, its wholly owned and majority owned subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. The Company evaluates subsequent events through the date of filing with the Securities and Exchange Commission (“SEC”). Operating results for the three and six months ended June 30, 2015 are not indicative of the results that may be expected for the year ending December 31, 2015, as a result of the gain on sale associated with the NABCO Sale and only four months of operating performance of Real Alloy in the six months ended June 30, 2015. These interim period unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2014, which are included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 16, 2015 (the “Annual Report”).

During the second quarter, the Company identified an error in the calculation of currency translation adjustments as reported in the March 31, 2015 unaudited condensed consolidated financial statements, which resulted in the overstatement of accumulated other comprehensive income and comprehensive income attributable to Real Industry of $5.2 million as of March 31, 2015, and for the three months then ended. The error was corrected during the second quarter in order to properly report the balance of accumulated other comprehensive income and comprehensive loss attributable to Real Industry as of June 30, 2015, and for the six months then ended. Management has concluded that the error reflected in the March 31, 2015 unaudited condensed consolidated financial statements was not material.

Certain amounts in the accompanying unaudited condensed consolidated financial statements have been reclassified to conform to the current presentation, including the classification of NABCO as a discontinued operation.

The Company’s significant accounting policies are disclosed in the consolidated financial statements included in Part IV, Item 15 of the Annual Report, which, as a result of the Real Alloy Acquisition, now include the following new and modified significant accounting policies.

Revenue recognition and shipping and handling costs

Revenues are recognized when title transfers and the risk of loss passes to the customer. This typically occurs when the goods reach their destination, depending on individual shipping terms. For customer-owned toll material, revenue is recognized upon the performance of the tolling service for the customers. For material that is consigned, revenue is not recognized until the product is used by the customer. Shipping and handling costs are included within cost of sales in the unaudited condensed consolidated statements of operations included elsewhere in this Report.

Accounts receivable allowances and credit risk

Credit is extended to our customers based on an evaluation of their financial condition; generally, collateral is not required. We maintain an allowance against our accounts receivable for the estimated probable losses on uncollectible accounts and sales returns and allowances. The allowance is based upon our historical loss experience, current economic conditions within the industries we serve as

6


well as our determination of the specific risk related to certain customers. Accounts receivable are charged off against the reserve when, in management’s estimation, further collection efforts would not result in a reasonable likelihood of receipt, or later as proscribed by statutory regulations.

Financing Receivable

A subsidiary of Real Alloy has an agreement to sell certain of its accounts receivable in Europe. Agreements that result in true sales of the transferred receivables, as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 860, Transfers and Servicing, which occur when receivables are transferred to a purchaser, without recourse to the Company, are reported as financing receivable in the unaudited condensed consolidated balance sheets until proceeds from such sales are received from the counterparty. Cash proceeds received from such sales are included in operating cash flows. The Company has no obligation to the purchaser of such receivables after sale.  

Inventories

Inventories are stated at the lower of cost or market. Cost is determined primarily on the average cost or specific identification method and includes material, labor and overhead related to the manufacturing process. The cost of inventories acquired in business combinations is recorded at fair value.

Property, plant and equipment

Property, plant and equipment is stated at cost, net of asset impairments and depreciation. The cost of property, plant and equipment acquired in business combinations represents the fair value of the acquired assets at the time of acquisition.

The estimated fair value of asset retirement obligations incurred after the Real Alloy Acquisition are capitalized to the related long-lived asset at the time the obligations are incurred and are depreciated over the estimated remaining useful life of the related asset.

Major renewals and improvements that extend an asset’s useful life are capitalized to property, plant and equipment. Major repair and maintenance projects are expensed over periods not exceeding twenty-four months, while normal maintenance and repairs are expensed as incurred. Depreciation is primarily computed using the straight-line method over the estimated useful lives of the related assets, as follows:

 

 

 

 

Estimated Useful Lives

Building and improvements

 

 

5 - 33 years

Production equipment and machinery

 

 

2 - 25 years

Office furniture, equipment and other

 

 

3 - 10 years

 

The construction costs of landfills used to store by-products of the recycling process are depreciated as space in the landfills is used based on the unit of production method. Additionally, used space in the landfill is determined periodically either by aerial photography or engineering estimates.

Goodwill

Goodwill is tested for impairment as of October 1 of each year and may be tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. We evaluate goodwill based upon our reporting units, which are defined as operating segments or, in certain situations, one level below the operating segment. As the purchase price allocation for the Real Alloy Acquisition is not yet finalized, the allocation of goodwill to our reporting units has not yet been finalized.

The impairment test is a two-step process, which requires us to make judgments in determining what assumptions to use in the calculations. The first step of the process consists of estimating the fair value of each reporting unit based on discounted cash flow models and guideline Company information, using revenue and profit forecasts, and comparing those estimated fair values with the carrying values, which include allocated goodwill. These projections include assumptions about prices, margins and other operating costs. Other key assumptions included in the fair value of our reporting units include estimated cash flow periods, terminal values based on our anticipated growth rate and the discount rate used, which is based on our current cost of capital, adjusted for the risks associated with our operations. If the determined fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill, which is compared to the corresponding carrying value.

7


Deferred financing costs

The costs related to the issuance of debt are capitalized and classified as a reduction of the associated debt and amortized over the terms of the related debt agreements as interest expense using the effective interest method.

