Item 1.
|
Financial Statements
|
TMS INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Revenue from Sale of Materials
|
|
$
|
453,630
|
|
|
$
|
612,659
|
|
Service Revenue
|
|
|
135,965
|
|
|
|
134,299
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
589,595
|
|
|
|
746,958
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
Cost of Raw Materials Shipments
|
|
|
433,791
|
|
|
|
591,058
|
|
Site Operating Costs
|
|
|
101,668
|
|
|
|
101,846
|
|
Selling, General and Administrative Expenses
|
|
|
15,821
|
|
|
|
17,261
|
|
Depreciation
|
|
|
15,796
|
|
|
|
13,166
|
|
Amortization
|
|
|
3,083
|
|
|
|
3,053
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
|
570,159
|
|
|
|
726,384
|
|
Income from Operations
|
|
|
19,436
|
|
|
|
20,574
|
|
Interest Expense, Net
|
|
|
(5,973
|
)
|
|
|
(8,101
|
)
|
Loss from equity investment
|
|
|
(43
|
)
|
|
|
|
|
Loss on Modification and Early Extinguishments of debt
|
|
|
(1,102
|
)
|
|
|
(12,300
|
)
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
12,318
|
|
|
|
173
|
|
Income Tax Expense
|
|
|
(4,261
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
8,057
|
|
|
|
113
|
|
Net loss attributable to noncontrolling interests
|
|
|
6
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to TMS International Corp. common stock
|
|
$
|
8,063
|
|
|
$
|
411
|
|
|
|
|
|
|
|
|
|
|
Net Income per Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.01
|
|
Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
39,277,441
|
|
|
|
39,255,973
|
|
Diluted
|
|
|
39,330,737
|
|
|
|
39,255,973
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
TMS INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TMS International
|
|
|
Noncontrolling
Interests
|
|
|
Total
|
|
|
|
Quarter
ended
March 31
|
|
|
Quarter
ended
March 31
|
|
|
Quarter
ended
March 31
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net income (loss)
|
|
$
|
8,063
|
|
|
$
|
411
|
|
|
$
|
(6
|
)
|
|
$
|
(298
|
)
|
|
$
|
8,057
|
|
|
$
|
113
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in foreign currency translation
|
|
|
(4,067
|
)
|
|
|
4,359
|
|
|
|
(114
|
)
|
|
|
102
|
|
|
|
(4,181
|
)
|
|
|
4,461
|
|
Net change from periodic revaluations
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Net amount reclassified to earnings
|
|
|
342
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
342
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income, net of tax
|
|
|
(3,725
|
)
|
|
|
4,599
|
|
|
|
(114
|
)
|
|
|
102
|
|
|
|
(3,839
|
)
|
|
|
4,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
4,338
|
|
|
$
|
5,010
|
|
|
$
|
(120
|
)
|
|
$
|
(196
|
)
|
|
$
|
4,218
|
|
|
$
|
4,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
TMS INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share data)
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30,276
|
|
|
$
|
26,936
|
|
Accounts receivable, net of allowance for doubtful accounts of $2,951 and $3,038, respectively
|
|
|
280,251
|
|
|
|
280,472
|
|
Inventories
|
|
|
58,956
|
|
|
|
50,520
|
|
Prepaid and other current assets
|
|
|
21,254
|
|
|
|
22,757
|
|
Deferred tax asset
|
|
|
7,108
|
|
|
|
7,485
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
397,845
|
|
|
|
388,170
|
|
Property, plant and equipment, net
|
|
|
217,933
|
|
|
|
214,668
|
|
Equity investment
|
|
|
2,192
|
|
|
|
2,235
|
|
Deferred financing costs, net of accumulated amortization of $2,327 and $1,863, respectively
|
|
|
9,348
|
|
|
|
10,069
|
|
Goodwill
|
|
|
241,554
|
|
|
|
242,669
|
|
Other intangibles, net of accumulated amortization of $74,842 and $72,012, respectively
|
|
|
146,661
|
|
|
|
147,885
|
|
Other noncurrent assets
|
|
|
4,087
|
|
|
|
4,098
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,019,620
|
|
|
$
|
1,009,794
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
252,351
|
|
|
$
|
251,941
|
|
Salaries, wages and related benefits
|
|
|
23,612
|
|
|
|
29,274
|
|
Current taxes payable
|
|
|
408
|
|
|
|
964
|
|
Accrued expenses
|
|
|
17,363
|
|
|
|
18,284
|
|
Revolving bank borrowings
|
|
|
13,500
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
7,492
|
|
|
|
8,395
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
314,726
|
|
|
|
308,858
|
|
Long-term debt
|
|
|
303,563
|
|
|
|
303,657
|
|
Loans from noncontrolling interests
|
|
|
3,094
|
|
|
|
4,341
|
|
Deferred tax liability
|
|
|
60,066
|
|
|
|
58,192
|
|
Other noncurrent liabilities
|
|
|
26,285
|
|
|
|
27,704
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
707,734
|
|
|
|
702,752
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Class A Common Stock; 200,000,000 shares authorized, $0.001 par value per share; 14,578,332 and 14,564,928 shares issued and
outstanding at March 31, 2013 and December 31, 2012, respectively
|
|
|
14
|
|
|
|
14
|
|
Class B Common Stock; 30,000,000 shares authorized, $0.001 par value per share; 24,699,109 and 24,712,513 shares issued and
outstanding at March 31, 2013 and December 31, 2012, respectively.
