UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended: March 31, 2015 |
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OR |
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o |
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 |
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22-3136782 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
One Parker Plaza
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 o |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company x |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s common stock,
$0.01 par value, outstanding as of May 12, 2015: 8,694,678
TABLE OF CONTENTS
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)
| |
March
31, 2015
Unaudited | | |
December 31, 2014 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash | |
$ | 4,652 | | |
$ | 1,130 | |
Trade accounts receivable (less allowance for doubtful
accounts of $536 and $562) | |
| 108,094 | | |
| 89,693 | |
Inventories | |
| 186,753 | | |
| 192,064 | |
Deferred tax assets | |
| 3,901 | | |
| 3,911 | |
Advance to supplier, net of imputed interest of $31 and $66 | |
| 2,469 | | |
| 3,277 | |
Other current assets, including derivatives | |
| 13,640 | | |
| 18,605 | |
Total current assets | |
| 319,509 | | |
| 308,680 | |
Preferential supply agreement, net | |
| 240 | | |
| 321 | |
Long-term financing costs, net of amortization | |
| 915 | | |
| 1,024 | |
Property and equipment, net | |
| 4,335 | | |
| 4,258 | |
Total assets | |
$ | 324,999 | | |
$ | 314,283 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Notes payable – banks | |
$ | 222,331 | | |
$ | 201,088 | |
Trade accounts payable | |
| 31,389 | | |
| 42,626 | |
Income taxes payable | |
| 4,898 | | |
| 4,190 | |
Accrued expenses and derivative liabilities | |
| 4,859 | | |
| 4,137 | |
Dividends payable | |
| 218 | | |
| 449 | |
Total current liabilities | |
| 263,695 | | |
| 252,490 | |
| |
| | | |
| | |
Subordinated convertible debt net of unamortized
discount of $605 and $803 respectively | |
| 10,395 | | |
| 10,197 | |
Derivative liability for embedded conversion option | |
| 1,738 | | |
| 2,734 | |
Deferred taxes payable | |
| 49 | | |
| 51 | |
Total liabilities | |
| 275,877 | | |
| 265,472 | |
| |
| | | |
| | |
Commitments (Note 19) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders' equity: | |
| | | |
| | |
Common stock $0.01 par value, 20,000,000 shares authorized and 11,749,651
shares issued at March 31, 2015 and December 31, 2014 | |
| 117 | | |
| 117 | |
Additional paid-in capital | |
| 13,678 | | |
| 13,678 | |
Retained earnings | |
| 42,242 | | |
| 40,805 | |
Accumulated other comprehensive loss | |
| (719 | ) | |
| (334 | ) |
Treasury stock, 3,007,528 and
2,843,717 shares at March 31, 2015 and December 31, 2014, respectively | |
| (6,196 | ) | |
| (5,455 | ) |
Total stockholders' equity | |
| 49,122 | | |
| 48,811 | |
Total liabilities and stockholders' equity | |
$ | 324,999 | | |
$ | 314,283 | |
See notes to unaudited condensed consolidated financial statements
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands except per share amounts)
| |
Three Months Ended March 31, | |
| |
2015 | | |
2014 | |
| |
Unaudited | | |
Unaudited | |
| |
| | |
See Note 20 | |
Net sales | |
$ | 168,253 | | |
$ | 138,317 | |
Cost of goods sold | |
| 161,077 | | |
| 131,830 | |
Gross profit | |
| 7,176 | | |
| 6,487 | |
Selling, general and administrative expenses | |
| 3,898 | | |
| 3,299 | |
Operating income | |
| 3,278 | | |
| 3,188 | |
Interest expense, net | |
| 1,675 | | |
| 1,091 | |
Income before other expenses | |
| 1,603 | | |
| 2,097 | |
Other expenses | |
| | | |
| | |
Change in value of derivative liability | |
| 996 | | |
| (429 | ) |
Income before income taxes | |
| 2,599 | | |
| 1,668 | |
Income taxes | |
| 944 | | |
| 860 | |
Net income | |
$ | 1,655 | | |
$ | 808 | |
Weighted average shares outstanding: | |
| | | |
| | |
Basic | |
| 8,807 | | |
| 8,629 | |