Derivatives and hedging

Real Alloy is engaged in activities that expose it to various market risks, including changes in the prices of aluminum alloys, scrap aluminum, copper, zinc and natural gas, as well as changes in currency exchange rates. Certain of these financial exposures are managed as an integral part of its risk management program, which seeks to reduce the potentially adverse effects that the volatility of the markets may have on operating results. Real Alloy may enter into forward contracts or swaps to manage the exposure to market risk. The fair value of these instruments is reflected in the unaudited condensed consolidated balance sheets and the impact of these instruments is reflected in the unaudited condensed consolidated statements of operations. Real Alloy does not hold or issue derivative financial instruments for trading purposes.

The estimated fair values of derivative financial instruments are recognized as assets or liabilities as of the balance sheet date. Fair values for metal and natural gas derivative financial instruments are determined based on the differences between contractual and forward rates of identical hedge positions as of the balance sheet date. In developing these fair values, Real Alloy includes an estimate of the risk associated with nonperformance by either its counterparty or itself.

Real Alloy does not account for its derivative financial instruments as hedges. The changes in fair value of derivative financial instruments and the associated gains and losses realized upon settlement are recorded in losses on derivative financial instruments in the unaudited condensed consolidated statements of operations. All realized gains and losses are included within net cash provided by operating activities in the unaudited condensed consolidated statements of cash flows. Real Alloy is exposed to losses in the event of nonperformance by its derivative counterparties. The counterparties’ creditworthiness is monitored on an ongoing basis, and credit levels are reviewed to ensure appropriate concentrations of credit outstanding to any particular counterparty. Although nonperformance by counterparties is possible, we do not currently anticipate nonperformance by any of these parties.      

Currency translation

Certain of Real Alloy’s international subsidiaries use the local currency as their functional currency. Real Alloy translates all of the amounts included in the unaudited condensed consolidated statements of operations from its international subsidiaries into U.S. dollars at average monthly exchange rates, which management believes is representative of the actual exchange rates on the dates of the transactions. Additionally, Real Alloy maintains intercompany, long-term loans between its U.S. and foreign jurisdiction entities, which were established in the subsidiaries’ functional currency and due to their long-term nature, any currency related effects are recorded as a component of accumulated other comprehensive loss.  Adjustments resulting from the translation of the assets and liabilities into U.S. dollars at the balance sheet date exchange rates are reflected as a separate component of the Company’s stockholders’ equity. Currency translation adjustments accumulate in the Company’s stockholders’ equity until the disposition or liquidation of the international entities. Currency transactional gains and losses associated with receivables and payables denominated in currencies other than the functional currency are included within other, net in the unaudited condensed consolidated statements of operations. The translation of accounts receivables and payables denominated in currencies other than the functional currencies resulted in transactional losses of zero and $0.1 million for the three and six months ended June 30, 2015, respectively.

Environmental and asset retirement obligations

Environmental obligations that are not legal or contractual asset retirement obligations and that relate to existing conditions caused by past operations with no benefit to future operations are expensed, while expenditures that extend the life, increase the capacity or improve the safety of an asset, or mitigate or prevent future environmental contamination are capitalized in property, plant and equipment. Obligations are recorded when their occurrence is probable and the associated costs can be reasonably estimated. While accruals are based on management’s current best estimate of the future costs of remedial action, these liabilities can change substantially due to factors such as the nature and extent of contamination, changes in the required remedial actions and technological advancements. Existing environmental liabilities are not discounted to their present values, as the amount and timing of the expenditures are not fixed or reliably determinable.

Asset retirement obligations represent the present value of estimated future obligations associated with the retirement of tangible long-lived assets. Our asset retirement obligations relate primarily to capping our three landfills, as well as costs related to the future removal of asbestos and removal of underground storage tanks. The estimated fair value of such legal obligations is recognized in the period in which the obligations are incurred, and capitalized as part of the carrying amount of the associated long-lived asset. These estimated fair values are based upon the present value of future cash flows expected to be required to satisfy the obligations. Determining the estimated fair value of asset retirement obligations requires judgment, including estimates of the credit adjusted interest rate and

8


estimates of future cash flows. Estimates of future cash flows are obtained primarily from engineering consulting firms. The present value of the obligations is accreted over time while the capitalized cost are depreciated over the estimated remaining useful life of the related asset.

Pension benefits

Pension benefit costs are accrued based on annual analyses performed by actuaries. These analyses are based on assumptions including a discount rate and the expected rate of return on plan assets. Both the discount rate and expected rate of return on plan assets require estimates and projections by management and can fluctuate from period to period. Real Alloy’s objective in selecting a discount rate is to select the best estimate of the rate at which the benefit obligations could be effectively settled. In making this estimate, projected cash flows are developed and matched with a yield curve based on an appropriate universe of high-quality corporate bonds. Assumptions for long-term rates of return on plan assets are based upon historical returns and future expectations for returns. See Note 3—Business Combinations for more information about the assumptions used to determine the pension benefit obligation as of the date of the Real Alloy Acquisition.

Management believes these assumptions are appropriate; however, the actuarial assumptions used to determine pension benefits may differ from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. Management does not believe differences in actual experience or reasonable changes in assumptions will materially affect the Company’s financial position or results of operations.

