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EX-32.1 - EXHIBIT 32.1 - EMPIRE RESOURCES INC /NEW/v423556_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - EMPIRE RESOURCES INC /NEW/v423556_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - EMPIRE RESOURCES INC /NEW/v423556_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - EMPIRE RESOURCES INC /NEW/v423556_ex32-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)
 
   x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended: September 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: 001-12127

 

EMPIRE RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   22-3136782
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

2115 Linwood Avenue

Fort Lee, New Jersey 07024
(Address of principal executive offices)
(Zip Code)

 

(201) 944-2200
(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. 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 (§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). Yes x 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer ¨
     
Non-accelerated filer ¨   Smaller reporting company x
     
(Do not check if a smaller reporting company)    

 

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

 

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of November 10, 2015: 8,551,634

 

 

 

 

TABLE OF CONTENTS

 

      Page
  PART I    
       
Item 1. Financial Statements   3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   17
Item 4. Controls and Procedures   22
       
  PART II    
       
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds   23
Item 6. Exhibits   23

 

 - 2 - 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

EMPIRE RESOURCES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands except share and per share amounts)

 

   September 30, 2015
Unaudited
   December 31, 2014 
ASSETS          
Current assets:          
Cash  $5,536   $1,130 
Trade accounts receivable (less allowance for doubtful accounts of $356 and $562)   76,248    89,693 
Inventories   153,507    192,064 
Deferred tax assets   3,834    3,911 
Advance to supplier, net of imputed interest of $3 and $66   831    3,277 
Other current assets, including derivatives   13,232    18,605 
Total current assets   253,188    308,680 
Preferential supply agreement, net   80    321 
Long-term financing costs, net of amortization   817    1,024 
Property and equipment, net   4,372    4,258 
Total assets  $258,457   $314,283 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Notes payable - banks  $166,471   $201,088 
Subordinated convertible debt net of unamortized discount of $346   10,654    - 
Trade accounts payable   22,928    42,626 
Income taxes payable   1,209    4,190 
Accrued expenses and derivative liabilities   6,737    4,137 
Dividends payable   217    449 
Total current liabilities   208,216    252,490 
           
Subordinated convertible debt net of unamortized discount of $803   -    10,197 
Derivative liability for embedded conversion option   1,550    2,734 
Deferred taxes payable   47    51 
Total liabilities   209,813    265,472 
           
Commitments (Note 18)          
           
Stockholders' equity:          
Common stock $0.01 par value, 20,000,000 shares authorized and 11,749,651 shares issued at September 30, 2015 and December 31, 2014   117    117 
Additional paid-in capital   13,038    13,678 
Retained earnings   42,927    40,805 
Accumulated other comprehensive loss   (576)   (334)
Treasury stock, 3,173,843 and 2,843,717 shares at September 30, 2015 and December 31, 2014, respectively   (6,862)   (5,455)
Total stockholders' equity   48,644    48,811 
Total liabilities and stockholders' equity  $258,457   $314,283 

 

See notes to unaudited condensed consolidated financial statements

 

 - 3 - 

 

 

EMPIRE RESOURCES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(In thousands except per share amounts)

(Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Net sales  $121,950   $159,366   $424,689   $444,199 
Cost of goods sold   116,603    151,897    406,488    423,228 
Gross profit   5,347    7,469    18,201    20,971 
Selling, general and administrative expenses   3,094    3,819    10,632    10,600 
Operating income   2,253    3,650    7,569    10,371 
Interest expense, net   1,419    1,041    4,665    3,223 
Income before other expenses   834    2,609    2,904    7,148 
Other expenses                    
Change in value of derivative liability   (224)   (2,059)   1,184    (2,239)
Loss related to extinguishment of debt converted into common stock   -    (164)   -    (164)
Income before income taxes   610    386    4,088    4,745 
Income taxes   295    1,080    1,314    2,985 
Net income (loss)  $315   $(694)  $2,774   $1,760 
Weighted average shares outstanding:                    
Basic   8,870    8,814    8,709    8,705 
Diluted   8,898    8,814    11,736    8,964 
Earnings (loss) per share:                    
Basic  $0.04   $(0.08)  $0.32   $0.20 
Diluted  $0.04   $(0.08)  $0.22   $0.20 

 

See notes to unaudited condensed consolidated financial statements

 

 - 4 - 

 

 

EMPIRE RESOURCES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)

(Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Net income (loss)  $315   $(694)  $2,774   $1,760 
Other comprehensive income/(loss) before tax                    
Foreign currency translation adjustments   13    (278)   (242)   (292)
Decrease in value of interest rate swap liability   -    13         39 
Other comprehensive income (loss) before tax   13    (265)   (242)   (253)
Income tax related to components of other comprehensive income   -    (5)   -    (15)
Other comprehensive income (loss), net of tax   13    (270)   (242)   (268)
Comprehensive income (loss)  $328   $(964)  $2,532   $1,492 

 

See notes to unaudited condensed consolidated financial statements

 

 - 5 - 

 

 

EMPIRE RESOURCES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   Nine Months Ended September 30, 
  2015   2014 
Cash flows - operating activities:          
Net income  $2,774   $1,760 
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:          
Depreciation and amortization   487    482 
Change in value of derivative liability   (1,184)   2,239 
Amortization of convertible note discount   457    419 
Imputed interest on vendor advance   (53)   (144)
Loss related to extinguishment of debt converted into common stock   -    164 
Reduction in allowance for doubtful accounts   (188)   - 
Amortization of supply agreement   240    240 
Deferred income taxes   73    271 
Foreign exchange loss and other   437    296 
Stock-based compensation   -    630 
Changes in:   -    - 
Trade accounts receivable   13,043    (45,330)
Inventories   37,828    18,947 
Other current assets   5,353    27 
Trade accounts payable   (19,689)   (10,751)
Income taxes payable   (2,973)   995 
Accrued expenses and derivative liabilities   2,649    5,708 
Net cash provided by/(used in) operating activities   39,254    (24,047)
Cash flows - investing activities:          
Repayment related to supply agreement   2,500    2,500 
Purchases of property and equipment   (237)   (19)
Net cash provided by investing activities   2,263    2,481 
Cash flows - financing activities:          
(Repayment of)/proceeds from notes payable – banks   (33,978)   25,602 
Repayments - mortgage payable   -    (136)
Deferred financing costs   (158)   (1,005)
Dividends paid   (884)   (648)
Treasury stock purchased   (1,407)   (13)
Purchase of stock options   (922)   - 
Proceeds from stock options exercised   -    15 
Excess tax benefit related to purchase of stock options   282    - 
Net cash (used in)/provided by financing activities   (37,067)   23,815 
Net increase in cash   4,450    2,249 
Effect of exchange rate   (44)   (63)
Cash at beginning of period   1,130    2,477 
Cash at end of the period  $5,536   $4,663 
Supplemental disclosures of cash flow information:          
Cash paid during the period for:          
Interest  $4,024   $3,476 
Income taxes  $2,480   $2,737 
Non cash financing activities:          
Dividend declared but not yet paid  $217   $224 
Treasury stock issued on conversion of subordinated debt        1,507 