|
|
|
25
|
|
|
|
25
|
|
Capital in excess of par value
|
|
|
436,985
|
|
|
|
436,359
|
|
Accumulated deficit
|
|
|
(114,091
|
)
|
|
|
(122,154
|
)
|
Accumulated other comprehensive loss
|
|
|
(12,688
|
)
|
|
|
(8,963
|
)
|
|
|
|
|
|
|
|
|
|
Total TMS International Corp. stockholders equity
|
|
|
310,245
|
|
|
|
305,281
|
|
Noncontrolling interests
|
|
|
1,641
|
|
|
|
1,761
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
311,886
|
|
|
|
307,042
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,019,620
|
|
|
$
|
1,009,794
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TMS INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
8,057
|
|
|
$
|
113
|
|
Adjustments to reconcile Net Income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
18,879
|
|
|
|
16,219
|
|
Amortization of deferred financing costs and original issue discount
|
|
|
617
|
|
|
|
747
|
|
Deferred income tax
|
|
|
2,907
|
|
|
|
(4
|
)
|
(Recovery) provision for bad debts
|
|
|
(87
|
)
|
|
|
226
|
|
Gain (loss) on the disposal of equipment
|
|
|
43
|
|
|
|
(165
|
)
|
Non-cash share-based compensation cost
|
|
|
626
|
|
|
|
322
|
|
Equity loss
|
|
|
43
|
|
|
|
|
|
Loss on modification and early extinguishment of debt
|
|
|
1,102
|
|
|
|
12,300
|
|
Increase (decrease) from changes in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
308
|
|
|
|
(47,247
|
)
|
Inventories
|
|
|
(8,436
|
)
|
|
|
(14,257
|
)
|
Prepaid and other current assets
|
|
|
58
|
|
|
|
5,604
|
|
Other noncurrent assets
|
|
|
11
|
|
|
|
(348
|
)
|
Accounts payable
|
|
|
410
|
|
|
|
48,905
|
|
Accrued expenses
|
|
|
(7,139
|
)
|
|
|
(14,227
|
)
|
Other noncurrent liabilities
|
|
|
(1,078
|
)
|
|
|
99
|
|
Other, net
|
|
|
(1,517
|
)
|
|
|
1,503
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
14,804
|
|
|
|
9,790
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
(20,579
|
)
|
|
|
(33,153
|
)
|
Software and systems expenditures
|
|
|
(2,366
|
)
|
|
|
(71
|
)
|
Proceeds from sale of equipment
|
|
|
78
|
|
|
|
271
|
|
Contingent payment for acquired business
|
|
|
|
|
|
|
(131
|
)
|
Cash flows related to IU International, net
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(22,867
|
)
|
|
|
(33,111
|
)
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Revolving credit facility borrowing (repayments), net
|
|
|
13,500
|
|
|
|
25,142
|
|
Debt issuance and termination fees
|
|
|
(772
|
)
|
|
|
(13,630
|
)
|
Repayment of debt
|
|
|
(3,185
|
)
|
|
|
(380,732
|
)
|
Proceeds from debt issuance, net of original issue discount
|
|
|
2,250
|
|
|
|
297,000
|
|
Payments to acquire noncontrolling interest
|
|
|
|
|
|
|
(231
|
)
|
Borrowings from noncontrolling interests
|
|
|
|
|
|
|
1,917
|
|
Contributions from noncontrolling interest
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
11,793
|
|
|
|
(70,265
|
)
|
Effect of exchange rate on cash and cash equivalents
|
|
|
(390
|
)
|
|
|
232
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
3,340
|
|
|
|
(93,354
|
)
|
Cash at beginning of period
|
|
|
26,936
|
|
|
|
108,830
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
30,276
|
|
|
$
|
15,476
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Notes to Unaudited Condensed Consolidated Financial Statements.
Note 1Nature of Operations
TMS International Corp. ( the Company) through its subsidiaries, including TCIMS, is the largest provider
of outsourced industrial services to steel mills in North America with a substantial international presence. The Company operates at 81 customer sites in 12 countries and has a raw materials procurement network that extends to five continents. The
Companys primary services include: (i) scrap management and preparation, (ii) semi-finished and finished material handling, (iii) metal recovery and slag handling, processing and sales, (iv) surface conditioning,
(v) raw materials procurement and logistics and (vi) proprietary software-based raw materials cost optimization.
Note 2Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For the three-month period ending March 31, 2012, $0.2 million dollars of selling, general and administrative expenses were
recorded as an increase to non-current liabilities. The amount was subsequently reclassified as an increase to other comprehensive income and accumulated other comprehensive income. Operating results for the first three months ended March 31,
2013 and 2012 are not necessarily indicative of the results that may be expected for future periods.
Note 3Earnings per Share
The calculation of basic net income (loss) per share for each period is based on the weighted-average number of shares
of common stock outstanding during the period. Diluted net income (loss) per share is calculated using the weighted-average number of common shares plus potential common shares outstanding during the period, but only to the extent that such
potential common shares are dilutive.
The table below reconciles the basic weighted average shares outstanding to the
dilutive weighted average shares outstanding for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31
|
|
|
|
2013
|
|
|
2012
|
|
Basic average common shares outstanding
|
|
|
39,277,441
|
|
|
|
39,255,973
|
|
Dilutive effect of stock options outstanding
|
|
|
53,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted average common shares outstanding
|
|
|
39,330,737
|
|
|
|
39,255,973
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013, options to purchase 1,360,960 shares of Class A Common Stock were issued and
outstanding. The dilutive impact of those options is calculated using the treasury stock method.
Note 4Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
(unaudited)
|
|
|
|
|
Scrap iron and steel
|
|
$
|
20,013
|
|
|
$
|
26,183
|
|
Goods in transit
|
|
|
26,345
|
|
|
|
11,926
|
|
Spare parts and supplies
|
|
|
12,598
|
|
|
|
12,411
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
58,956
|
|
|
$
|
50,520
|
|
|
|
|
|
|
|
|
|
|
Note 5Income Taxes
The income tax expense for the three months ended March 31, 2013 and 2012 reflects a year-to-date effective tax
rate of 34.6% and 34.9%, respectively, and a 2013 estimated annualized effective tax rate, excluding discrete items, of 30.2%. The income tax expense for the three months ended March 31, 2013 is based on an estimated annual effective rate,
which requires management to make its best estimate of expected pre-tax income for the year. The difference between the estimated annualized effective tax rate and the year-to-date effective tax rate is caused by discrete items including the
immediate recognition of the anticipated impact of a tax law change in South Africa. The expense recorded reflects managements current best estimate of the effect of the law change, but may be subject to further adjustment as we continue to
analyze the expected application of the new law. The estimated effective tax rates for 2013 and 2012 differ from the United States federal statutory rate of 35.0% due principally to state taxes, foreign taxes and permanent differences related to
nondeductible marketing expenses.
5
Accounting for Uncertainty in Income Taxes
As of March 31, 2013 and December 31, 2012, the Companys liability equaled $1.2 million for uncertain tax positions in
accordance with ASC 740-10,
Accounting for Uncertainty in Income Taxes
. The total amount of interest and penalty recognized related to uncertain tax positions as of March 31, 2013 and 2012 was not material. The tax years 2009-2012 remain
open to examination by the major taxing jurisdictions where the Company conducts business.
Note 6Debt
Debt is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
(unaudited)
|
|
|
|
|
ABL facility
|
|
$
|
13,500
|
|
|
$
|
|
|
Senior secured term loan due 2019, net of original issue discount $2,438 and $2,664, respectively
|
|
|
296,812
|
|
|
|
295,086
|
|
Loans from noncontrolling interests
|
|
|
3,094
|
|
|
|
4,341
|
|
Bank term loan facility
|
|
|
12,917
|
|
|
|
14,958
|
|
Capital equipment leases, installment notes and other
|
|
|
1,326
|
|
|
|
2,008
|
|
|
|
|
|
|
|
|
|
|
Total indebtedness
|
|
$
|
327,649
|
|
|
$
|
316,393
|
|
|
|
|
|
|
|
|
|
|
Total indebtedness includes the following line items on the condensed consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
(unaudited)
|
|
|
|
|
Revolving borrowings
|
|
$
|
13,500
|
|
|
$
|
|
|
Current portion of long-term debt
|
|
|
7,492
|
|
|
|
8,395
|
|
Long-term debt
|
|
|
303,563
|
|
|
|
303,657
|
|
Loans from noncontrolling interests
|
|
|
3,094
|
|
|
|
4,341
|
|
|
|
|
|
|
|
|
|
|
Total indebtedness
|
|
$
|
327,649
|
|
|
$
|
316,393
|
|
|
|
|
|
|
|
|
|
|
2013 Repricing Amendment
On March 21, 2013, TCIMS, the Companys wholly owned subsidiary, and certain other of its subsidiaries entered into Amendment No. 1 (the Amendment) to TCIMSs outstanding
senior secured Term Loan B credit agreement (the Existing Term Loan Agreement and, as amended by the Amendment, the Amended Term Loan) among TCIMS, as borrower, certain other subsidiaries of the Company, as guarantors,
JPMorgan Chase Bank, N.A., as administrative agent and lender, and the other lenders party thereto.