Recent accounting pronouncements

In July 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330) (“ASU 2015-11”), which provides that an entity measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 will be effective for the Company on January 1, 2017, will be applied prospectively, and early adoption is permitted as of the beginning of an interim or annual period. We do not believe that the application of ASU 2015-11 will have a material impact on the Company’s financial statements or disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which was the result of a joint project by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The issuance of a comprehensive and converged standard on revenue recognition is expected to enable financial statement users to better understand and consistently analyze an entity’s revenue across industries, transactions and geographies. The standard will require additional disclosures to help financial statement users better understand the nature, amount, timing, and potential uncertainty of the revenue that is recognized. ASU 2014-09 will be effective for the Company on January 1, 2018, and will require either retrospective application to each prior reporting period presented or retrospective application with the cumulative effect of initially applying the standard recognized at the date of adoption. We are currently evaluating the impact the application of ASU 2014-09 will have on the Company’s financial statements and disclosures.

 

 

NOTE 3—BUSINESS COMBINATIONS

On February 27, 2015, Real Industry, through its indirect wholly owned subsidiary, Real Alloy, acquired 100% of the voting interests of the Real Alloy Business from Aleris, under a purchase agreement (the “Real Alloy Purchase Agreement”). Upon closing, we paid $496.2 million to Aleris, and an additional $5.0 million of cash and the Redeemable Preferred Stock were placed into escrow to satisfy the indemnification obligations of Aleris under the Real Alloy Purchase Agreement, in which Aleris has agreed to indemnify Real Alloy and its affiliates for certain claims and losses. During the second quarter, we paid an additional $31.3 million of the purchase price representing the initial working capital adjustment under the Real Alloy Purchase Agreement. The final working capital adjustment, estimated to be approximately $2.4 million as of June 30, 2015, is recorded within accrued liabilities in the unaudited condensed consolidated balance sheet and was reduced by $2.2 million during the second quarter.

In addition, Real Alloy and Aleris have entered into a transition services agreement, under which Aleris will provide certain customary post-closing transition services, including information technology services, treasury services, accounts payable, cash management and payroll, credit/collection services, environmental services and human resource services, to Real Alloy, for periods ranging from three to twenty-four months following the acquisition date.

We incurred acquisition and financing-related costs and expenses associated with the Real Alloy Acquisition totaling approximately $14.4 million and $0.4 million in the first and second quarters of 2015, respectively, which are classified as nonoperating expenses in the

9


unaudited condensed consolidated statements of operations. Acquisition and financing-related costs and expenses associated with the Real Alloy Acquisition recognized in 2014 totaled $3.4 million.

The acquisition was accounted for as a business combination, with the purchase price allocated based on the estimated fair values of the assets acquired and liabilities assumed. The purchase price allocation remains preliminary as management continues to evaluate the assumptions and methodology used in the valuation of acquired inventories, property, plant and equipment, intangible assets, accrued pension liabilities, environmental liabilities and asset retirement obligations, and the resultant deferred income tax adjustments.

 

(In millions)

 

 

 

Purchase consideration:

 

 

 

Consideration paid at closing

$

501.2

 

Redeemable Preferred Stock issued

 

19.6

 

Initial working capital adjustment

 

31.3

 

Estimated final working capital adjustment

 

2.4

 

Total purchase consideration

$

554.5

 

 

 

 

 

Purchase price allocation:

 

 

 

Assets:

 

 

 

Cash

$

10.2

 

Trade accounts receivable

 

150.1

 

Inventories

 

173.9

 

Property, plant and equipment

 

326.4

 

Deferred income taxes

 

5.9

 

Other

 

4.0

 

Identifiable intangible assets

 

21.0

 

Total assets

 

691.5

 

Liabilities:

 

 

 

Trade payables

 

112.4

 

Accrued liabilities

 

26.7

 

Accrued pension liabilities

 

46.0

 

Environmental liabilities

 

18.4

 

Other

 

13.6

 

Deferred income taxes

 

4.4

 

Total liabilities

 

221.5

 

Estimated fair value of net assets acquired

$

470.0

 

 

 

 

 

Total purchase consideration

$

554.5

 

Estimated fair value of net assets acquired

 

470.0

 

Goodwill

$

84.5

 

 

The estimated fair value of trade accounts receivable is based on the undiscounted receivables management expects to receive from the $150.4 million of total trade accounts receivable at the acquisition date. Due to the short-term nature of the receivables, the undiscounted receivables expected to be collected are estimated to approximate fair value.

Inventories include the estimated fair value of finished goods, work in process, raw material and supplies. The estimated fair value of finished goods was based on analyses of future selling prices and the profit associated with the manufacturing effort. The estimated fair value of work in process considered costs to complete to finished goods and was based on analyses of future selling prices and the profit associated with the manufacturing effort. The estimated fair value of raw materials and supplies was based on replacement cost. The $173.9 million of estimated fair value of inventories includes $10.7 million in fair value adjustments, of which $3.5 million and $7.2 million was recognized as noncash charges in cost of sales during the three and six months ended June 30, 2015, respectively. Based on additional analyses performed in the second quarter, management increased its estimate of the fair value of inventories by $6.5 million compared to the preliminary estimate as of March 31, 2015, primarily related to the estimate of fair value of supplies. The incremental cost of sales related to the measurement period adjustment was not material to the prior period.      