Diluted | |
| 11,924 | | |
| 8,886 | |
Earnings per share: | |
| | | |
| | |
Basic | |
$ | 0.19 | | |
$ | 0.09 | |
Diluted | |
$ | 0.09 | | |
$ | 0.09 | |
See notes to unaudited condensed consolidated financial statements
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
| |
Three Months Ended March 31, | |
| |
2015 | | |
2014 | |
| |
Unaudited | | |
Unaudited | |
Net income | |
$ | 1,655 | | |
$ | 808 | |
Other comprehensive (loss)/income before tax | |
| | | |
| | |
Foreign currency translation adjustments | |
| (385 | ) | |
| 6 | |
Decrease in value of interest rate swap liability | |
| - | | |
| 13 | |
Other comprehensive (loss)/income before tax | |
| (385 | ) | |
| 19 | |
Income tax related to components
of other comprehensive (loss)/income | |
| | | |
| (5 | ) |
Other comprehensive (loss)/income, net of tax | |
| (385 | ) | |
| 14 | |
Comprehensive income | |
$ | 1,270 | | |
$ | 822 | |
See notes to unaudited condensed consolidated financial statements
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
| |
Three Months Ended March 31, | |
| |
2015 | | |
2014 | |
| |
Unaudited | | |
Unaudited | |
Cash flows - operating activities: | |
| | | |
| | |
Net income | |
$ | 1,655 | | |
$ | 808 | |
Adjustments to reconcile net income to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 162 | | |
| 275 | |
Change in value of derivative liability | |
| (996 | ) | |
| 429 | |
Amortization of convertible note discount | |
| 197 | | |
| 141 | |
Imputed interest on vendor advance | |
| (26 | ) | |
| (55 | ) |
Amortization of supply agreement | |
| 80 | | |
| 80 | |
Deferred income taxes | |
| 9 | | |
| 2 | |
Foreign exchange loss/(gain) and other | |
| 460 | | |
| (2 | ) |
Stock-based compensation | |
| - | | |
| 373 | |
Changes in: | |
| | | |
| | |
Trade accounts receivable | |
| (19,269 | ) | |
| (25,743 | ) |
Inventories | |
| 4,409 | | |
| 22,124 | |
Other current assets | |
| 4,959 | | |
| 769 | |
Trade accounts payable | |
| (11,217 | ) | |
| (13,776 | ) |
Income taxes payable | |
| 716 | | |
| 838 | |
Accrued expenses and derivative liabilities | |
| 804 | | |
| 2,584 | |
Net cash used in operating activities | |
| (18,057 | ) | |
| (11,153 | ) |
Cash flows - investing activities: | |
| | | |
| | |
Repayment related to supply agreement | |
| 833 | | |
| 833 | |
Purchases of property and equipment | |
| (116 | ) | |
| (11 | ) |
Net cash provided by investing activities | |
| 717 | | |
| 822 | |
Cash flows - financing activities: | |
| | | |
| | |
Proceeds from notes payable – banks | |
| 22,163 | | |
| 9,833 | |
Repayments - mortgage payable | |
| - | | |
| (44 | ) |
Deferred financing costs | |
| (13 | ) | |
| - | |
Dividends paid | |
| (449 | ) | |
| (215 | ) |
Treasury stock purchased | |
| (741 | ) | |
| (13 | ) |
Net cash provided by financing activities | |
| 20,960 | | |
| 9,561 | |
Net increase/(decrease) in cash | |
| 3,620 | | |
| (770 | ) |
Effect of exchange rate | |
| (98 | ) | |
| 1 | |
Cash at beginning of period | |
| 1,130 | | |
| 2,477 | |
Cash at end of the period | |
$ | 4,652 | | |
$ | 1,708 | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest | |
$ | 1,310 | | |
$ | 1,509 | |
Income taxes | |
$ | 614 | | |
$ | 241 | |
Non cash financing activities: | |
| | | |
| | |
Dividend declared but not yet paid | |
$ | 218 | | |
$ | 217 | |
See notes to unaudited condensed consolidated financial statements
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 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (741 | ) | |
| (741 | ) |
Net change in cumulative translation adjustment | |
| | | |
| | | |
| | | |
| | | |
| (385 | ) | |
| | | |
| (385 | ) |
Dividends declared ($0.025 per share) | |
| | | |
| | | |
| | | |
| (218 | ) | |
| | | |
| | | |
| (218 | ) |
Net income | |
| | | |
| | | |
| | | |
| 1,655 | | |
| | | |
| | | |
| 1,655 | |
Balance at March 31, 2015 | |
| 11,750 | | |
$ | 117 | | |
$ | 13,678 | | |
$ | 42,242 | | |
$ | (719 | ) | |
$ | (6,196 | ) | |