Pursuant to the
Amendment, the applicable margin used to calculate the amount of interest payable on borrowings under the Amended Term Loan has been reduced. Prior to the amendment, borrowings under the Existing Term Loan Agreement bore interest at a rate equal to
an applicable margin plus, at TCIMS option, either (a) a base rate calculated in a customary manner (which would never be less than the adjusted Eurodollar rate plus 1%) or (b) an adjusted Eurodollar rate calculated in a customary
manner (with a floor of 1.25%). The applicable margin under the Existing Term Loan Agreement was 3.50% per annum with respect to base rate borrowings and 4.50% per annum with respect to Eurodollar rate borrowings. Pursuant to the
Amendment, the applicable margin has been amended to be 2.75% with respect to base rate borrowings and 3.75% with respect to Eurodollar rate borrowings, and the interest rate floor with respect to Eurodollar rate borrowings has been reduced to
1.00%.
6
In connection with the Amendment, the Company received $2.25 million in proceeds bringing
the principal amount of the Term Loan back to $300.0 million. The Company incurred a $1.1 million loss on debt extinguishment and modification associated with the amendment. The loss on debt extinguishment and modification was comprised of $0.7
million of fees paid in connection with the transition and a $0.4 million write-off of unamortized deferred issuance cost and original issue discount.
2012 Refinancing
On March 20, 2012 (the Closing
Date), certain subsidiaries of the Company, including TCIMS (as the borrower) and Metal Services Holdco LLC (Metal Services) and Tube City IMS, LLC, as guarantors, entered into a new $300 million senior secured term loan agreement
due in March 2019 (Term Loan Facility).
TCIMS received $297.0 million in proceeds from the Term Loan Facility
which was net of a discount of $3.0 million, or 1%. On the Closing Date, TCIMS used the proceeds from the Term Loan Facility, combined with available cash and a draw on its revolving credit facility, to extinguish its obligations under its previous
senior secured term loan due 2014, which allowed for prepayment without penalty, and to discharge and extinguish its liability under its senior subordinated notes due 2015. To extinguish its liability under the senior subordinated notes, TCIMS
deposited $233.2 million in cash with the senior notes trustee, which was used to fund the repayment of $223.0 million in outstanding senior notes principal, a $5.4 million redemption premium, $3.0 million of accrued and unpaid interest
through the date of discharge and $1.8 million of additional interest payable through the redemption date. Upon depositing the funds, TCIMS was discharged from its obligations under the senior notes indenture and received notice of the
discharge from the senior notes trustee. The senior notes were redeemed in full on April 19, 2012 using the previously deposited funds.
In connection with the refinancing, the Company incurred a $12.3 million loss on the early extinguishment of debt which was comprised of the $5.4 million senior note redemption premium, $1.8 million of
additional interest payable through the redemption date, $5.0 million to write-off the unamortized deferred issuance costs on the extinguished indebtedness and $0.1 million in miscellaneous legal and administrative charges.
Asset-Based Revolving Credit Facility
On December 15, 2011, certain of the Companys subsidiaries, including TCIMS, entered into a new five year, asset-backed, multi-currency revolving credit facility (the ABL facility)
with a group of lenders including JP Morgan Chase Bank as administrative agent. The ABL facility permits borrowing up to $350.0 million in total. The Companys U.S. subsidiaries are permitted to borrow up to the full $350.0 million limit of the
facility. There are separate sub-facilities that allow the Companys Canadian subsidiary to borrow up to $20.0 million, the Companys U.K. subsidiaries to borrow up to $10.0 million and the Companys French subsidiaries to borrow up
to $20.0 million. The borrowings on those sub-facilities are available in the local currency of the subsidiaries. The ABL facility also provides for a sub-limit of borrowings on the same-day notice referred to as swingline loans up to $30.0 million
and a sub-limit for the issuance of letters of credit up to $100.0 million.
There is no scheduled amortization under the ABL
facility. The principal amount outstanding will be due and payable in full at maturity, on December 15, 2016. The maximum available commitments under the ABL facility are based on specified percentages of the value of cash, accounts receivable,
inventory, equipment and owned real property, less certain ineligible assets and subject to certain customary reserves as may be determined by the agent.
As of March 31, 2013, the eligible accounts receivable, inventory and equipment that comprise the collateral under the ABL facility supported a gross borrowing base of $275.5 million. At
March 31, 2013, there was $13.5 million in borrowings drawn under the ABL facility and $49.2 million letters of credit outstanding against the facility, leaving a net available balance of $212.8 million. The ABL facility allows for eligible
equipment to provide borrowing base capacity under the facility and the ABL lenders have a first lien on the domestic and Canadian equipment of the Company. The Company expects to add up to approximately $20 million of additional equipment related
borrowing base capacity upon the resolution of certain collateral access and other administrative agreements with the agent for the ABL lenders. The Company believes the ABL facility and other sources of liquidity are adequate to fund its
operations, but is carefully monitoring the global economic environment and its impact on its customers procurement volumes, which could affect its liquidity.
The per annum interest rates with respect to loans made under the U.S. dollar and Canadian dollar tranches of the ABL facility are, at the option of TCIMS, (1) the U.S. prime rate of JPMorgan Bank,
plus an applicable margin ranging between 0.5% and 1.25%, as determined based on average historical excess availability under the ABL facility or (2) LIBOR, plus an applicable margin ranging between 1.5% and 2.25%, as determined based on
average historical excess availability under the ABL facility. The per annum interest rates with respect to loans made under the Pound Sterling and Euro tranches are LIBOR, plus an applicable margin ranging between 1.5% and 2.25%, as determined
based on average historical excess availability under the ABL facility.
7
The Borrowers are required to pay a commitment fee in respect of unused commitments equal to
either 0.25% or 0.375% per annum determined based on the average historical unused portion of the commitments under the ABL facility. In addition, the Borrowers pay the agents and issuing banks customary administrative fees and letter of credit
fees.
The ABL facility is subject to mandatory prepayment with: (i) 100% of the net cash proceeds of certain asset
sales, subject to certain reinvestment rights; (ii) 100% of the net cash proceeds from issuance of debt, other than debt permitted under the ABL facility; and (iii) 100% of net cash proceeds from certain insurance and condemnation
payments, subject to certain reinvestment rights.
The commitments may be voluntarily reduced or terminated by TCIMS without
premium or penalty subject to certain conditions including customary breakage costs.
TCIMS and the Companys
other domestic subsidiaries guarantee the entire ABL facility. The facility is secured, subject to certain exceptions, by a first-priority security interest in substantially all of the U.S. domiciled current assets and related intangible assets of
the Companys U.S. subsidiaries. The Companys Canadian, U.K. and French subsidiaries guarantee the respective sub-facilities available to them. The individual sub-facilities are secured, subject to certain exceptions, by a first-priority
security interest in the current assets of the respective subsidiary. Borrowing base availability for borrowings by our foreign subsidiaries can be provided either by their own current assets or by excess availability under the borrowing base
supplied by U.S. assets. However, the U.S. subsidiaries may only borrow against borrowing base supplied by their own assets and may not use collateral support from the foreign subsidiaries who are party to the agreement. The priority of security
interests between the lenders under the ABL facility and the lenders under the Term Loan Facility are governed by an intercreditor agreement.