10


Property, plant and equipment includes land, site improvements, buildings and building improvements, and machinery, equipment, furniture and fixtures. The estimated fair value of property, plant and equipment was based on appraisals and replacement cost analyses. The fair value of property, plant and equipment acquired was estimated as follows:

 

(In millions)

 

 

Estimated Fair Value

 

Land

 

 

$

63.6

 

Buildings

 

 

 

57.0

 

Machinery, equipment, furniture and fixtures

 

 

 

193.8

 

Construction work in progress

 

 

 

12.0

 

Property, plant and equipment

 

 

$

326.4

 

 

Identifiable intangible assets represent the estimated fair value of customer relationships and have an estimated useful life of 20 years. The valuation of the intangible assets acquired was based on management’s estimates, available information, and reasonable and supportable assumptions. The fair value of these assets was estimated using the income approach. An excess earnings approach was used to estimate the fair value of the customer relationships. Significant assumptions used include forecasted revenues, customer retention rates and profit margins, a discount rate of 13.5% based on our overall cost of equity, adjusted for perceived business risks related to these customer relationships, and an estimated economic useful life of 20 years. As a result of refinement of the methodologies and assumptions used in the valuation, management has decreased the estimated fair value of the identifiable intangible assets by $0.6 million during the second quarter. The adjustment related to an indefinite-lived asset, therefore there was no impact to amortization expense related to the measurement period adjustment.

The fair value of trade payables was estimated to approximate carrying value due to the short-term nature of the liabilities. Based on additional analyses performed in the second quarter, management reduced the estimated fair value of trade payables by $10.7 million, primarily due to the exclusion of trade payables due certain Aleris affiliates that were not assumed in the Real Alloy Acquisition, but had been erroneously reported in the preliminary purchase price allocation as of March 31, 2015.

The fair value of accrued liabilities was estimated to approximate carrying value due to the short-term nature of the liabilities.

Accrued pension liabilities include defined benefit pension plans for the German employees. The plans are based on final pay and service, but some senior officers are entitled to receive enhanced pension benefits. Benefit payments are financed, in part, by contributions to a relief fund which establishes a life insurance contract to secure future pension payments. Based on statutory pension contributions calculations proscribed under German law, the plans are substantially underfunded. The unfunded accrued pension costs are covered under a pension insurance association under German law should Real Alloy, or its subsidiaries, be unable to fulfill their pension obligations.  

The following assumptions were utilized to measure the accrued pension liabilities:

 

Discount rate

 

1.7

%

Salary increase

 

3.0

%

Pension increase

 

1.8

%

Turnover

 

2.0

%

 

Environmental liabilities represent estimated reserves for environmental remediation costs, which have been recognized based on the guidance in FASB ASC 450, Contingencies, and FASB ASC 410, Asset Retirement and Environmental Obligations. Real Alloy is subject to various environmental laws and regulations governing, among other things, the handling, disposal and remediation of hazardous substances and wastes and employee safety. Given the changing nature of environmental legal requirements, Real Alloy may be required to take environmental control measures at some of its facilities to meet future requirements.

The estimated fair value of the Redeemable Preferred Stock was determined based on a discounted cash flow using estimates of market rates and redemption probabilities. For more information on the Redeemable Preferred Stock, refer to Note 5—Debt, Other Financing Arrangements and Redeemable Preferred Stock and Note 12—Derivative and Other Financial Instruments and Fair Value Measurements.

Deferred income taxes represent the differences between the book and tax bases of the assets acquired. As a result of an election under section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the “Tax Code”), the tax bases of U.S. assets acquired were adjusted to the acquisition date fair values. Deferred income taxes represent book and tax differences of non-U.S. assets acquired.

11


Other liabilities assumed include asset retirement obligations, which represent obligations associated with the retirement of tangible long-lived assets. Assumed asset retirement obligations relate primarily to the requirement of capping three landfills, as well as costs related to the future removal of asbestos and costs to remove underground storage tanks. The estimated fair value is based upon the present value of the future cash flows expected to be required to satisfy the obligation using discount rates ranging from 6.7% to 13.2%. Determining the fair value of asset retirement obligations requires judgment, including estimates of the credit adjusted interest rate and estimates of future cash flows. The present value of the obligations is accreted over time.

Based on the estimated fair value of assets acquired and liabilities assumed, goodwill of $84.5 million is attributable to Real Alloy’s strong management team, assembled workforce and its defensible market share. As the purchase price allocation for the Real Alloy Acquisition has not yet been finalized, the allocation of goodwill to our reporting units has not yet been finalized. The following table reflects the activity associated with goodwill during the six months ended June 30, 2015:

 

(In millions)

 

 

 

Balance at beginning of period

$

 

Preliminary purchase price allocation for the Real Alloy Acquisition reported as of March 31, 2015

 

102.3

 

Adjustments to preliminary purchase price allocation for the Real Alloy Acquisition recorded in the

  quarter ended June 30, 2015

 

(17.8

)

  Balance at end of period

$

84.5

 

 

The operating results of Real Alloy are included in the Company’s unaudited condensed consolidated financial statements from the acquisition date. For the period from the acquisition date to June 30, 2015, Real Alloy’s total revenues and loss from continuing operations before income taxes were $506.4 million and $20.8 million, respectively. The following selected unaudited pro forma results of operations of the Company for the three and six months ended June 30, 2015 and 2014, give effect to this business combination as though the transaction occurred on January 1, 2014:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In millions)