$ | 49,122 | |
See notes to unaudited condensed consolidated financial statements
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 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. Newly Effective 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. The Company is currently evaluating the impact of the new guidance on its consolidated financial
statements.
In April 2015, the Financial Accounting
Standards Board (“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.
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 March 31, 2015 and the results of its operations and cash flows for the three months ended March 31, 2015 and 2014.
Interim results may not be indicative of the results that may be expected for the year.
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 three month periods ended March
31, 2015 and 2014 no one customer accounted for 10% or more 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 37% of total purchases during the three month period ended March 31, 2015.
For the period ended March 31, 2014, two suppliers, PT Alumindo and Hulamin Ltd. accounted for an aggregate of 40% 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 our 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. As of March 31, 2015, there were outstanding employee stock options to acquire 400 shares of common
stock, which had vested in prior years. During the three month period ended March 31, 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 March 31, 2015, the Company repurchased a total
of 1,502 shares under the repurchase program for an aggregate cost of $4,379. During the three month periods ended March 31, 2015
and 2014, the Company purchased 164 and 3 common shares at a cost of $741 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.
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 our 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 March 31, 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
and the uncommitted credit agreement must be repaid by the Company on or before June 19, 2015 unless otherwise agreed to. As of
March 31, 2015, the committed line of credit had loans outstanding of $156,800 and the uncommitted line of credit had loans outstanding
of $58,500. As of March 31, 2015 and December 31, 2014, the credit utilized amounted to, respectively, $255,847 and
$229,386 (including approximately $40,547 and $36,586 of outstanding letters of credit).
The Company’s wholly owned Belgian
subsidiary, Imbali, maintains a line of credit with ING Belgium S.A./N.V., for a EUR 8,000 (US$8,588) commitment for loans and
documentary letters of credit. Loan advances are limited to a percentage of Imbali’s pledged accounts receivables and inventory
and bear interest at EURIBOR plus 1.75%. This secured credit arrangement is unconditionally guaranteed by the Company. As of March
31, 2015, the outstanding loan amounted to EUR 6,550 (US $7,031), as compared to EUR 6,850 (US $8,288) on December 31, 2014. As
of March 31, 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 March 31, 2015, the notes are convertible at the option of the holders into shares of common stock at a conversion rate of
259.09 shares of common stock per $1 principal amount of notes (equivalent to a conversion price of $3.86 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 sixteen 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 March 31, 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.
As a result of transactions which cause
adjustments to the conversion rate, the embedded conversion option has been 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 month periods ended March 31, 2015, and 2014, the change in the fair value of the derivative liability resulted in a
gain of $996 and a loss of $429, respectively. Amortization of the discount amounted to $197 for the three month periods end March
31, 2015, and $141 for the three month period ended March 31, 2014.