Our ABL facility contains customary negative covenants, including: (1) limitations on indebtedness; (2) limitations on liens and negative pledges; (3) limitations on investments, loans,
advances and acquisitions; (4) limitations on capital expenditures; (5) limitations on dividends and other payments in respect of capital stock and payments or repayments of subordinated debt; (6) limitations on mergers,
consolidations, liquidations and dissolutions; (7) limitations on sales of assets; (8) limitations on transactions with stockholders and affiliates; (9) limitations on sale and leaseback transactions; and (10) limitations on
changes in lines of business. The credit agreement also contains certain customary affirmative covenants.
During each period
commencing when the amount available under our ABL facility is less than 10.0% of the total commitments under our ABL facility, and continuing until the amount available under the ABL facility has been greater than 10.0% of the total commitments
under our ABL facility for 30 consecutive days, a minimum fixed charge coverage ratio (as defined in the credit agreement) of at least 1.0 to 1.0 will apply. The credit agreement also contains events of default for breach of principal or interest
payments, breach of certain representations and warranties, breach of covenants and other customary events of default.
Senior Secured
Term Loan due 2019
In the 2012 refinancing described above, the Term Loan Facility replaced TCIMS then existing
senior secured term loan credit facility among TCIMS, Metal Services, certain other subsidiaries party thereto, Credit Suisse (a/k/a Credit Suisse AG, Cayman Islands Branch), as administrative agent and collateral agent, and the other agents and
lenders party thereto from time to time. No prepayment penalties or fees were assessed in connection with the prepayment of the existing term loan facility, which was due to mature on January 25, 2014.
Obligations of TCIMS under the Term Loan Facility are senior obligations guaranteed by Metal Services and substantially all of
TCIMS wholly-owned existing and future direct and indirect U.S. subsidiaries, with certain customary and agreed-upon exceptions. TCIMS and the subsidiary guarantors have pledged substantially all of their assets as security for such
obligations, while Metal Services has pledged its shares of capital stock of TCIMS, provided that the security interest in favor of the lenders under the Term Loan Agreement has second priority for such lenders with respect to all collateral
securing TCIMS ABL Facility (including accounts receivable, inventory and certain fixed assets) and first priority with respect to substantially all other pledged assets.
The Term Loan Facility also permits TCIMS to incur incremental borrowings thereunder in an aggregate principal amount equal to the
greater of (1) $75 million and (2) an amount such that, after giving effect to such incremental borrowing, TCIMS will be in pro forma compliance with a total net first lien senior secured leverage ratio of 2.75 to 1.00. Incremental
borrowings are uncommitted and the availability thereof will depend on market conditions at the time TCIMS seeks to incur such borrowings.
The Term Loan Facility amortizes in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount thereof, with any remaining balance payable on the final
maturity date of the Term Loan Facility, which is March 20, 2019. TCIMS may prepay amounts outstanding under the Term Loan Facility at any time. If such prepayment is made as a result of certain refinancing or repricing transactions within one
year following the closing date, TCIMS will be required to pay a fee equal to 1.00% of the principal amount of the obligations so refinanced or repriced. Subject to certain exceptions, the Term Loan Facility requires TCIMS to prepay certain amounts
outstanding thereunder with (a) the net cash proceeds of certain asset sales and certain issuances of debt and (b) a percentage of excess cash flow, which percentage is based upon TCIMS total net first lien senior secured leverage
ratio.
8
After the March 21, 2013 Amendment, borrowings under the Term Loan Facility bear
interest at a rate equal to an applicable margin plus, at TCIMS option, either (a) a base rate calculated in a customary manner (which will never be less than the adjusted eurodollar rate plus 1%) or (b) an adjusted eurodollar rate
calculated in a customary manner (with a floor of 1.00%). The applicable margin is 2.75% per annum with respect to base rate borrowings and 3.75% per annum with respect to eurodollar rate borrowings.
The Term Loan Facility contains customary negative covenants, including among others: (1) limitations on indebtedness;
(2) limitations on liens; (3) limitations on investments, loans, advances and acquisitions; (4) limitations on dividends and other payments in respect of capital stock and payments or repayments of pari passu and subordinated debt;
(5) limitations on mergers, consolidations, liquidations and dissolutions; (6) limitations on sales of assets; (7) limitations on transactions with affiliates; (8) limitations on sale and leaseback transactions; and
(9) limitations on changes in lines of business. The Term Loan Agreement also contains certain customary affirmative covenants. These negative and affirmative covenants are subject to certain customary and agreed-upon exceptions. The Term Loan
Agreement also contains events of default for breach of principal or interest payments, breach of certain representations and warranties, breach of covenants, defaults on other indebtedness, judgment defaults, bankruptcy proceedings and other
customary events of default. Certain events of default, including the breach of principal payments and bankruptcy proceedings, result in the immediate termination of commitments under the Term Loan Agreement and all amounts shall become due and
payable. Such amounts shall bear the interest rate applicable thereto plus 2.0%.
Loans From Noncontrolling Interest
In 2011, the Company formed a South African subsidiary with a minority partner. The Company controls the subsidiary through a 75%
ownership of the subsidiarys common stock and the results of the subsidiary are consolidated. In addition to its equity funding, the South African subsidiary received proceeds from loans from its shareholders. The loans were made in the same
proportion as the equity interest so that the subsidiary received 75% of its shareholder loan funding from the Company. The remaining 25% of the South African subsidiarys shareholder loan funding has been received from the minority partner and
is recorded as Loans from noncontrolling interests.
Bank Term Loan Facility
In addition to equity and loan funding from its shareholders, the Companys South African subsidiary (the South African
Subsidiary) has entered into a term loan agreement with a South African bank (Bank term loan facility). The South African Subsidiary received 30.0 million Rand ($3.6 million USD) in proceeds in the second quarter of 2012 and
100.0 million Rand ($11.5 million USD) in proceeds in the fourth quarter of 2012 from such loan. The loan carries interest at the South African prime rate minus 0.8% and is payable in South African Rand. The loan is subject to financial
covenants based on the results of operations of the South African Subsidiary. The loan is non-recourse to the Company and to any subsidiary or affiliate of the Company other than the South African Subsidiary.
Capital Leases
From time to time, the Company enters into lease arrangements with unrelated parties to finance the acquisition of equipment used on its job sites. Determinations of whether each arrangement should be
treated as a capital or operating lease are made by applying the rules of ASC Topic 840 on accounting for leases.
Note 7Derivative Financial Instruments and Fair Values
The Company is exposed to certain risks relating to its ongoing business operations. The primary
risks managed by using derivative instruments are interest rate risk and foreign currency risk. The
Accounting for Derivative Instruments and Hedging Activities
Topic of FASB ASC required all companies to recognize all derivative instruments
as either assets or liabilities at fair value in the statement of financial position.
Interest Rate Risk
As part of its overall risk management strategy, the Company attempts to reduce the volatility in cash interest payments associated with its variable rate term debt. TCIMS had entered into interest rate
swap agreements swapping its variable rate interest payment for fixed payments to reduce the volatility of cash requirements associated with its variable rate debt. In accordance with the
Accounting for Derivative Instruments and Hedging
Activities
Topic of FASB ASC, the Company designated its interest rate swaps as cash flow hedges of variable interest payments. In connection with its debt refinancing on March 20, 2012, the Company terminated its outstanding swap
agreements. This termination occurred 10 days before the March 30, 2012 scheduled expiration of the swap agreements.