 

2015

 

 

 

2014

 

 

 

2015

 

 

 

2014

 

Total revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

$

368.7

 

 

$

 

 

$

506.5

 

 

$

0.1

 

Pro forma

 

368.7

 

 

 

394.5

 

 

 

743.3

 

 

 

773.0

 

Loss from continuing operations before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

$

(13.5

)

 

$

(2.6

)

 

$

(38.7

)

 

$

(4.7

)

Pro forma

 

(12.9

)

 

 

(8.2

)

 

 

(27.4

)

 

 

(35.3

)

 

 

NOTE 4—INVENTORIES

The following table presents the components of inventories as of June 30, 2015 and December 31, 2014:

 

 

June 30,

 

 

December 31,

 

(In millions)

2015

 

 

2014

 

Finished goods

$

33.6

 

 

$

 

Raw materials and work in process

 

77.0

 

 

 

 

Supplies

 

12.6

 

 

 

 

Total inventories

$

123.2

 

 

$

 

 

 

12


NOTE 5—DEBT, OTHER FINANCING ARRANGEMENTS AND REDEEMABLE PREFERRED STOCK

The following table presents the Company’s long-term debt as of June 30, 2015 and December 31, 2014:

 

 

June 30,

 

 

December 31,

 

(In millions)

2015

 

 

2014

 

Senior Secured Notes:

 

 

 

 

 

 

 

Principal amount outstanding

$

305.0

 

 

$

 

Unamortized original issue discount and issuance costs

 

(15.8

)

 

 

 

Senior Secured Notes, net

 

289.2

 

 

 

 

Asset-Based Facility:

 

 

 

 

 

 

 

Principal amount outstanding

 

51.0

 

 

 

 

Unamortized debt issuance costs

 

(2.8

)

 

 

 

Asset-Based Facility, net

 

48.2

 

 

 

 

Capital leases

 

3.9

 

 

 

 

Current portion of long-term debt

 

(1.5

)

 

 

 

 

Total long-term debt, net

$

339.8

 

 

$

 

Long-term debt

Senior Secured Notes

On January 8, 2015, Real Alloy, as successor to SGH Escrow, completed a private placement of $305.0 million aggregate principal of 10% Senior Secured Notes to qualified institutional purchasers in accordance with Rule 144A and Regulation S under the Securities Act at a price of 97.206% of the principal amount thereof. The Senior Secured Notes were issued pursuant to an indenture, dated as of January 8, 2015 (the “Indenture”) between Real Alloy, as successor to SGH Escrow, Real Alloy Parent, and Wilmington Trust, National Association (“Wilmington”), as trustee and notes collateral trustee.

Under the terms of the Pledge and Security Agreement, dated as of February 27, 2015, by and between each of Real Alloy, Real Alloy Parent and the other parties signatory thereto and Wilmington as notes collateral trustee, the Senior Secured Notes and related guarantees are secured by first priority security interests in the fixed assets of Real Alloy, Real Alloy Parent and the Subsidiary Guarantors (as defined in the Pledge and Security Agreement) and by second priority security interests in certain other collateral of Real Alloy, Real Alloy Parent and the Subsidiary Guarantors.

The Indenture, among other things, limits Real Alloy and its restricted subsidiaries’ (as defined in the Indenture) ability to: incur additional indebtedness or issue certain preferred stock; pay dividends or make other distributions on capital stock or prepay subordinated indebtedness; purchase or redeem any equity interests; make investments; create liens; sell assets; enter into agreements that restrict dividends or other payments by restricted subsidiaries; consolidate, merge or transfer all or substantially all of its assets; engage in transactions with the Real Alloy’s affiliates; or enter into any sale and leaseback transactions. These covenants are subject to important exceptions and qualifications. As of June 30, 2015, Real Alloy was in compliance with all such covenants.

The Senior Secured Notes mature on January 15, 2019 and interest is payable on January 15 and July 15 of each year, commencing on July 15, 2015, through the date of maturity.  For the three and six months ended June 30, 2015, interest expense associated with the Senior Secured Notes was $8.7 million and $16.7 million, respectively, including $1.1 million and $2.1 million of noncash expense related to the amortization of the original issue discount and debt issuance costs.

Asset-Based Facility

On February 27, 2015, a wholly owned domestic subsidiary of Real Alloy and an affiliate of Real Alloy entered into the $110.0 million Asset-Based Facility. The Asset-Based Facility is secured by a first priority lien on the borrowers and, to the extent no adverse tax impact would be incurred, Real Alloy’s foreign subsidiaries’ accounts receivable, inventory, instruments representing receivables, guarantees and other credit enhancements related to receivables, and bank accounts into which receivables are deposited, among other related assets. The Asset-Based Facility is also secured by a second priority lien on the assets that secure the Senior Secured Notes.  The borrowing base under the Asset-Based Facility is determined based on eligible accounts receivable and eligible inventory. U.S. dollar denominated loans under the U.S. Sub-facility will bear interest, at the borrowers’ option, either (i) at 1, 2, 3 or 6-month interest periods at LIBOR, or (ii) the Base Rate (as defined below), in each case plus a margin based on the amount of the excess availability under the Asset-Based Facility. The “Base Rate” is equal to the greater of (a) the U.S. prime rate, (b) the U.S. Federal Funds Rate plus 50 basis points, and (c) the sum of LIBOR plus a margin based on the amount of the excess availability under the Asset-Based Facility. Canadian dollar denominated loans under the Canadian Sub-facility will bear interest, at the borrowers’ option, either (i) at 1, 2, 3 or 6-month