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 March 31, 2015, December 31, 2014 and issuance:
| |
March 31, 2015 | | |
December 31, 2014 | | |
June 3, 2011 | |
| |
| | |
| | |
| |
Equity value | |
$ | 37,092 | | |
$ | 41,738 | | |
$ | 36,811 | |
Volatility | |
| 30 | % | |
| 35 | % | |
| 70 | % |
Risk free return | |
| 0.26 | % | |
| 0.67 | % | |
| 1.60 | % |
Dividend yield | |
| 2.36 | % | |
| 2.15 | % | |
| 2.51 | % |
Strike price | |
$ | 3.86 | | |
$ | 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 May 15, 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 three month period ended March 31, 2015 and 2014 amortization amounted to
$80 in each three month period.
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 per share:
| |
Three Months Ended March 31, | |
| |
2015 | | |
2014 | |
Numerator: | |
| | | |
| | |
Net income | |
$ | 1,655 | | |
$ | 808 | |
Add back of interest on convertible subordinated
debt, net of taxes | |
| 170 | | |
| - | |
Add back of amortization of discount on convertible
subordinated debt | |
| 122 | | |
| - | |
Adjustment for change in value
of convertible note derivative | |
| (921 | ) | |
| - | |
Numerator for diluted earnings
per share | |
$ | 1,026 | | |
$ | 808 | |
Denominator: | |
| | | |
| | |
Weighted average shares outstanding-basic | |
| 8,807 | | |
| 8,629 | |
Dilutive effect of convertible subordinated debt | |
| 2,850 | | |
| | |
Dilutive effect of stock options | |
| 267 | | |
| 257 | |
Weighted average shares outstanding-diluted | |
| 11,924 | | |
| 8,886 | |
Basic Earnings per Share | |
$ | 0.19 | | |
$ | 0.09 | |
Diluted Earnings per Share | |
$ | 0.09 | | |
$ | 0.09 | |
In computing diluted earnings per share
for the three months ended March 31, 2014 no effect has been given to the 3,026 common shares issuable upon conversion of subordinated
debt as the effect thereof 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. 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.
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 | |
March 31, 2015 | | |
December 31, 2014 | |
Asset derivatives: | |
| |
| | | |
| | |
Aluminum futures contracts | |
Other current assets | |
$ | 4,620 | | |
| 9,769 | |
Foreign currency forward contracts | |
Other current assets | |
| 403 | | |
| 1,337 | |
Total | |
| |
$ | 5,023 | | |
$ | 11,106 | |
For the periods ended March 31, 2015 and
December 31, 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:
| |
| |
| |
Three Months Ended | |
Derivatives in hedging | |
| |
Location of Gain or | |
March 31, | |
relationships | |
| |
(Loss) Recognized | |
2015 | | |
2014 | |
Foreign currency forward contracts | |
(a) | |
Cost of goods sold | |
$ | 674 | | |
$ | 27 | |
Interest rate swaps | |
(b) | |
Interest expense, net | |
| - | | |
| (14 | ) |
Aluminum futures | |
(c) | |
Cost of goods sold | |
| 4,260 | | |
| 1,644 | |
Total | |
| |
| |
$ | 4,934 | | |
$ | 1,657 | |
| a) | Fair value hedge: the related
hedged item is accounts receivable and offsetting losses in the three months March 31,
2015 and 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 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.