9
The effective portion of the gain or loss on the interest rate swaps was reported as a
component of other comprehensive income and reclassified into earnings in the same period in which the hedged transaction, the incurrence of variable rate interest, occurred. The variable rates and reset dates of the interest rates swap agreements
mirrored the terms of the associated term debt. Accordingly, the hedges were highly effective in mitigating the underlying risk. The Company hedged a total notional amount of $80.0 million from April 1, 2010 until terminating the agreements on
March 20, 2012 as follows (notional amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
|
Fixed
Rate
|
|
|
Index
Rate
|
|
Effective
Date
|
|
Termination
Date
|
Interest Rate Swap 4
|
|
$
|
40,000
|
|
|
|
2.1675
|
%
|
|
1 month LIBOR
|
|
April 1, 2010
|
|
March 20, 2012
|
Interest Rate Swap 5
|
|
|
40,000
|
|
|
|
2.3375
|
%
|
|
1 month LIBOR
|
|
April 1, 2010
|
|
March 20, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/average
|
|
$
|
80,000
|
|
|
|
2.2525
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the dates indicated, the Company recognized the following fair value liabilities in its consolidated balance sheets
related to its interest rate swap agreements designated as cash flow hedging instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
Balance
Sheet
Location
|
|
Fair Value
|
|
Derivatives designated as hedging instruments under the
Accounting for Derivative Instruments and Hedging
Activities Topic of FASB ASC
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Interest rate swaps
|
|
Other noncurrent liabilities
|
|
$
|
|
|
|
$
|
|
|
The interest rate swaps that became effective on April 1, 2010 settled on a monthly basis and the Company recorded
Interest Expense for cash payments it made to its counterparties.
The Company recognized the following amounts related to its
derivatives for the first quarter ended March 31, 2013 and 2012, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain
(loss)
recognized in OCI
on derivative instruments
|
|
|
|
|
Amount of loss
reclassified
from accumulated OCI
into expense
|
|
Derivatives in the Accounting for Derivative
Instruments and Hedging Activities Topic of FASB
ASC Cash Flow Hedging Relationship
|
|
Quarter ended
March
31,
|
|
|
Location of loss
reclassified
from
accumulated OCI
into expense
|
|
Quarter
ended
March 31,
|
|
|
2013
|
|
|
2012
|
|
|
|
2013
|
|
|
2012
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
Interest Expense
|
|
$
|
|
|
|
$
|
247
|
|
The amount of gain (loss) recognized in OCI on derivatives is net of a deferred tax benefit which was not material.
The volume of the Companys derivative activity is limited. The Company will, from time to time, evaluate its future
exposure to variable interest payments and may enter into additional interest rate swap agreements based on its evaluation of that exposure. However, such evaluation is made at infrequent intervals.
10
The Company is also continuing to increase its international raw materials procurement
activities and may encounter transactions where the related purchase and sale of materials are in different currencies. In those cases, the Company will evaluate its exposure and may enter into additional foreign currency forward agreements to
protect its margin on those transactions. The Company will also continue to monitor other risks; including risks related to commodity pricing and, in the future, may use derivative instruments to mitigate those risks as well.
Note 8Stockholders Equity
Common Stock
As of March 31, 2013, there were 14,578,332 shares of Class A Common Stock and 24,699,109 shares of Class B Common Stock outstanding. There were 14,564,928 shares of Class A Common Stock
and 24,712,513 outstanding at December 31, 2012.
Holders of the Companys Class B Common Stock consist of current
and former employees and affiliates of the Company, including Onex. Pursuant to the Companys Certificate of Incorporation, shares of Class B Common Stock are convertible into Class A Common Stock, on a one-for-one basis, at the option of
the holder. Certain shareholders have effected such conversions to allow for the sale or potential future sale of the resulting Class A Shares.
Accumulated Other Comprehensive income (loss)
The changes in
accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
and post
|
|
|
|
|
|
|
Foreign
|
|
|
retirement
|
|
|
|
|
|
|
currency
|
|
|
benefit
|
|
|
|
|
In thousands
|
|
translation
|
|
|
plans
|
|
|
Total
|
|
Balance at December 31, 2012
|
|
$
|
(1,402
|
)
|
|
$
|
(7,561
|
)
|
|
$
|
(8,963
|
)
|
Other comprehensive income Before reclassifications
|
|
|
(4,067
|
)
|
|
|
|
|
|
|
(4,067
|
)
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
|
|
|
|
342
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income
|
|
|
(4,067
|
)
|
|
|
342
|
|
|
|
(3,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2013
|
|
$
|
(5,469
|
)
|
|
$
|
(7,219
|
)
|
|
$
|
(12,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts reclassified from accumulated other comprehensive income were charged to selling, general and
administrative expenses.
Note 9Stock Based Compensation
Long Term Incentive PlanStock Options
In April 2011, the Company adopted the TMS International Corp. Long-Term Incentive Plan and registered 1,558,170 shares of Class A Common Stock to be available for awards. The plan provides for
grants of stock-based awards to key employees and non-employee directors. The Company has had three grants of stock options under the Long Term Incentive Plan. On April 13, 2011, the date of the Companys initial public offering, the
Company granted 519,390 stock options. On April 13, 2012, the Company granted 386,500 stock options and on February 18, 2013, the Company granted 508,300 stock options. Each grant vests over four years with 10% vesting on the first
anniversary date of the grant, 20% on the second anniversary, 30% on the third anniversary and 40% on the fourth anniversary. In addition to the time based vesting requirement, one-half the total grant is also subject to a market based
exercisability requirement: For those options to be exercisable, the share price of the Companys Class A Common Stock must close at 115% or more of the exercise price of the option on the day immediately preceding the exercise of the
option. The 2011 grant has an exercise price of $13.00 per option and half the award is exercisable only when the stock price is $14.95 per share or greater. The 2012 grant has an exercise price of $11.18 and half the award is exercisable only when
the stock price is $12.86 or greater. The 2013 grant has an exercise price of $13.35 and half the award is exercisable only when the stock price is $15.36 or greater.
11
For that portion of the awards that is subject to time based vesting only, the Company used
the Black-Scholes option pricing model to value the options. The expected term of grant was determined using a safe harbor calculation provided in SAB 107 for entities without extensive historical data. The term is calculated as the
mid-point between the vesting period and the contractual term of the option. The risk free interest rate was determined for each vesting tranche of an award based upon the calculated yield on U.S. Treasury obligations for the expected term of the
award. The expected forfeiture rate was estimated based on forfeiture experience in the Companys previous share based compensation plans. For the option grants in 2011 and 2012, the expected volatility was estimated based on the average
volatility of the stock price of peer group companies that were identified based on their market capitalization, industry, stage of life cycle and capital structure. For the option grants in 2013 the expected volatility was estimated using a
combination of peer group companies and the Companys own historical volatility for the period from its initial public offering in April 2011 through the 2013 grant date.
For that portion of the award which is subject to the additional market based restriction, the Company completed a Monte Carlo simulation which simulates a distribution of stock prices
throughout the contractual life of the option. The lookback period for the peer historical volatility used in the model is 10 years, since 10 years of prices must be simulated and the valuation was done in a risk-neutral framework using the 10-year
risk-free rate.