13


interest periods at an average Canadian interbank rate, or (ii) floating at the greater of the Canadian prime rate or the average 30-day Canadian interbank rate plus 1.35%, in each case plus a margin based on the amount of the excess availability under the Asset-Based Facility. Events of default will trigger an increase of 2.0% in all interest rates. Interest is payable monthly in arrears, except for LIBOR loans and Canadian interbank rate loans, for which interest is payable at the end of each relevant interest period. On the initial funding date, the borrowers paid a 1.0% funding fee. For the three and six months ended June 30, 2015, interest expense associated with the Asset-Based Facility was $0.5 million and $0.6 million, respectively, including $0.2 million and $0.2 million related to the amortization of debt issuance costs, respectively. As of June 30, 2015, the borrowers were in compliance with all applicable covenants under the Asset-Based Facility.

Capital Leases

As part of the Real Alloy Acquisition, existing capital leases of the Real Alloy Business, primarily mobile and office equipment, were assumed. In the normal course of operations, Real Alloy enters into capital leases to finance office and other equipment for its operations. As of June 30, 2015, $1.5 million of the $3.9 million in capital lease obligations are due within the next twelve months.

Factoring Facility

On February 27, 2015, an indirect wholly owned German subsidiary of Real Alloy, entered into the €50 million Factoring Facility, which provides for purchases of eligible receivables by a financial institution, which are subject to certain limitations and eligibility requirements to be determined in the reasonable discretion of such financial institution based on the relevant account debtor creditworthiness and reliability.  The arrangement is a true-sale, where receivables are sold on a nonrecourse basis in the event of payment default by the relevant customer.  Advances on eligible factored receivables are 90% of their face value.  The Factoring Facility has a termination date of January 15, 2019.  The interest rate applicable to the advances against the factored receivables under the Factoring Facility is the three-month EURIBOR (daily rate) fixed on the last business day of a month for the following month, plus 1.65%. Factoring and administrative fees also apply. Including the initial amount of receivables factored upon entering into the Factoring Facility, the German subsidiary sold $114.7 million and $219.3 million of receivables during the three and six months ended June 30, 2015, respectively. Administrative expenses associated with the Factoring Facility were $0.2 million and $0.4 million during the three and six months ended June 30, 2015 related to this arrangement, and are classified as selling, general and administrative expenses in the unaudited condensed consolidated statements of operations. Interest expense on advances against the factored receivables was approximately $0.1 million for the six months ended June 30, 2015.

Redeemable Preferred Stock

The Redeemable Preferred Stock was issued to Aleris on February 27, 2015 as a portion of the purchase price for the Real Alloy Acquisition.  The Redeemable Preferred Stock pays quarterly dividends at a rate of 7% for the first 18 months after the date of issuance, 8% for the next 12 months, and 9% thereafter. Dividends may be paid in kind for the first two years, and thereafter will be paid in cash. All accrued and accumulated dividends on the Redeemable Preferred Stock will be prior and in preference to any dividend on any of the Company’s common stock or other junior securities.

The shares of Redeemable Preferred Stock are generally non-voting, however the consent of the holders of a majority of the outstanding shares of Redeemable Preferred Stock are required, among other requirements, (i) until the second anniversary of issuance, to (x) declare or pay cash dividends on Real Industry common stock; or (y) purchase, redeem or acquire shares of Real Industry common stock, other than, among others, certain shares of common stock issued to employees; (ii) so long as at least $10.0 million in aggregate principal amount of Redeemable Preferred Stock is outstanding, to make acquisitions valued at more than 5% of the consolidated assets of the Company and its subsidiaries; (iii) to take actions that would adversely affect the rights of the holders of the Redeemable Preferred Stock; and (iv) to undertake certain merger activities unless the Redeemable Preferred Stock remains outstanding or is purchased at the liquidation preference.

The Company may generally redeem the shares of Redeemable Preferred Stock at any time at the liquidation preference, and the holders may require the Company to redeem their shares of Redeemable Preferred Stock at the liquidation preference upon a change of control under the Senior Secured Notes (or any debt facility that replaces or redeems the Senior Secured Notes) to the extent that the change of control does not provide for such redemption at the liquidation preference. A holder of Redeemable Preferred Stock may require the Company to redeem all, but not less than all, of such holder’s Redeemable Preferred Stock sixty-six months after the issuance date. In addition, the Company may redeem shares of Redeemable Preferred Stock to the extent Aleris is required to indemnify the Company under the Real Alloy Purchase Agreement for the Real Alloy Acquisition. The Redeemable Preferred Stock held by Aleris and its subsidiaries has a liquidation preference of $25.6 million, as of June 30, 2015, and is not transferrable (other than to another subsidiary of Aleris) for eighteen months following issuance (or such longer period in connection with any ongoing indemnity claims under the Real Alloy Purchase Agreement).