 

See notes to unaudited condensed consolidated financial statements

 

 - 6 - 

 

 

EMPIRE RESOURCES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity(Unaudited)

(In thousands, except per share amounts)

 

   Common
Stock
Number of
Shares
   Common
Stock
 Amount
   Additional
Paid-in
Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Income/(Loss)
   Treasury
Stock
   Total
Stockholders'
Equity
 
Balance at December 31, 2014   11,750   $117   $13,678   $40,805   $(334)  $(5,455)  $48,811 
Treasury stock acquired                            (1,407)   (1,407)
Stock options purchased             (922)                  (922)
Excess tax benefit related to purchase of stock options             282                   282 
Net change in cumulative translation adjustment                       (242)        (242)
Dividends declared ($0.075 per share)                  (652)             (652)
Net income                  2,774              2,774 
Balance at September 30, 2015   11,750   $117   $13,038   $42,927   $(576)  $(6,862)  $48,644 

 

See notes to unaudited condensed consolidated financial statements

 

 - 7 - 

 

 

Empire Resources, Inc. and Subsidiaries.

 

Notes to Condensed Consolidated Financial Statements Unaudited

(In thousands, except for per share amounts)

 

1. The Company

 

The condensed consolidated financial statements include the accounts of Empire Resources, Inc. (the “Company”) and its wholly-owned subsidiaries, Empire Resources Pacific Ltd., the Company’s sales agent in Australia, 6900 Quad Avenue LLC, the owner of a warehouse facility in Baltimore, Maryland, Imbali Metals BVBA (“Imbali”), the Company’s operating subsidiary in Europe, Empire Resources (UK) Ltd., the Company’s operating subsidiary in the UK, which was organized in February 2015, and Empire Resources de Mexico, the Company’s operating subsidiary in Mexico. All significant inter-company transactions and accounts have been eliminated on consolidation.  The Company purchases and sells semi-finished aluminum and steel products to a diverse customer base located in the Americas, Australia, Europe and New Zealand.

 

2. Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance, Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, on revenue recognition. The new standard provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. There is no option for early adoption. For public entities, this ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. In August 2015 the FASB extended the deadline of ASU 2014-09 by a year. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

 

In April 2015, the FASB issued accounting guidance, Accounting Standards Update (“ASU”) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. The guidance will be effective for fiscal years beginning after December 15, 2015. The Company does not believe that the new standard will have a material impact on its consolidated financial statements.

 

ln July 2015, the FASB issued accounting Standards Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11") which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.

 

3. Interim Financial Statements

 

The condensed consolidated interim financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. The information and note disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

The Company’s management is responsible for interim financial information. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the Company’s financial position as of September 30, 2015 and the results of its operations and cash flows for the three and nine months ended September 30, 2015 and 2014. Interim results may not be indicative of the results that may be expected for the year.

 

 - 8 - 

 

 

4. Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from these estimates.

 

5. Concentrations

 

During the nine month period ended September 30, 2015 one customer, Ryerson, Inc., accounted for 10.6% the Company’s consolidated sales. During the period ended September 30, 2014 no one customer accounted for 10% of the Company’s consolidated sales.

 

The Company purchases metal products from a limited number of suppliers throughout the world. Two suppliers, PT Alumindo Light Metal Industry Tbk (“PT. Alumindo”) and Southeast Aluminum accounted for an aggregate of 44% of total purchases during the nine month period ended September 30, 2015. For the period ended September 30, 2014, two suppliers, PT Alumindo and Hulamin Ltd. accounted for an aggregate of 39% of total purchases.

 

The loss of any one of the Company’s largest suppliers or a material default by any such supplier in its obligations to the Company could have a material adverse effect on the Company’s business.

 

6. Stock Options

 

Stock-based compensation for an award of equity instruments, including stock options, is recognized as an expense over the vesting period based on the fair value of the award at the grant date. On May 19 and May 20, 2015 the Company repurchased 350 fully vested employee stock options at the market value on the date of repurchase less the exercise price. The purchase price of $922 was charged to additional paid in capital. The repurchase resulted in a tax deduction which exceeded the cumulative compensation cost for the options recognized for financial reporting purposes resulting in an excess tax benefit of $282 which was credit to additional paid in capital. As of September 30, 2015, there were outstanding employee stock options to acquire 50 shares of common stock, which had vested in prior years. During the nine month period ended September 30, 2015, the Company did not grant any stock options.

 

7. Treasury Stock

 

On July 22, 2008, the Board of Directors authorized the Company to repurchase up to 2,000 shares of its common stock. As of September 30, 2015, the Company repurchased a total of 1,668 shares under the repurchase program for an aggregate cost of $5,045. During the nine month periods ended September 30, 2015 and 2014, the Company repurchased 330 and 3 common shares at a cost of $1,407 and $13, respectively.

 

8. Inventories

 

Inventories, which consist of purchased semi-finished metal products, are stated at the lower of cost or market value.  Cost is determined by the specific-identification method. Inventory is purchased for specific customer orders and the Company’s own inventory.  The carrying amount of inventory which is hedged by futures contracts designated as fair value hedges, is adjusted to fair value.

 

9. Notes Payable—Banks

 

Prior to June 19, 2014, the Company was a party to a credit agreement with Rabobank International, for itself and as lead arranger and agent, JPMorgan Chase, for itself and as syndication agent, and ABN AMRO, BNP Paribas, RBS Citizens, Société Générale, and Brown Brothers Harriman which provided for a $200,000 revolving line of credit, including a commitment to issue letters of credit and a swing-line loan sub facility, with a maturity date of June 30, 2014.