|
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 March 31, 2015 and December 31, 2014 are classified as follows:
| |
March 31, 2015 | | |
December 31, 2014 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Inventories | |
$ | 168,189 | | |
| | | |
| | | |
$ | 165,586 | | |
| | | |
| | |
Aluminum futures contracts | |
$ | 4,620 | | |
| | | |
| | | |
| 9,769 | | |
| | | |
| | |
Foreign currency forward contracts | |
$ | 403 | | |
| | | |
| | | |
| 1,337 | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Embedded conversion option | |
| | | |
| | | |
$ | 1,738 | | |
| | | |
| | | |
$ | 2,734 | |
15. Fair Value of Financial Instruments
The carrying amounts of variable rate
notes payable to the banks and the variable rate mortgage payable approximate fair value as of March 31, 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 March 31, 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 March 31, | |
| |
2015 | | |
2014 | |
United States | |
$ | 117,912 | | |
$ | 74,968 | |
Latin America | |
| 13,206 | | |
| 33,171 | |
Canada | |
| 13,960 | | |
| 11,696 | |
Australia & New Zealand | |
| 12,609 | | |
| 10,913 | |
Europe | |
| 10,566 | | |
| 7,569 | |
| |
$ | 168,253 | | |
$ | 138,317 | |
17. Accumulated Other Comprehensive
Income/(Loss)
Changes in accumulated other comprehensive income/(loss)
by component on an after tax basis are as follows:
Three Months ended March 31, 2015 | |
Foreign Currency Translation | | |
Interest Rate Swap Contract | | |
Total | |
Beginning balance | |
$ | (334 | ) | |
| | | |
$ | (334 | ) |
Other comprehensive (loss) before reclassification | |
| (385 | ) | |
| - | | |
| (385 | ) |
Loss reclassified to operations | |
| - | | |
| - | | |
| - | |
Net current period other comprehensive loss | |
| (385 | ) | |
| - | | |
| (385 | ) |
Ending balance | |
$ | (719 | ) | |
$ | - | | |
$ | (719 | ) |
Three Months ended March 31, 2014 | |
Foreign Currency Translation | | |
Interest Rate Swap Contract | | |
Total | |
Beginning balance | |
$ | 84 | | |
$ | (33 | ) | |
$ | 51 | |
Other comprehensive income before reclassification | |
| 6 | | |
| | | |
| 6 | |
Loss reclassified to operations | |
| - | | |
| 8 | (a) | |
| 8 | |
Net current period other comprehensive income | |
| 6 | | |
| 8 | | |
| 14 | |
Ending balance | |
$ | 90 | | |
$ | (25 | ) | |
$ | 65 | |
(a) Reclassified to following line items in the statement of income: | |
| | | |
| | | |
| | |
Interest expense, net | |
| | | |
$ | 13 | | |
| | |
Income taxes | |
| | | |
| (5 | ) | |
| | |
Net of tax | |
| | | |
$ | 8 | | |
| | |
18. Income Taxes
The disproportionate relationship between income taxes and
pre-tax income for the three month period ended March 31, 2014 is primarily attributable to no tax benefit being recognized for
the loss from change in value of the derivative liability, as such loss will not be deductible for income tax purposes.
19. Commitments
The Company had $40,547 in outstanding
letters of credit to certain of its suppliers at March 31, 2015 and $36,586 at December 31, 2014.
20. Restatement
Net income for the three months ended
March 31, 2014 has been decreased by $218 ($0.03 per share basic and diluted) from the previously reported $1,026. The adjustment
reflects that the loss arising from the change in value of the derivative liability for the quarter is not recognized for income
tax purposes.
Adjusted amounts after restatement are
as follows:
| |
Three months ended | |
| |
March 31, 2014 | |
Net income as previously reported | |
$ | 1,026 | |
Adjustment | |
$ | (218 | ) |
Net income as restated | |
$ | 808 | |
Earning per share as restated: | |
| | |
Basic | |
$ | 0.09 | |
Diluted | |
$ | 0.09 | |
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.
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 37% of our products during the first three months of 2015 as compared to an aggregate of 40%
of our products during the same period in 2014. While we generally place orders with our suppliers based upon orders that we receive
from our customers, we 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 March 31, 2015, we had $108,094
in trade receivables, after an allowance for doubtful accounts of $536. 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 a credit insurance policy
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.
Comparison of Three Months Ended March 31, 2015 and 2014
During the three months ended March 31,
2015, net sales increased by $29,936, from $138,317 to $168,253 or 21.6% from the same period in 2014. This increase
was due to improved sales volumes in all geographic regions except for Latin America, as compared to the same period in 2014.
In particular, sales in the United States increased 57% due to strong demand in this market. Sales in Latin America declined 60%
due to economic stresses in the region.