14


The carrying value of Redeemable Preferred Stock is based on the estimated fair value of the instrument as of the issuance date. The difference between the redemption value and the estimated fair value as of the issuance date is being accreted to the redemption value over the period preceding the holder’s right to redeem the instrument, or sixty-six months, using the effective interest method. The following table presents the activity related to the Redeemable Preferred Stock during the six months ended June 30, 2015:

 

(In millions)

 

 

 

Balance at beginning of period

$

 

Issuance of Redeemable Preferred Stock

 

19.6

 

Dividends and accretion

 

0.9

 

Balance at end of period

$

20.5

 

 

 

NOTE 6—COMMON STOCK WARRANT LIABILITY

On June 11, 2010, warrants to purchase an aggregate of 1.5 million shares of Real Industry’s common stock were issued (the “Warrants”). The aggregate purchase price for the Warrants was $0.3 million, due in equal installments as the Warrants vested, 20% upon issuance and, thereafter, 20% annually on the anniversary of the issuance date and, as of June 30, 2015, the Warrants are 100% vested. The Warrants expire in June 2020 and had an original exercise price of $10.30 per share. The Warrants were issued without registration in reliance on the exemption set forth in Section 4(a)(2) of the Securities Act.

The Warrants include customary terms that provide for certain adjustments of the exercise price and the number of shares of common stock to be issued upon the exercise of the Warrants in the event of stock splits, stock dividends, pro rata distributions and certain other fundamental transactions. Additionally, the Warrants are subject to pricing protection provisions. During the term of the Warrants, the pricing protection provisions provide that certain issuances of new shares of common stock at prices below the current exercise price of the Warrants automatically reduce the exercise price of the Warrants to the lowest per share purchase price of common stock issued. In February 2015, the Company issued shares of common stock in the Rights Offering at $5.64 per share, thereby reducing the exercise price of the Warrants to $5.64 per share as of June 30, 2015.

In May 2015, 15,000 Warrants were exercised, including 7,500 on a cashless basis, resulting in the issuance of 9,360 shares of common stock and gross proceeds of $0.1 million. As of June 30, 2015, 1,485,000 Warrants remain outstanding.

The Company utilizes a Monte Carlo simulation to estimate the fair value of the common stock warrant liability as of June 30, 2015 and December 31, 2014. See Note 12—Derivative and Other Financial Instruments and Fair Value Measurements for a discussion about the estimated fair values determined using the Monte Carlo simulation option pricing model.  A decrease in the common stock warrant liability results in other income, while an increase in the common stock warrant liability results in other expense. The following table presents changes in the fair value of the common stock warrant liability during the three and six months ended June 30, 2015 and 2014:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In millions)

2015

 

 

2014

 

 

2015

 

 

2014

 

Balance at beginning of period

$

4.9

 

 

$

8.5

 

 

$

5.6

 

 

$

9.3

 

Warrants exercised

 

(0.1

)

 

 

 

 

 

(0.1

)

 

 

 

Change in fair value of common stock warrant liability

 

6.3

 

 

 

(0.2

)

 

 

5.6

 

 

 

(1.0

)

Balance at end of period

$

11.1

 

 

$

8.3

 

 

$

11.1

 

 

$

8.3

 

 

 

15


NOTE 7—STOCKHOLDERSEQUITY AND NONCONTROLLING INTEREST

The following table summarizes the activity within stockholders’ equity and noncontrolling interest for the six months ended June 30, 2015:

 

(In millions)

Equity Attributable to Real Industry, Inc.

 

 

Noncontrolling Interest

 

 

Total Equity

 

Balance at beginning of the period

$

85.7

 

 

$

(0.1

)

 

$

85.6

 

Net earnings (loss)

 

(4.5

)

 

 

0.2

 

 

 

(4.3

)

Dividends and accretion on Redeemable Preferred Stock

 

(0.9

)

 

 

 

 

 

(0.9

)

Exercise of common stock options

 

1.1

 

 

 

 

 

 

1.1

 

Issuance of common stock

 

58.2

 

 

 

 

 

 

58.2

 

Share-based compensation expense

 

0.6

 

 

 

 

 

 

0.6

 

Exercise of common stock warrants

 

0.2

 

 

 

 

 

 

0.2

 

Noncontrolling interest acquired in business combination

 

 

 

 

0.8

 

 

 

0.8

 

Change in accumulated other comprehensive loss

 

(0.9

)

 

 

 

 

 

(0.9

)

Balance at the end of the period

$

139.5

 

 

$

0.9

 

 

$

140.4

 

 

The following table reflects changes in the number of outstanding shares of common stock:

 

 

 

 

 

 

Shares of Common Stock Outstanding

 

Balance at beginning of the period

 

 

 

 

 

17,099,882

 

Common stock issued

 

 

 

 

 

10,814,773

 

Restricted common stock awards granted, net of forfeitures

 

 

 

 

 

240,990

 

Common stock options exercised

 

 

 

 

 

202,050

 

Common stock issued from the exercise of Warrants

 

 

 

 

 

9,360

 

Balance at end of the period

 

 

 

 

 

28,367,055

 

 

 

NOTE 8—ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes the activity within accumulated other comprehensive loss for the six months ended June 30, 2015:

 

(In millions)

 

 

 

 

Currency Translation

 

Balance at beginning of period

 

 

 

 

$

 

Current period currency translation adjustments

 

 

 

 

 

(0.9

)

Balance at end of period

 

 

 

 

$

(0.9

)

 

 

NOTE 9—INCOME TAXES

At the end of each reporting period, Real Industry makes an estimate of its annual effective income tax rate. The estimate used for the six months ended June 30, 2015 may change in subsequent periods. The effective tax rate for the three and six months ended June 30, 2015 and 2014 differed from the federal statutory rate applied to earnings and losses before income taxes primarily as a result of the mix of earnings and losses and tax rates between tax jurisdictions and changes in valuation allowances.    