 

 - 9 - 

 

 

On June 19, 2014, the Company entered into an amended and restated committed credit agreement with Rabobank International, for itself and as lead arranger and agent, BNP Paribas, for itself and as syndication agent, and Société Générale, ABN AMRO, RB International, and Brown Brothers Harriman as well as a new uncommitted line of credit with Rabobank International, BNP Paribas and Société Générale. Both credit lines are secured, asset-based credit facilities. The committed credit facility provided for amounts up to $150,000, and the uncommitted facility provided for a maximum amount of $75,000. The agreement also allowed for an additional increase in the committed credit facility of $75,000, for a total of $300,000, subject to certain restrictions and conditions. On December 18, 2014, these credit lines were amended and increased by $50,000 increasing the overall line of credit to $275,000. The amended committed credit agreement increased by $35,000 to $185,000, and the uncommitted credit facility, increased by $15,000 to $90,000. There were no changes to the interest rate or to the maturity date of the committed facility, which remains June 19, 2017. Subsequent to these amendments the additional aggregate increase available under the term of these agreements is $25,000, subject to certain restrictions and conditions. Borrowings under these lines of credit are secured by substantially all of the Company’s assets.

 

Amounts borrowed bear interest at Eurodollar, money market or base rates, at the Company’s option, plus an applicable margin.   The credit agreements contains financial and other covenants, including but not limited to, covenants requiring maintenance of minimum tangible net working capital and compliance with leverage ratios, as well as an ownership minimum and limitations on other indebtedness, liens, distributions or dividends, and investments and dispositions of assets.   As of September 30, 2015, the Company was in compliance with all covenants under the credit agreements.

 

Both credit agreements provide that amounts under the facilities may be borrowed and repaid, and re-borrowed, subject to a borrowing base test. The committed line of credit matures June 19, 2017. On June 11, 2015, the Company entered into a Second Amendment to the Uncommitted Credit Agreement which amended the termination date to June 18, 2016 from June 19, 2015. As of September 30, 2015, the committed line of credit had loans outstanding of $134,000 and the uncommitted line of credit had loans outstanding of $28,000.  As of September 30, 2015 and December 31, 2014, the credit utilized amounted to $197,915 and $229,386, respectively (including approximately $35,915 and $36,586 of outstanding letters of credit).

 

The Company’s wholly owned Belgian subsidiary, Imbali, maintained a line of credit with ING Belgium S.A./N.V., (“ING”) for a EUR 8,000 (US$8,942) commitment for loans and documentary letters of credit. On July 30, 2015, Imbali entered into an uncommitted credit agreement with Rabobank International for EUR 12,500 (US$13,973) to replace ING and utilized EUR 4,000 (US$4,471) of borrowings under the Rabobank facility to repay the outstanding balance due to ING. Loan advances are limited to a percentage of Imbali’s pledged accounts receivables and inventory and bear interest at EURIBOR plus 1.9% This secured credit arrangement is unconditionally guaranteed by the Company. As of September 30, 2015, the outstanding loan amounted to EUR 4,000 (US $4,471), as compared to EUR 6,850 (US $8,288) on December 31, 2014. As of September 30, 2015, Imbali was in compliance with all financial covenants.

 

10. Convertible Subordinated Debt

 

On June 3, 2011, the Company issued $12,000 principal amount of 10% Convertible Senior Subordinated Notes Due June 1, 2016 in a private placement to selected accredited investors.  As of September 30, 2015, the notes are convertible at the option of the holders into shares of common stock at a conversion rate of 262.21 shares of common stock per $1 principal amount of notes (equivalent to a conversion price of $3.81 per share of common stock), subject to dilutive adjustment for cash and stock dividends, stock splits and similar transactions, at any time before maturity.  The current conversion price reflects eighteen adjustments for dividends declared on the Company’s common stock since the issuance of the notes.  In addition, if the last reported sale price of the Company’s common stock for 30 consecutive trading days is equal to or greater than $7.00, and a registration statement is effective covering the resale of the shares of common stock issuable upon conversion of the notes, the Company has the right, in its sole discretion, to require the holders to convert all or part of their notes at the then applicable conversion rate.  Interest on the notes is payable in arrears on the first day of June and December every year the notes are outstanding. The purchase agreement pursuant to which the notes were issued contains covenants, including restrictions on the Company’s ability to incur certain indebtedness and create certain liens. As of September 30, 2015, the Company was in compliance with all covenants. Officers and directors of the Company and certain affiliated entities purchased $4,000 principal amount of the notes.

 

On August 18, 2014, a note holder converted $1,000 principal amount of notes into 254 shares of common stock, having a fair value on such date of $1,507. The carrying value of the note converted was $916, and the carrying value of the related embedded conversion option was $427, resulting in a loss on extinguishment of the debt of $164 which was recorded during the three month period ended September 30, 2014.

 

 - 10 - 

 

 

As a result of transactions which cause adjustments to the conversion rate, the embedded conversion option was bifurcated and recorded as a separate derivative liability at a fair value at issuance of the notes of $2,829, with a corresponding discount recorded on the notes. The derivative liability is carried at fair value with changes therein recorded in income. The quarterly mark to market of the derivative liability will result in non-operating, non-cash gains or losses based on decreases or increases in the Company’s stock price, respectively, among other factors. The non-cash discount is being amortized as additional interest expense over the term of the notes. During the three and nine month periods ended September 30, 2015, the change in the fair value of the derivative liability resulted in a loss of $224 and a gain of $1,184, respectively. Amortization of the discount amounted to $130 and $457 for the three and nine month periods end September 30, 2015, respectively. During the three and nine month periods ended September 30, 2014, the change in the fair value of the derivative liability resulted in a loss of $2,059 and $2,239, respectively, and amortization of the discount amounted to $136 and $419, respectively.

 

The derivative liability was valued using a lattice model using unobservable level 3 inputs. This technique was selected because it embodies all of the types of inputs that the Company expects market participants would consider in determining the fair value of equity linked derivatives embedded in hybrid debt agreements.