Gross profit increased by $689, to $7,176
during the three months ended March 31, 2015 from $6,487 in the same period of 2014, representing a 10.6% increase, of which $1,404
is attributable to the increased sales and ($714) to a decline in the gross margin of 0.4% to 4.3% from 4.7%. The decline in margin
reflects increased market pressures in Latin America.
Selling, general and administrative expenses
during the three months ended March 31, 2015 increased by $599 from $3,299 to $3,898 primarily as a result of sales compensation
based on increased sales.
During the three months ended March 31,
2015, interest expense increased 53.5% or $584 to $1,675 from $1,091 for the same period in 2014 as a result of increased bank
loans to support higher inventory levels, higher accounts receivable and lower accounts payable balances. During the three
months ended March 31, 2015 and 2014, interest on our 10% Convertible Senior Subordinated Notes Due June 1, 2016 totaled $275
and $300, respectively. Amortization of the debt discount in connection with these notes totaled
$197 for the three months ended March 31, 2015 and $141 for March 31, 2014.
During the three months ended March 31,
2015 income before other expenses declined by $494 from $2,097 to $1,603 or 23.6%. This decline is due to the increased selling,
general and administrative expenses and interest expense offset by the increase in gross profit.
Our 10% Convertible Senior Subordinated
Notes Due June 1, 2016 have an embedded conversion option which has been 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 $996 during
the three month period ended March 31, 2015, as compared to a $429 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 gain of $996 and the non-cash, non-operating loss of $429 during the quarters
ended March 31, 2015 and 2014, respectively. The tax rate for the quarter ending March 31, 2015 was 36.3% and 51.6% for the quarter
ending March 31, 2014. The fluctuations in the tax rates relative to reported income from 2014 to 2015, results from the material
non-taxable gains or losses, for which no deferred tax is provided.
Net income increased from $808 to $1,655
during the three months ended March 31, 2014 and March 31, 2015, respectively. The increase in net income of $847 includes a swing
from a loss to a gain of $1,425 in the non-cash, non-operating change in value of the derivative liability, offset by the increased
interest expense of $584.
Liquidity and Capital Resources
Overview
At March 31, 2015, we had cash of $4,652,
net accounts receivable of $108,094, senior secured debt of $215,300, junior secured debt of $7,031, 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. However, we will require
additional debt or equity financing in connection with the future expansion of our operations.
Comparison of Three Month Periods
Ended March 31, 2015 and 2014
Net cash used in operating activities
was $18,057 during the three months ended March 31, 2015, as compared to $11,153 during the same period in 2014. In the three
months ended March 31, 2015 cash used in operating activities resulted from increases in trade accounts receivable of $19,269,
decreases in trade accounts payable of $11,217, offset by a small reduction in inventories of $4,409. Our inventory levels are
higher than an optimal level as we had delayed supplier deliveries in the third quarter of 2014 combined with on time supplier
deliveries thereafter.
Our days sales outstanding increased from
51 days in March 2014 to 58 days in March 2015 attributable to sales in Latin America late in 2014, which has longer payment cycles.
Our inventory in warehouses, available for delivery to customers, as of March 31, 2015 was approximately 71 days of sales as compared
to 44 days as of the same date in 2014. Our inventory turn rate, including materials in transit, was 3.6 times or 100 days on
hand, as of March 31, 2015 as compared to 4.7 times or 77 days on hand as of March 31, 2014. The days payable outstanding was
18 days as of March 31, 2015, as compared to 25 days for the same period in 2014.
Cash flows provided by investing activities
during the three months ended March 31, 2015 and 2014, amounted to $717 and $822 respectively, which is primarily the monthly
repayment by PT. Alumindo of the advance related to our supply agreement with PT. Alumindo.
Cash flows provided by financing activities
during the three months ended March 31, 2015, amounted to $20,960, as compared to $9,561 during the same period in 2014.