The fair value of each type of award was calculated for each individual vesting tranche. The options granted,
exercise price, minimum stock price required for exercisability, weighted-average fair value of each type of award, total weighted average fair value of options granted with the assumptions used in determining the fair values is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Grant
|
|
|
2012 Grant
|
|
|
2011 Grant
|
|
|
|
Time
based
vesting
only
|
|
|
Time based
vesting + market
criteria
|
|
|
Time
based
vesting
only
|
|
|
Time based
vesting + market
criteria
|
|
|
Time
based
vesting
only
|
|
|
Time based
vesting + market
criteria
|
|
Options granted
|
|
|
254,150
|
|
|
|
254,150
|
|
|
|
193,250
|
|
|
|
193,250
|
|
|
|
259,695
|
|
|
|
259,695
|
|
Exercise price
|
|
$
|
13.35
|
|
|
$
|
13.35
|
|
|
$
|
11.18
|
|
|
$
|
11.18
|
|
|
$
|
13.00
|
|
|
$
|
13.00
|
|
Minimum stock price for exercise
|
|
|
N/A
|
|
|
$
|
15.36
|
|
|
|
N/A
|
|
|
$
|
12.86
|
|
|
|
N/A
|
|
|
$
|
14.95
|
|
Weighted average fair value of grant
|
|
$
|
7.42
|
|
|
$
|
7.16
|
|
|
$
|
5.77
|
|
|
$
|
5.73
|
|
|
$
|
6.84
|
|
|
$
|
6.78
|
|
Total fair value of options granted (in thousands)
|
|
$
|
1,885
|
|
|
$
|
1,819
|
|
|
$
|
1,115
|
|
|
$
|
1,107
|
|
|
$
|
1,776
|
|
|
$
|
1,761
|
|
Risk free rate
|
|
|
1.27
|
%
|
|
|
2.09
|
%
|
|
|
1.27
|
%
|
|
|
2.08
|
%
|
|
|
2.59
|
%
|
|
|
3.42
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected forfeiture rate
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
Expected volatility
|
|
|
57.59
|
%
|
|
|
53.26
|
%
|
|
|
52.41
|
%
|
|
|
49.16
|
%
|
|
|
50.87
|
%
|
|
|
48.32
|
%
|
Expected term in years
|
|
|
6.50
|
|
|
|
6.58
|
|
|
|
6.50
|
|
|
|
6.59
|
|
|
|
6.50
|
|
|
|
6.59
|
|
The Company is recognizing the expense related to the time based only vesting options using the accelerated method. The
Company is recognizing the expense related to the market based options by amortizing each individual tranche over the estimated requisite service period. During the three-month period ended March 31, 2013 and March 31, 2012, the Company
recognized $0.6 million and $0.3 million, respectively, in share based compensation expense related to options issued under the Long Term Incentive Plan.
As of March 31, 2013 there were 1,360,960 stock options outstanding, of which 47,836 were vested. Of the vested total, 23,918 are subject to a performance condition and may only be exercised if the
price of the Companys common stock closes at $14.95 or higher on the day before exercise.
12
Long Term Incentive PlanRestricted Shares
The Long Term Incentive Plan also provides for the issuance of restricted share units.
On July 11, 2012, the Company granted 21,468 shares of Class A Common Stock to independent members of its board of directors.
The shares granted to a director will vest if the recipient remains installed on the Companys board of directors on the day immediately prior to the Companys 2013 annual stockholder meeting. Once vested, the recipient will have the right
to sell 40% of the shares immediately, but the remaining 60% will be restricted from sale or transfer for three years after the vesting date. The shares were valued at $9.54 per share, which was the closing price on the date of grant. The Company
recognized $0.1 million of share based compensation expense related to the award during the first quarter of 2013. As of March 31, 2013, the 21,468 shares that had been granted remained outstanding and unvested.
Note 10Operating Segments
The Company has two reportable segments in addition to its Administrative Group; the Mill Services Group and the Raw
Material and Optimization Group. The services provided under the Mill Services Group segment are performed at the Companys customers sites under long-term contracts. These contracts are typically structured on a fee-per-ton basis tied to
production volumes at the Companys customers sites and are not based on the underlying price of steel. In addition, these contracts typically include tiered pricing structures, with unit prices that increase as volume declines, and/or
minimum monthly fees, each of which stabilizes the Companys revenue in the event of volume fluctuations. The services provided to the Companys customers under this segment include: (i) scrap management and preparation;
(ii) semi-finished and finished material handling; (iii) metal recovery and slag handling, processing and sales; and (iv) surface conditioning. The services provided under the Raw Material and Optimization Group segment include:
(i) raw materials procurement and logistics and (ii) proprietary software-based raw materials cost optimization.
13
Information by reportable segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues, net of inter-segment revenues
|
|
|
|
|
|
|
|
|
Mill Services Group
|
|
$
|
172,351
|
|
|
$
|
180,070
|
|
Raw Material and Optimization Group
|
|
|
417,190
|
|
|
|
566,872
|
|
Administrative Group
|
|
|
54
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
589,595
|
|
|
$
|
746,958
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings before interest, taxes, depreciation and amortization
|
|
|
|
|
|
|
|
|
Mill Services Group
|
|
$
|
32,750
|
|
|
$
|
32,417
|
|
Raw Material and Optimization Group
|
|
|
13,769
|
|
|
|
14,615
|
|
Administrative Group
|
|
|
(8,247
|
)
|
|
|
(10,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,272
|
|
|
$
|
36,793
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
Mill Services Group
|
|
$
|
16,783
|
|
|
$
|
14,109
|
|
Raw Material and Optimization Group
|
|
|
86
|
|
|
|
90
|
|
Administrative Group
|
|
|
2,010
|
|
|
|
2,020
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,879
|
|
|
$
|
16,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
(unaudited)
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
Mill Services Group
|
|
$
|
735,119
|
|
|
$
|
720,942
|
|
Raw Material and Optimization Group
|
|
|
313,215
|
|
|
|
315,884
|
|
Administrative Group
|
|
|
(28,714
|
)
|
|
|
(27,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,019,620
|
|
|
$
|
1,009,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Percentage of total revenue contributed by each class of service:
|
|
|
|
|
|
|
|
|
Mill Services Group
|
|
|
29.2
|
%
|
|
|
24.1
|
%
|
Raw Material and Optimization Group
|
|
|
70.8
|
%
|
|
|
75.9
|
%
|
The following table provides a reconciliation of earnings before interest, taxes, depreciation and amortization to
income before tax for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Adjusted earnings before interest, taxes, depreciation and amortization
|
|
$
|
38,272
|
|
|
$
|
36,793
|
|
Less: Depreciation and Amortization
|
|
|
(18,879
|
)
|
|
|
(16,219
|
)
|
Interest Expense
|
|
|
(5,973
|
)
|
|
|
(8,101
|
)
|
Loss on Modification and Early Extinguishment of debt
|
|
|
(1,102
|
)
|
|
|
(12,300
|
)
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
$
|
12,318
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
14
Note 11Retirement and Pension Plans
The following table reports net periodic pension costs for the
Company and includes the components of net pension expense (benefit) recognized under the
Employers Accounting for Defined Benefit Pensions and Other Post Retirement Benefit Plans
Topic of FASB ASC (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
U.S. plans
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
221
|
|
|
|
242
|
|
Expected return on plan assets
|
|
|
(305
|
)
|
|
|
(308
|
)
|
Net amortization
|
|
|
301
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension costs-U.S. plans
|
|
|
217
|
|
|
|
160
|
|
|
|
|
Canadian plans
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
59
|
|
|
|
53
|
|
Interest cost
|
|
|
61
|
|
|
|
63
|
|
Expected return on plans assets
|
|
|
(51
|
)
|
|
|
(52
|
)
|
Net amortization
|
|
|
15
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension costs-Canadian plans
|
|
|
84
|
|
|
|
75
|
|
|
|
|
Other plans
|
|
|
|
|
|
|
|
|
Defined contribution
|
|
|
1,075
|
|
|
|
1,092
|
|
Multi-employer pension plans
|
|
|
1,453
|
|
|
|
1,409
|
|
|
|
|
|
|
|
|
|
|
Total other plans
|
|
|
2,528
|
|
|
|
2,501
|
|
|
|
|
|
|
|
|
|
|
Total net pension expense
|
|
$
|
2,829
|
|
|
$
|
2,736
|
|
|
|
|
|
|
|
|
|
|
The Companys contributions to its defined benefit pension plans for the three months ended March 31, 2013
and 2012 were $0.1 million and $0.5 million, respectively.