 

The following table summarizes the significant inputs resulting from the calculations as of September 30, 2015, December 31, 2014 and issuance:

 

   September 30, 2015   December 31, 2014   June 3, 2011 
             
Equity value  $32,101   $41,738   $36,811 
Volatility   60%   35%   70%
Risk free return   0.33%   0.67%   1.60%
Dividend yield   2.69%   2.15%   2.51%
Strike price  $3.81   $3.88   $4.65 

 

The majority of the proceeds from the notes were earmarked for a long term advance in connection with a supply agreement with the Indonesian company PT. Alumindo, a leading producer of high quality semi-finished aluminum products, and its affiliates, as described below.  The Company provided a $10,000 non-interest bearing advance to an affiliate of PT. Alumindo to enable the expansion of capacity within that group of companies’ production network.  Agreements entered into in connection with this loan also provide for a long term, multi-year substantial and preferential supply position from PT. Alumindo's premier aluminum rolling mill located in Surabaya, Indonesia.   The pre-payment advance became repayable to us beginning on January 1, 2013 in monthly installments of $278. As of November 10, 2015 the payments are up to date and current. If the Company and PT. Alumindo are unable to agree on a product price under the supply agreement for any given quarter, the monthly re-payment obligation will increase to $556 and the outstanding balance will accrue interest, at the one month U.S. dollar LIBOR rate plus 3.5% per annum, per month. The entire remaining balance, if any, must be repaid on January 1, 2016. As consideration for this loan, PT. Alumindo agreed to make available a committed and significant tonnage of production to the Company on a guaranteed and long-term basis, which should help the Company lessen the risk of an interruption in the sources of its metal supply from PT. Alumindo’s mill in Surabaya, Indonesia, with which the Company has had substantial experience. The supply agreement calls for increased supply and minimum tonnages.

 

Interest at the rate of 3.74%, based on the interest rate chargeable in the agreement in the event the supplier does not meet its supply commitments, has been imputed on the non-interest bearing advance and the resulting discount which amounted to $962 has been ascribed to the preferential supply agreement.  Imputed interest is recorded in income over the term of the advance by use of the interest method. The preferential supply agreement is being amortized by the straight line method over three years starting from January 1, 2013, the date that the increased supply agreement began. During the nine month periods ended September 30, 2015 and 2014 amortization amounted to $240.

 

 - 11 - 

 

 

11. Earnings per Share

 

Basic earnings per share are based upon weighted average number of shares of common stock outstanding during each period. Diluted earnings per share are based upon the weighted average number of shares of common stock outstanding during each period, plus potential dilutive shares of common stock from assumed exercise of the outstanding stock options using the treasury stock method and assumed conversion of subordinated debt.

 

The following table sets forth the computation of basic and diluted earnings/(loss) per share:

 

   Three Months Ended
 September 30,
   Nine Months Ended
 September 30,
 
   2015   2014   2015   2014 
Numerator:                    
Net income (loss)  $315   $(694)  $2,774   $1,760 
Add back of interest on convertible subordinated debt, net of taxes             510      
Add back of amortization of discount on convertible subordinated debt, net of taxes             283      
Adjustment for change in value of convertible note derivative, net of taxes             (1,010)     
Numerator for diluted earnings (loss) per share  $315   $(694)  $2,557   $1,760 
Denominator:                    
Weighted average shares outstanding-basic   8,870    8,814    8,709    8,705 
Dilutive effect of convertible subordinated debt             2,884      
Dilutive effect of stock options   28         143    259 
Weighted average shares outstanding-diluted   8,898    8,814    11,736    8,964 
Basic earnings (loss) per share   0.04   $(0.08)  $0.32   $0.20 
Diluted earnings (loss) per share  $0.04   $(0.08)  $0.22   $0.20 

 

In computing earnings (loss) per share for the three months ended September 30, 2015, and 2014 and the nine months ended September 30, 2014, no effect has been given to the 2,884, 2,804 and 2,804 common shares, respectively issuable on conversion of subordinated debt as their effect is anti-dilutive. For the three months ended September 30, 2014, no effect has been given to the 266 common shares issuable on exercise of stock options as their effect is anti-dilutive.

 

12. Dividends

 

On March 19, 2015, the Company announced a cash dividend of $0.025 per share to stockholders of record at the close of business on April 3, 2015. The dividend, totaling $218, was paid on April 13, 2015. On June 19, 2015, the Company announced a cash dividend of $0.025 per share to stockholders of record at the close of business on July 2, 2015. The dividend, totaling $217, was paid on July 17, 2015. On September 17, 2015, the Company announced a cash dividend of $0.025 per share to stockholders of record at the close of business on September 30, 2015. The dividend totaling $217 was paid on October 14, 2015. The Board of Directors will review its dividend policy on a quarterly basis, and make a determination regarding future dividends subject to the profitability and free cash flow and the other requirements of the business.

 

 - 12 - 

 

 

13. Derivative Financial Instruments and Risk Management

 

The Company uses derivative financial instruments designated as fair value hedges to manage its exposure to commodity price risk and foreign currency exchange risk inherent in its operations. It is the Company’s policy to hedge such risks to the extent practicable. The Company enters into high-grade aluminum futures contracts to limit its gross margin exposure by hedging the metal content element of firmly committed purchase and sales commitments. The Company also enters into foreign exchange forward contracts to hedge its exposure related to commitments to buy and sell metals as well as its accounts receivable denominated in international currencies.

 

The Company’s unrealized assets and liabilities in respect of its fair value hedges measured at fair value are as follows:

 

Derivatives designated
as fair value hedges
  Balance Sheet Location  September 30,
 2015
   December 31,
2014
 
            
Asset derivatives:             
Aluminum futures contracts  Other current assets  $5,011    9,769 
Foreign currency forward contracts  Other current assets   711    1,337 
Total     $5,722   $11,106 

 

For the periods ended September 30, 2015 and September 30, 2014, hedge ineffectiveness associated with derivatives designated as fair value hedges was insignificant, and no fair value hedges were derecognized.

 

The table below summarizes the realized gains or (losses) of the Company’s derivative instruments and their location in the income statement:

 

Derivatives in hedging     Location of Gain or  Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
relationships     (Loss) Recognized  2015   2014   2015   2014 
Foreign currency forward contracts  (a)  Cost of goods sold  $283   $392   $(196)  $(9)
Interest rate swaps  (b)  Interest expense, net   -    (13)   -    (41)
Aluminum futures  (c)  Cost of goods sold   7,175    (3,399)   17,171    (1,694)
Total        $7,458   $(3,020)  $16,975   $(1,744)

 

a)Fair value hedge: the related hedged item is accounts receivable and offsetting losses in the three and nine months ended September 30, 2015 and gains in the three and nine months ended September 30, 2014 are included in cost of goods sold in the same respective amounts.
b)Cash flow hedge: recognized loss is reclassified from accumulated other comprehensive loss.
c)Fair value hedge: the related hedged item is inventory and offsetting losses in 2015 and gains in 2014 are included in cost of goods sold in the same respective amounts.