During the first three months of 2015, we funded the increase in accounts receivable of $19,269 and a decrease in accounts payable
of $11,217 with borrowings from our line of credit. In addition, we acquired 164 additional common shares at a cost of $741 during
the period ended March 31, 2015.
Credit Agreements and Other Debt
We were a party to 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 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 March 31, 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. The committed line of credit matures June 19, 2017
and the uncommitted credit agreement must be repaid on or before June 19, 2015 unless otherwise agreed to. We anticipate
that this credit agreement will be extended prior to its expiration, however, there can be no assurances that we will be able
to successfully extend the term. As of March 31, 2015 and December 31, 2014, the credit utilized amounted to, respectively, $255,847
and $229,386 (including approximately $40,547 and $36,586 of outstanding letters of credit). As of March 31, 2015, the committed
line of credit had loans outstanding of $156,800 and the uncommitted line of credit had loans outstanding of $58,500.
Our wholly owned Belgian subsidiary, Imbali,
maintains a line of credit with ING Belgium S.A./N.V., for a EUR 8,000 (US$8,588) commitment for loans and documentary letters
of credit. Loan advances are limited to a percentage of Imbali’s pledged accounts receivables and inventory and bear interest
at EURIBOR plus 1.75%. This secured credit arrangement is unconditionally guaranteed by us. As of March 31, 2015, the outstanding
loan amounted to EUR 6,550 (US $7,031), as compared to EUR 6,850 (US $8,288) on December 31, 2014. As of March 31, 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 259.09 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 sixteen 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.
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 March 31, 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). 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.
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 March 31, 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 March 31, 2015 that has
materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II - OTHER
INFORMATION
Item 6. Exhibits
See Index to Exhibits.
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.
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EMPIRE RESOURCES, INC. |
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Date: May 15, 2015 |
By: |
/s/ Nathan Kahn |
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Name: |
Nathan Kahn |
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Title: |
President and Chief Executive Officer |
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(Principal Executive Officer) |
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By: |
/s/Sandra Kahn |
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Name: |
Sandra Kahn |
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Title: |
Vice President and Chief Financial Officer |
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(Principal Financial Officer) |
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EXHIBIT INDEX
31.1* |
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
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31.2* |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
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32.1* |
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Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
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32.2* |
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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 March 31, 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.
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, Nathan Kahn, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Empire Resources, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| d. | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions): |
| a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
May 15, 2015 |
/s/Nathan Kahn |
|
Nathan Kahn |
|
President and Chief Executive Officer
(Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, Sandra Kahn, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Empire Resources, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| d. | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions): |
| a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
May 15, 2015 |
/s/Sandra Kahn |
|
Sandra Kahn |
|
Vice President and Chief Financial Officer
(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
This certification is furnished solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and accompanies the Quarterly Report on Form 10-Q (the “Form 10-Q”)
for the quarter ended March 31, 2015 of Empire Resources, Inc. (the “Company”). I, Nathan Kahn, the President, Chief
Executive Officer and Principal Executive Officer of the Company, certify that, based on my knowledge:
(1) |
The Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in this report. |
Date: May 15, 2015 |
|
By: |
/s/ Nathan Kahn |
|
|
Name: |
Nathan Kahn |
|
|
Title: |
President and Chief Executive Officer
(Principal Executive Officer) |
The foregoing certification is being furnished as an exhibit
to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing
of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
This certification is furnished solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and accompanies the Quarterly Report on Form 10-Q (the “Form 10-Q”)
for the quarter ended March 31, 2015 of Empire Resources, Inc. (the “Company”). I, Sandra Kahn, the Vice President,
Chief Financial Officer and Principal Financial Officer of the Company, certify that, based on my knowledge:
(1) |
The Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in this report. |
Date: May 15, 2015 |
|
By: |
/s/ Sandra Kahn |
|
|
Name: |
Sandra Kahn |
|
|
Title: |
Vice President and Chief Financial Officer
(Principal Financial Officer) |
The foregoing certification is being furnished as an exhibit
to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing
of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
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