For the full year 2013, the Company estimates that it will make
employer contributions to its defined benefit pension plans of approximately $0.9 million. The following table reports net periodic cost for the Companys other post-employment benefit plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Service cost
|
|
$
|
83
|
|
|
$
|
76
|
|
Interest cost
|
|
|
73
|
|
|
|
78
|
|
Net amortization
|
|
|
26
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Net periodic costs
|
|
$
|
182
|
|
|
$
|
171
|
|
|
|
|
|
|
|
|
|
|
The Company does not expect to contribute to the other post-employment benefit plan in 2013 and intends to pay benefit
claims as they become due. For the three months ended March 31, 2013 and March 31, 2012 other post-employment benefit payments were not material.
Note 12Fair Value of Financial Instruments
The carrying amount of cash and equivalents, accounts receivable and accounts payable approximate fair value due to the
short-term maturities of these instruments. The Companys obligations under its ABL facility, Term Loan and capital expenditure loans all have variable interest rates and, in our opinion, the carrying value approximates the fair value at the
balance sheet dates. The fair value of the Companys senior subordinated notes is based on quoted market prices, however, the senior subordinated notes are thinly traded. The fair value of the Companys capital equipment leases has been
estimated based on future expected cash flows relative to current interest rates.
15
The fair value compared to the carrying value is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
(unaudited)
|
|
|
|
|
Carrying value of financial instruments in:
|
|
|
|
|
|
|
|
|
Long-term debt (includes current portion)
|
|
|
|
|
|
|
|
|
Senior secured term loan due 2019, net of original issue discount
|
|
$
|
296,812
|
|
|
$
|
295,086
|
|
Bank term loan facility
|
|
|
12,917
|
|
|
|
14,958
|
|
Capital equipment leases, installment notes and noncontrolling partner loan
|
|
|
4,420
|
|
|
|
6,349
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
314,149
|
|
|
$
|
316,393
|
|
|
|
|
|
|
|
|
|
|
Fair value:
|
|
|
|
|
|
|
|
|
Long-term debt (includes current portion)
|
|
|
|
|
|
|
|
|
Senior secured term loan due 2019, net of original issue discount
|
|
$
|
296,812
|
|
|
$
|
295,086
|
|
Bank term loan facility
|
|
|
12,917
|
|
|
|
14,958
|
|
Capital equipment leases, installment notes and noncontrolling partner loan
|
|
|
4,420
|
|
|
|
6,349
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
314,149
|
|
|
$
|
316,393
|
|
|
|
|
|
|
|
|
|
|
Note 13Commitments and Contingencies
Two non-operating subsidiaries of a predecessor company, along with a landfill and waste management business, were
spun-off to our former stockholders in October 2002. The two former subsidiaries were subject to asbestos related personal injury claims. We believe that the Company has no obligation for asbestos related claims regarding the spun-off subsidiaries.
In addition, the Company has been named as a defendant in certain asbestos-related claims relating to lines of business that were discontinued over 20 years ago. We believe that the Company is sufficiently protected by insurance with respect to
these asbestos-related claims related to these former lines of business, and we do not believe that the ultimate outcome will have a material adverse effect on the Companys financial position, results of operations or cash flows.
The Company is a party to other lawsuits, litigation and proceedings arising in the normal course of business, including, but not limited
to regulatory, commercial and personal injury matters. While the precise amount of loss, if any, is not presently determinable, the Company does not believe that the final outcome of these matters will have a material adverse effect on the
Companys financial position or results of operations or cash flows.
The Company has agreements with certain officers
and other employees. The agreements provide for termination benefits in the event of termination without cause, or in some instances, in the event of a change in control of the Company. The aggregate commitment for such potential future benefits at
March 31, 2013 was approximately $8.3 million.
Note 14Commercial Arbitration Award
On March 28, 2011, the Company was awarded $13.2 million against a former customer in a commercial arbitration
case brought under the parties service agreement. The basis for the Companys claims was the refusal of the customer to negotiate required price increases based on its change of practices and the customers wrongful unilateral early
termination of the agreement. The Company considers the arbitration award a contingent gain and therefore did not record a gain for the full amount of the award, but recorded income when the proceeds from the award were constructively received.
The former customer and its parent entity were sold pursuant to a stock sale to a buyer (Buyer Entities)
following the dispute and subsequent to the arbitration award. Following the purchase by the Buyer Entities, in April 2011, the Company petitioned the arbitrator for fees and costs in the amount of $3.1 million. In July 2011, the Company entered
into a scrap purchase agreement with the Buyer Entities, and in August 2011, the Company and the Buyer Entities entered into a payment agreement pursuant to which the Buyer Entities agreed to pay the Company $15.0 million in respect of the
arbitration award and the Companys fees and costs, which represented a discount of $1.2 million against the total amount of the award, costs and expenses. Pursuant to the agreement, the discount would only be applied if the $15.0 million was
paid in full by June 30, 2012. The Buyer Entities did not pay the agreed $15.0 million in full by June 30, 2012. The Buyer Entities had been making payments against the award partially by committed cash payments and the balance by credits
against the transfer of various scrap metal commodities from the Buyer Entities to the Company at mutually agreed values under the scrap purchase agreement.
On May 31, 2012, the Buyer Entities and various other subsidiaries and affiliates filed for protection under the U.S. Bankruptcy Code. At that date, the remaining balance of the arbitration award
plus fees and costs, as restated to $16.3 million based on the loss of the discount owed to the Company, was $4.8 million. That balance is an unsecured claim in the bankruptcy proceedings of the Buyer
16
Entities. The Company does not expect to recognize any further income from this award. In February 2013, RG Steel Wheeling, LLC, the entity against whom the Award was entered, and various
affiliated companies, including RG Steel Sparrows Point, LLC and RG Steel Warren, LLC ( collectively, the Plaintiffs), filed adversary actions against the Company asserting causes of action under the preference and fraudulent transfer
sections of the Bankruptcy Code with respect to transfers alleged to have been received by the Company from the Plaintiffs prior to the filing of the bankruptcies. The above described complaints are generic, in nature, and at this juncture, prevent
the Company from accurately assessing the extent to which the relief sought relates to payments received or set offs asserted by the Company in respect of the award; nonetheless, the Company believes that it has meritorious defenses to any such
claims. The Company has not recorded a liability with regard to such claims.