 

14. Fair Value

 

Authoritative guidance defines fair value 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. The fair value hierarchy consists of three broad levels, as described below:

 

·Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
·Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
·Level 3 - Inputs that are both significant to the fair value measurement and unobservable.

 

 - 13 - 

 

 

Derivative contracts consisting of aluminum contracts, foreign currency contracts and interest rates swaps are valued using quoted market prices and significant other observable inputs. These financial instruments are typically exchange-traded and are generally classified within Level 1 or Level 2 of the fair value hierarchy depending on whether the exchange is deemed to be an active market or not.

 

Major categories of assets and liabilities measured at fair value at September 30, 2015 and December 31, 2014 are classified as follows:

 

   September 30, 2015   December 31, 2014 
   Level 1   Level 2   Level 3   Level 1   Level 2   Level 3 
Assets:                              
Inventories  $143,394         $165,586       
Aluminum futures contracts  $5,011              9,769           
Foreign currency forward contracts  $711              1,337           
Liabilities:                              
Embedded conversion option            $1,550             $2,734 

 

15. Fair Value of Financial Instruments

 

The carrying amounts of variable rate notes payable to the banks approximate fair value as of September 30, 2015 and December 31, 2014, because these notes reflect market changes to interest rates. The fair value of the subordinated convertible debt approximates its principal amount of $11,000 at September 30, 2015 and December 31, 2014, which exceeds its carrying amount as a result of the unamortized discount related to the bifurcation of the embedded conversion option. The fair value of the advance to supplier approximates its carrying value. Derivative financial instruments are carried at fair value (see Note 13).

 

16. Business Segment and Geographic Area Information

 

The Company’s only business segment is the sale and distribution of metals. Sales are attributed to countries based on location of customers as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
United States  $88,920   $101,907   $314,337   $264,604 
Latin America   921    23,995    15,509    81,263 
Canada   9,426    10,665    33,757    35,348 
Australia & New Zealand   10,004    11,241    29,738    33,647 
Europe   12,679    11,558    31,348    29,337 
   $121,950   $159,366   $424,689   $444,199 

 

 - 14 - 

 

 

17. Accumulated Other Comprehensive (Loss)/Income

 

Changes in accumulated other comprehensive (loss)/ income by component on an after tax basis are as follows:

 

Three Months ended September 30, 2015  Foreign
Currency
Translation
   Interest Rate
Swap
Contract
   Total 
Beginning balance  $(589)  $-   $(589)
Other comprehensive income   13    -    13 
Net current period other comprehensive income   13    -    13 
Ending balance  $(576)  $-   $(576)

 

Three Months ended September 30, 2014  Foreign
Currency
 Translation
   Interest Rate
Swap
Contract
   Total 
Beginning balance  $70   $(17)  $53 
Other comprehensive loss before reclassification   (278)   -    (278)
Loss reclassified to operations   -    8(a)   8 
Net current period other comprehensive loss   (278)   8    (270)
Ending balance  $(208)  $(9)  $(217)
(a) Reclassified to following line items in the statement of income:               
Interest expense, net       $13      
Income taxes        (5)     
Net of tax       $8      

 

 - 15 - 

 

 

Nine Months ended September 30, 2015  Foreign
Currency
Translation
   Interest Rate
Swap
Contract
   Total 
Beginning balance  $(334)  $-   $(334)
Other comprehensive loss   (242)   -    (242)
Net current period other comprehensive loss   (242)   -    (242)
Ending balance  $(576)  $-   $(576)

 

Nine Months ended September 30, 2014  Foreign
Currency
 Translation
   Interest Rate
Swap
Contract
   Total 
Beginning balance  $84   $(33)  $51 
Other comprehensive loss before reclassification   (292)   -    (292)
Loss reclassified to operations   -    24(a)  $24 
Net current period other comprehensive (loss)/income   (292)   24    (268)
Ending balance  $(208)  $(9)  $(217)
(a) Reclassified to following line items in the statement of income:               
Interest expense, net       $39      
Income taxes        (15)     
Net of tax       $24      

 

18. Commitments

 

The Company had $35,915 in outstanding letters of credit to certain of its suppliers at September 30, 2015 and $36,586 at December 31, 2014.

 

19. Income Taxes

 

For interim income tax reporting, the Company estimates its annual effective tax rate and applies it to its year to date ordinary income. The effect on the tax rate related to income or loss attributable to the change in value of the derivative liability is separately computed and recognized as such income or loss occurs. The disproportionate relationship between income taxes and pre-tax income for the nine months ended September 30, 2015, results primarily from no deferred tax being provided on the non-taxable gain resulting from the change in the value of the derivative liability to the extent such gains exceeds the $457 amortization of the related debt discount, for which a deferred tax benefit is provided.

 

The disproportionate relationship between income taxes and pre-tax income for the three and nine month periods ended September 30, 2014 is primarily attributable to no tax benefit being recognized for the loss from change in value of the derivative liability and the loss related to extinguishment of debt, as such losses will not be deductible for income tax purposes.

 

 - 16 - 

 

 

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

 

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our 10-K filed with the Securities and Exchange Commission on March 31, 2015. All numbers used in this discussion are in thousands, except for per share information and percentages.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements,” which include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or our management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

·loss or default of one or more suppliers;

 

·loss or default of one or more significant customers;

 

·default by the counterparties to our derivative financial instruments;

 

·changes in general, national or regional economic conditions;

 

·an act of war or terrorism that disrupts international shipping;

 

·changes in laws, regulations and tariffs;

 

·the imposition of anti-dumping duties on the products we import;

 

·changes in the size and nature of our competition;

 

·changes in interest rates, foreign currencies or spot prices of aluminum;

 

·loss of one or more key executives;

 

·increased credit risk from customers;

 

·our failure to grow internally or by acquisition; and

 

·failure to improve operating margins and efficiencies.

 

For a discussion of these and other risks that relate to our business and investing in shares of our common stock, you should carefully review the risk factors and other cautionary statements in our Annual Report on Form 10-K for the year ended December 31, 2014 that was filed with the Securities and Exchange Commission on March 31, 2015, and those described from time to time in our other reports filed with the Securities and Exchange Commission. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

 

 - 17 - 

 

 

Our Business

 

We are engaged in the purchase, sale and distribution of semi-finished aluminum and steel products to a diverse customer base located in the Americas, Europe, Australia and New Zealand. We sell our products through our own marketing and sales personnel as well as through commission based independent sales agents located in North America and Europe. We purchase products from suppliers located throughout the world. Our two largest suppliers furnished approximately 44% of our products during the first nine months of 2015 as compared to an aggregate of 39% of our products during the same period in 2014. We place orders with our suppliers based upon orders that we receive from our customers and also purchase material for our own stock, which we typically use for shorter term deliveries to our customers.