As of December 31, 2014, the Company had estimated federal and California NOLs of $933.6 million and $994.7 million, respectively. The federal NOLs have a 20-year life and begin to expire after the 2027 tax year, while the California NOLs have either a 10-year or 20-year life and begin to expire after the 2017 tax year. In order to preserve these tax attributes, restrictions are included in Real Industry’s Amended and Restated Bylaws on transfers of its common stock (the “Tax Benefit Preservation Provision”). Unless approved by the board of directors (the “Board”), any attempted transfer of Real Industry common stock is prohibited and void to the extent that, as a result of such transfer (or any series of transfers) (i) any person or group of persons owning 4.9% of the then-outstanding shares of Real Industry common stock, whether directly or indirectly (a “4.9-percent holder”); or (ii) the ownership interests of any “five percent holder” (as defined in Section 1.382-2T(g) of the Tax Code) shall be increased or decreased, unless such decrease is the result of a

16


transfer to a public group through the facilities of a national exchange. Persons wishing to become a 4.9-percent holder (or existing five-percent holders wishing to increase or decrease their percentage ownership, unless the decrease relates to a transfer to a public group) must request a waiver of the restriction from Real Industry, and the Board may grant a waiver in its sole discretion. The Tax Benefit Preservation Provision is meant to reduce the potential for a “change of control” event, which, if it were to occur, would have the effect of limiting the amount of the NOLs available in a particular year.

Real Industry has valuation allowances recorded to reduce certain deferred tax assets to amounts that are more likely than not to be realized. The valuation allowances relate to the potential inability to realize our deferred tax assets associated with net operating loss carryforwards in the United States and certain other foreign jurisdictions. Real Industry intends to maintain its valuation allowances until sufficient positive evidence exists to support their reversal.  

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, as well as foreign jurisdictions located in Canada, Mexico, Germany, Norway, and the United Kingdom. With few exceptions, the 2010 through 2014 tax years remain open to examination.

 

 

NOTE 10—EMPLOYEE BENEFIT PLANS

The following table presents the components of the net periodic benefit expense under the German defined benefit pension plans for the three and six months ended June 30, 2015:

 

 

Three

Months Ended June 30,

 

 

Six

Months Ended June 30,

 

(In millions)

2015

 

 

2015

 

Service cost

$

0.3

 

 

$

0.4

 

Interest cost

 

0.2

 

 

 

0.3

 

Net periodic benefit expense

$

0.5

 

 

$

0.7

 

 

 

NOTE 11—EARNINGS (LOSS) PER SHARE

The Company computes earnings (loss) per share using the two-class method, as unvested restricted common stock contains nonforfeitable rights to dividends and meets the criteria of a participating security. Under the two-class method, earnings are allocated between common stock and participating securities. The presentation of basic and diluted earnings per share is required only for each class of common stock and not for participating securities. As such, the Company presents basic and diluted earnings per share for its one class of common stock.

The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. The Company’s reported net earnings is reduced by the amount allocated to participating securities to arrive at the earnings allocated to common stockholders for purposes of calculating earnings per share.

Basic earnings per share is computed by dividing net earnings attributable to Real Industry, Inc. by the weighted average number of common shares outstanding for the reporting period. In connection with the Rights Offering, the Company distributed subscription rights to all of its existing stockholders as of January 28, 2015, and the subscription rights price represented a discount to the market value of the Company’s common stock upon the closing of the Rights Offering on February 27, 2015, with respect to the common stockholders. The discount in the Rights Offering with respect to common stockholders represents an implied stock dividend, which requires retroactive adjustment of the weighted average shares outstanding reported in reporting periods prior to February 27, 2015. Adjustments to the weighted average shares outstanding in all reporting periods prior to and including December 31, 2014 disclosed in this Report reflect an 8.3% increase from previously reported weighted average shares outstanding, based on the fair value per share immediately preceding the closing of the Rights Offering, with respect to common stockholders, and the fair value of the common stock as of February 27, 2015. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of common shares outstanding is increased by the dilutive effect of unvested restricted common stock awards, common stock options, unvested performance shares and the Warrants, determined using the treasury stock method.

Unvested restricted common stock, common stock options, unvested performance shares and the Warrants are anti-dilutive and excluded from the computation of diluted earnings per share if the assumed proceeds upon exercise or vesting are greater than the cost to reacquire the same number of shares at the average market price during the period. The dilutive impact of these securities could be included in future computations of diluted earnings per share if the Company reports net earnings from continuing operations. For the three and six

17


months ended June 30, 2015 and 2014, the impact of all outstanding unvested restricted common stock, common stock options, unvested performance shares and the Warrants are excluded from diluted loss per share as their impact would be anti-dilutive.

The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2015 and 2014:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In millions, except share and per share amounts)

2015

 

 

2014

 

 

2015

 

 

2014

 

Loss from continuing operations

$

(13.7

)

 

$

(1.8

)

 

$

(31.5

)

 

$

(3.5

)

Earnings from discontinued operations,

   net of income taxes

 

2.9

 

 

 

1.3

 

 

 

27.2