 

Critical Accounting Policies and Estimates

 

The following 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 generally accepted accounting principles in the U.S. The preparation of financial statements in accordance with generally accepted accounting principles in the U.S. requires us to make estimates and assumptions that affect the amounts reported in our financial statements. The financial statements include estimates based on currently available information and our judgment as to the outcome of future conditions and circumstances. Significant estimates in these financial statements include allowance for doubtful accounts and the derivative liability for the embedded conversion option in our 10% Convertible Senior Subordinated Notes Due June 1, 2016 in the principal amount of $11,000. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the estimates and assumptions.

 

Among the significant judgments made by management in the preparation of our financial statements are the following:

 

Allowance for Doubtful Accounts

 

As of September 30, 2015, we had $76,248 in trade receivables, after an allowance for doubtful accounts of $356. We report accounts receivable, net of an allowance for doubtful accounts, to represent our estimate of the amount that ultimately will be realized in cash. We review the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical collection trends, age of receivables, as well as review of specific accounts, and make adjustments in the allowance that we believe are necessary. We maintain credit insurance policies on the majority of our customers. In general, this policy has a 10% deductible; however there are some instances where the co-insurance may vary and instances where we may exceed the insured values. Changes in economic conditions could have an impact on the collection of existing receivable balances or future allowance considerations. In addition, changes in the credit insurance environment could affect the availability of credit insurance and our ability to secure it.

 

Accruals for Inventory Claims

 

Generally, our exposure on claims for defective material is relatively small, as we usually refer all claims on defects back to our suppliers. If we do not believe that a supplier will honor a material claim for a defective product, we will record an allowance for inventory adjustments.

 

Results of Operations

 

General

 

We are engaged in the purchase, sale and distribution of semi-finished aluminum and steel products which we purchase from producing mills around the world.  The market prices of materials we purchase, as well as the market price of materials we sell, fluctuate constantly in world markets.  Our cost of sales is composed of metal content, which in part is determined on world metal exchanges, plus a unique fabrication premium charged by each producer to convert the raw metal to a semi-finished product.  In turn, we typically sell to our customers either on a fixed price basis or based on metal content plus a premium which includes supplier fabrication margin, and costs of importation, warehousing, and delivery of material to customers.  Since metal content costs are the largest component of cost of sales and selling price, our sales pricing trends and cost of sales trends generally track consistently.

 

 - 18 - 

 

 

Comparison of Three Months Ended September 30, 2015 and 2014

 

During the three months ended September 30, 2015, net sales decreased by $37,416, from $159,366 to $121,950 or 23.5% from the same period in 2014.  The Latin American economy, particularly Brazil, has suffered a precipitous drop in local currencies adding to economic stresses. We determined that the markets were unstable and did not enter into new contracts with local customers resulting in a decline of Latin American sales of $23,074 in the three month period ended September 30, 2015 as compared to the same period in 2014. Additionally, our sales in North America declined by $14,226 comprised of a decline in our steel sales offset by an increase in our aluminum sales.

 

Gross profit decreased by $2,122, to $5,347 during the three months ended September 30, 2015 from $7,469 in the same period of 2014, representing a 28.4% decrease, of which $1,641 is attributable to decreased sales and $481 to a decline in the gross margin of 0.3% to 4.4% from 4.7%. The decline in margin reflects increased competitive market pressures across all regions.

 

Selling, general and administrative expenses during the three months ended September 30, 2015 decreased by $725 from $3,819 to $3,094 primarily as a result of lower compensation costs and lower travel expenses.

 

During the three months ended September 30, 2015, interest expense increased 36% or $378 to $1,419 from $1,041 for the same period in 2014 as a result of increased bank loans to support higher inventory levels and lower accounts payable balances. During the three months ended September 30, 2015 and 2014, interest on our 10% Convertible Senior Subordinated Notes Due June 1, 2016 totaled $275 and $291, respectively. Amortization of the debt discount in connection with these notes totaled $130 for the three months ended September 30, 2015 and $136 for September 30, 2014.

 

During the three months ended September 30, 2015 income before other expenses declined by $1,775 from $2,609 to $834 or 68%. This decline is primarily due to the decline in gross profit, offset by the decrease in selling, general and administrative expenses described above.

 

Our 10% Convertible Senior Subordinated Notes Due June 1, 2016 have an embedded conversion option which was bifurcated and recorded as a separate derivative liability at a fair value at issuance of the notes. The derivative liability is carried at fair value with changes in mark to market recorded in income. The changes in the fair value of the derivative liability resulted in a non-cash non-operating loss of $224 during the three month period ended September 30, 2015, as compared to a $2,059 non-cash non-operating loss during the same period in 2014. The valuation has numerous inputs, however, these changes are driven primarily by the change in the stock price at the end of both quarters.

 

Fair value accounting requires changes in derivative liabilities related to our convertible notes to be charged or credited to income during each accounting period. Such losses are not tax deductible, and likewise any recoveries of such losses are not taxable upon recovery. Accordingly, no tax effect was given to the non-cash, non-operating losses of $224 and $2,059 during the quarters ended September 30, 2015 and 2014, respectively. Accordingly, the tax rate for the quarter ended September 30, 2015 was 48% and 280% for the quarter ended September 30, 2014. The fluctuations in the tax rates relative to reported income from 2014 to 2015, results from the non-taxable losses, for which no deferred tax benefit is provided. 

 

Net income increased to $315 during the three months ended September 30, 2015 from a net loss of $694 during the three months ended September 30, 2014. The increase in net income of $1,009 is a function of the change in the value of the derivative liability and income tax provisions related to such derivative liability.

 

Comparison of Nine Months Ended September 30, 2015 and 2014

 

During the nine months ended September 30, 2015, net sales decreased by $19,510, from $444,199 to $424,689 or 4.4% from the same period in 2014.  This decrease was primarily due to decreased sales of $65,754 in Latin America offset by an increase in sales in North America and Europe during the period ended September 30, 2015 as compared to the same period in 2014.

 

Gross profit decreased by $2,770 to $18,201 from $20,971 during the nine months ended September 30, 2015, representing a 13.2% decrease of which $836 is attributable to decreased sales and $1,934 to a decline in the gross margin of 0.4% to 4.3% from 4.7%. The dollar decrease is attributable to lower gross profit margin due to increased competitive market pressure across all regions.

 

 - 19 - 

 

 

Selling, general and administrative expenses for the nine months ended September 30, 2015 increased by $32 from $10,600 to $10,632 for the same period in 2014, primarily as a result of increases in consulting and legal fees and insurance costs offset by lower compensation and travel expenses.

 

During the nine months ended September 30, 2015, interest expense increased by $1,442 to $4,665 from $3,223 for the same period in 2014 as loan balances increased to support higher inventory levels. Interest on our 10% Convertible Senior Subordinated Notes Due June 1, 2016 and amortization of the debt discount in connection with these notes totaled $1,282 during the nine months ended September 2015 and $1,290 during the nine months ended September 2014.

 

Our 10% Convertible Senior Subordinated Notes Due June 1, 2016 have an embedded conversion option which was bifurcated and recorded as a separate derivative liability at a fair value at issuance of the notes. The derivative liability is carried at fair value with changes in mark to market recorded in income. The changes in the fair value of the derivative liability resulted in a non-cash non-operating gain of $1,184 during the nine month period ended September 30, 2015, as compared to a $2,239 non-cash non-operating loss during the same period in 2014. The valuation has numerous inputs; however, these changes are driven primarily by the change in the stock price at the end of these periods.

 

During the nine months ended September 30, 2015 net income of $2,774 increased by $1,014 as compared to the period ended September 30, 2014. This increase is mainly a result of the change in the value of the derivative liability and tax effect related to such derivative liability.

 

Liquidity and Capital Resources

 

Overview

 

At September 30, 2015, we had cash of $5,536, net accounts receivable of $76,248, senior secured debt of $162,000, junior secured debt of $4,471, and subordinated debt of $11,000.  Management believes that cash from operations, together with funds available under our credit facility will be sufficient to fund the cash requirements relating to our existing operations for the next twelve months and the repayment of the convertible debt due in June 2016, if not converted. However, we will require additional debt or equity financing in connection with future expansion of operations.

 

Comparison of Nine Month Periods Ended September 30, 2015 and 2014

 

Net cash provided by operating activities was $39,254 during the nine months ended September 30, 2015, as compared to $24,047 used in operating activities during the same period in 2014. In the nine months ended September 30, 2015 cash provided by operating activities resulted from decreases in inventories of $37,828, trade accounts receivable of $13,043 and offset by decreases in trade accounts payable of $19,689.

 

Our days sales outstanding decreased from 59 days in September 2014 to 48 days in September 2015 attributable to reduced sales in Latin America which has longer payment cycles. Our inventory in warehouses, available for delivery to customers, as of September 30, 2015 was approximately 80 days of sales as compared to 38 days as of the same date in 2014. While total inventory levels have been reduced by $38,557 since December 2014, they are higher than optimal as we received delayed supplier deliveries from the third quarter of 2014 combined with on time supplier deliveries thereafter. Our inventory turn rate, including materials in transit, was 3.7 times or 98 days on hand, as of September 30, 2015 as compared to 4.9 times or 73 days on hand as of September 30, 2014. The days payable outstanding was 17 days as of September 30, 2015, as compared to 22 days for the same period in 2014.

 

Cash flows provided by investing activities during the nine months ended September 30, 2015 and 2014, amounted to $2,263 and $2,481 respectively, which is primarily the monthly repayment by PT. Alumindo of the advance related to our supply agreement with PT. Alumindo.

 

Cash flows used in financing activities during the nine months ended September 30, 2015, amounted to $37,067, as compared to cash provided by financing activities of $23,815 during the same period in 2014.  During the first nine months of 2015, we reduced notes payable to banks by $33,978 as compared to an increase of $25,602 in notes payable during the first nine months of 2014. In addition, we acquired 330 additional common shares at a cost of $1,407 during the period ended September 30, 2015 and repurchased 350 stock options at a cost of $922, which resulted in an excess tax benefit of $282.

 

 - 20 - 

 

 

Credit Agreements and Other Debt

 

We were a party to a credit agreement with Rabobank International, for itself and as lead arranger and agent, JPMorgan Chase, for itself and as syndication agent, and ABN AMRO, BNP Paribas, RBS Citizens, Société Générale, and Brown Brothers Harriman which provided for a $200,000 revolving line of credit, including a commitment to issue letters of credit and a swing-line loan sub facility, with a maturity date of June 30, 2014.

 

On June 19, 2014, we entered into an amended and restated committed credit agreement with Rabobank International, for itself and as lead arranger and agent, BNP Paribas, for itself and as syndication agent, and Société Générale, ABN AMRO, RB International, and Brown Brothers Harriman as well as a new uncommitted line of credit with Rabobank International, BNP Paribas and Société Générale. Both credit lines are secured, asset-based credit facilities. The committed credit facility provided for amounts up to $150,000, and the uncommitted facility provided for a maximum amount of $75,000. The agreement also allowed for an additional increase in the committed credit facility of $75,000, for a total of $300,000, subject to certain restrictions and conditions. On December 18, 2014, we amended and increased these credit lines by an aggregate of $50,000, increasing our overall line of credit to $275,000. The amended committed credit agreement was increased by $35,000 to $185,000, and the uncommitted credit facility, increased by $15,000 to $90,000. There were no changes to the interest rate or to the maturity date of the committed facility, which remains June 19, 2017. Subsequent to these amendments the additional increase available under the term of these agreements is $25,000, subject to certain restrictions and conditions. Our borrowings under these lines of credit are secured by substantially all of our assets.

 

Amounts borrowed bear interest at Eurodollar, money market or base rates, at our option, plus an applicable margin.   The credit agreements contain financial and other covenants, including but not limited to, covenants requiring maintenance of minimum tangible net working capital and compliance with leverage ratios, as well as an ownership minimum and limitations on other indebtedness, liens, distributions or dividends, and investments and dispositions of assets.   As of September 30, 2015, we were in compliance with all covenants under these lines of credit.

 

Both credit agreements provide that amounts under the facilities may be borrowed and repaid, and re-borrowed, subject to a borrowing base test. On June 11, 2015 the Company entered into a Second Amendment to the Uncommitted Credit Agreement which amended the termination date to June 18, 2016 from June 19, 2015. As of September 30, 2015 and December 31, 2014, the credit utilized amounted to, respectively, $197,915 and $229,386 (including approximately $35,915 and $36,586 of outstanding letters of credit). As of September 30, 2015, the committed line of credit had loans outstanding of $134,000 and the uncommitted line of credit had loans outstanding of $28,000.

 

Our wholly owned Belgian subsidiary, Imbali, maintained a line of credit with ING Belgium S.A./N.V., for a EUR 8,000 (US$8,942) commitment for loans and documentary letters of credit. On July 30, 2015 Imbali entered into a credit agreement with Rabobank to replace the line of credit with ING Belgium for a line of credit of EUR 12,500(US$13,973). Imbali utilized EUR 4,000 (US$4,471) under the Rabobank facility to repay the outstanding balance due to ING. Loan advances are limited to a percentage of Imbali’s pledged accounts receivables and inventory and bear interest at EURIBOR plus 1.9%. This secured credit arrangement is unconditionally guaranteed by us. As of September 30, 2015, the outstanding loan amounted to EUR 4,000 (US $4,471), as compared to loans outstanding of EUR 6,850 (US $8,288) on December 31, 2014. As of September 30, 2015, Imbali was in compliance with all financial covenants.

 

On June 3, 2011, we issued $12,000 principal amount of 10% Convertible Senior Subordinated Notes Due June 1, 2016 in a private placement to selected accredited investors. On August 18, 2014, a note holder converted $1,000 of notes into common stock.  The notes are currently convertible at the option of the holders into shares of common stock at a conversion rate of 262.21 shares of common stock per $1 principal amount of notes, subject to adjustment for cash and stock dividends, stock splits and similar transactions, at any time before maturity.  The current conversion price reflects eighteen adjustments for dividends.  In addition, if the last reported sale price of the common stock for 30 consecutive trading days is equal to or greater than $7.00, and a registration statement is effective covering the resale of the shares of common stock issuable upon conversion of the notes, we have the right, in our sole discretion, to require the holders to convert all or part of their notes at the then applicable conversion rate.  Interest on the notes is payable in arrears on the first day of June and December every year the notes are outstanding.

 

 - 21 - 

 

 

Derivative Financial Instruments

 

Inherent in our business is the risk of matching the timing of our purchase and sales contracts. The prices of the aluminum products we buy and sell are based on a constantly moving terminal market price determined by the London Metal Exchange. Were we not to hedge such exposures, we could be exposed to significant losses due to the continually changing aluminum prices.

 

We use aluminum futures contracts to manage our exposure to this commodity price risk. It is generally our policy to hedge such risks to the extent practicable. We enter into hedges to limit our exposure to volatile price fluctuations that we believe would impact our gross margins on firm purchase and sales commitments. As an example, if we enter into fixed price contracts with our suppliers and variable priced sales contracts with our customers, we will generally enter into a futures contract to sell the aluminum for future delivery in the month when the aluminum is to be priced and delivered to the customer and repurchase this position once the pricing has been fixed with our customer.  If the underlying metal price increases, we suffer a hedging loss and have a derivative liability, but the sales price to the customer is based on a higher market price and offsets the loss. Conversely, if the metal price decreases, we have a hedging gain and recognize a derivative asset, but the sales price to the customer is based on the lower market price and offsets the gain.

 

We also enter into foreign exchange forward contracts to hedge our exposure related to commitments to purchase or sell metals and accounts receivable denominated in some international currencies. In such cases, we will purchase or sell the foreign currency through a bank for an approximate date when we anticipate making a payment to a supplier or receiving payment from the foreign customer.

 

In accordance with generally accepted accounting principles in the U.S., we designate these derivative contracts as fair value hedges and recognize them on our balance sheet at fair value.  We also recognize offsetting changes in the fair value of the related firm purchase and sales commitment to which the hedge is attributable in earnings upon revenue recognition, which occurs at the time of delivery to our customers.

 

The potential for losses related to our hedging activities, given our hedging methodology, arises from counterparty defaults with banks for our foreign exchange hedging, the London Metal Exchange for our aluminum hedges, or customer defaults. In the event of a customer default, we might be forced to sell the material in the open market and absorb losses for metal or foreign exchange hedges that were applied to the defaulting customers’ transactions. Our results of operations could be materially impacted by any counterparty or customer default, as we might not be able to collect money owed to us and/or our hedge might effectively be cancelled.

 

We use futures and forward contracts as hedges, for no purpose other than to avoid exposure to changes in aluminum prices and foreign currency rates between when we buy a shipment of aluminum from a supplier and when we deliver it to a customer.  Our derivatives are not for purposes of trading in the futures market. We earn our gross profit margin through our business operations and not from the movement of aluminum prices.

 

As part of our business we also engage in the purchase, sale and distribution of steel products. If we do not have a matching sales contract related to such products, (for example, any steel products that are unsold in our inventory), we have price risk that we currently do not or are unable to hedge. As such, any decline in pricing for such products may adversely impact our profitability.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Item 4. Controls and Procedures

 

Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

 

As of September 30, 2015, we conducted an evaluation, under the supervision and participation of management including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

 

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Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of September 30, 2015.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

PART II - OTHER INFORMATION

 

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

 

Period  Total
Number of
Shares
Purchased
   Average
 Price
Paid per
Share
   Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
   Maximum
Number of
Shares that May
Yet Be
Purchased
Under the Plans 
or Programs
 
July 1, 2015 - July 31, 2015   27   $4.01           
August 1, 2015 - August 31, 2015   15   $3.06           
September 1, 2015 - September 30, 2015   40   $3.83           
Total   82   $3.76    1,668    332 

 

In July 2008, the Board of Directors authorized the repurchase of 2 million shares of the Company’s common stock at a maximum price of $3.50 per share. In September 2014, the Board of Directors authorized a change in the maximum per share price from $3.50 to $5.00 per share.

 

Item 6. Exhibits

 

  (a) Exhibits

 

See Index to Exhibits.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  EMPIRE RESOURCES, INC.  
       
Date: November 16, 2015 By:  /s/ Nathan Kahn  
    Name:  Nathan Kahn  
    Title: President and Chief Executive Officer  
      (Principal Executive Officer)  
         
  By:  /s/Sandra Kahn  
    Name:  Sandra Kahn  
    Title: Vice President and Chief Financial Officer  
      (Principal Financial Officer)  

 

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EXHIBIT INDEX

 

     
31.1*   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1*   Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2*   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 101* The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language), (i)Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Stockholders’ Equity, and (v) the Notes to the Condensed Consolidated Financial Statements

 

 

*           Filed herewith.