During the three months ended
March 31, 2013, the Company recorded no amounts related to the arbitration award. During the three months ended March 31, 2012, the Company recorded $2.0 million against the arbitration award and incurred related contingent legal fees of
$0.3 million.
Note 15Related-Party Transactions
The Company incurred and paid management fees and expenses incurred to an affiliate of its majority owner, Onex
Partners II LP, totaling $0.3 million and $0.3 million for the three months ended March 31, 2013 and 2012, respectively.
Note 16Recent Accounting Pronouncements
In July 2012, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update No. 2012-02, IntangiblesGoodwill and Other (Topic 350)Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02), to allow entities to use a qualitative approach
to test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less
than its carrying value. If it is concluded that this is the case, it is then necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value.
Otherwise, the quantitative impairment test is not required. ASU 2012-02 is effective for us in fiscal 2013. We do not believe that ASU No. 2012-02 will have a material impact on our consolidated financial statements.
In February 2013 the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update No. 2013-02 (ASU 2013-02), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The ASU requires reporting and disclosure about changes in accumulated other comprehensive income (AOCI)
balances and reclassifications out of AOCI. For public companies, the ASU is effective prospectively for fiscal years and interim periods within those years beginning after 15 December 2012. The Company adopted this ASU in the first quarter of
2013 and the disclosure is presented in Note 8 Stockholders Equity.
Note 17Subsequent Event
On April 25, 2013, the Company announced approval of the initiation of a quarterly cash dividend. The first dividend of
$0.10 per share will be payable on July 3, 2013 to stockholders of record as of the close of business on May 16, 2013. This is the first dividend declared by the company since its initial public offering in April 2011.
17
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion and analysis of our consolidated results of operations, financial condition and liquidity should be read in
conjunction with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report. The following discussion contains forward-looking statements that reflect our current expectations, estimates, forecast and
projections. These forward-looking statements are not guarantees of future performance, and actual outcomes and results may differ materially from those expressed in these forward-looking statements. See Risk Factors and
Forward-Looking Statements.
Introduction
The following discussion is provided to supplement the consolidated financial statements and the related notes included in Part 1, Item 1 of this Quarterly Report to help provide an understanding of
our financial condition, changes in financial condition and results of our operations, and is organized as follows:
Company Overview
. This section provides a general description of our business in order to better understand our financial
condition and results of operations and to anticipate future trends and risks in our business.
Certain Line Items
Presented
. This section provides an explanation of certain GAAP line items that are presented in our consolidated financial statements included in this Quarterly Report. These line items are discussed in detail under the heading Results of
Operations below for the periods presented.
Key Measures We Use to Evaluate Our Company
. This section provides
an overview of certain non-GAAP measures that we believe are critical to understand in order to evaluate and assess our business. These are the measures that management utilizes most to assess our results of operations, anticipate future trends and
risks and determine compensation levels, including under our management bonus plan.
Application of Critical Accounting
Policies.
This section discusses the accounting policies and estimates that we consider important to our financial condition and results of operations and that require significant judgment and estimates on the part of management in their
application.
Results of Operations
. This section provides a discussion of our results of operations for the quarter
ended March 31, 2013 compared to the quarter ended March 31, 2012.
Liquidity and Capital Resources
. This
section provides an analysis of our cash flows for the three-month period ending March 31, 2013 compared to the three-month period ended March 31, 2012. This section also includes a discussion of our liquidity and Capital
Expenditures.
Company Overview
We are the largest provider of outsourced industrial services to steel mills in North America as measured by revenue and have a substantial and growing international presence. We offer the most
comprehensive suite of outsourced industrial services to the steel industry. Our employees and equipment are embedded at customer sites and are integral throughout the steel production process other than steel making itself. Our services are
critical to our customers 24-hour-a-day operations, enabling them to generate substantial operational efficiencies and cost savings while focusing on their core business of steel making. We operate at 81 customer sites in 12 countries across
North America, Europe, Latin America and the Middle East and our global raw materials procurement network spans five continents. Over the past 80 years we have established long-standing customer relationships and have served our top 10 customers, on
average, for over 35 years. Our diversified customer base includes 12 of the top 15 largest global steel producers, including United States Steel, ArcelorMittal, Gerdau, Nucor, Baosteel, POSCO and Tata Steel.
We provide a broad range of services through two reporting segments: our Mill Services Group and our Raw Material and Optimization Group:
|
|
|
Mill Services Group
. The services provided under this segment are performed at our customer sites under long-term contracts. These contracts are
typically structured on a fee-per-ton basis tied to production volumes at our customer sites and are not based on the underlying price of steel. In addition, many of our contracts include tiered pricing structures, with unit prices that increase as
volumes decline, and/or minimum monthly fees, each of which stabilizes our revenue in the event of volume fluctuations. The services provided to our customers under this segment include: (1) scrap management and preparation;
(2) semi-finished and finished material handling; (3) metal recovery and slag handling, processing and sales; and (4) surface conditioning. The revenues from these services appear in the line item Service Revenue on our
statement of operations, and the costs associated therewith appear in Site Operating Costs on our statement of operations. Substantially all of our Capital Expenditures, whether Growth Capital Expenditures or Maintenance Capital
Expenditures, are incurred in connection with the services provided by this segment. This segment also includes the results of operations at our location where we buy, process and sell scrap for our own account, which revenues are included in the
line item Revenue from Sale of Materials on our statement of operations and the costs associated therewith appear in Cost of Raw Materials Shipments on our statement of operations. This location represented 3% of the Mill
Services Groups Adjusted EBITDA for the three months ended March 31, 2013. The Total Revenue and Cost of Raw Materials Shipments from this location will fluctuate based upon the underlying price of scrap.
|
18
|
|
|
Raw Material and Optimization Group
. The services provided under this segment include: (1) raw materials procurement and logistics; and
(2) proprietary software-based raw materials cost optimization. Revenues for the raw materials procurement and logistics services we provide are primarily generated pursuant to two alternative transaction models: (1) a contractually
determined, volume-based fee for arranging delivery of raw materials shipments to a customer directly from a vendor with no price or inventory risk; or (2) a generally concurrent arrangement to purchase for our own account and sell raw
materials at specified prices, typically locking in a margin with minimal price or inventory risk. In addition, we occasionally take measured market risk in connection with our raw materials procurement services by either purchasing raw materials at
a fixed price without an immediate corresponding sale order or agreeing to sell raw materials at a fixed price before having procured such materials. The revenues from our raw materials procurement and logistics services are included in the line
item Revenue from Sale of Materials and the related costs appear in the line item Cost of Raw Materials Shipments on our statement of operations. Our earnings are primarily driven by the steel production volumes of our
customers rather than by the prices of steel or raw materials. We subtract the Cost of Raw Materials Shipments from Revenue from Sale of Materials, because market prices of the raw materials we procure for and generally concurrently sell to our
customers are offset on our statement of operations. By subtracting the Cost of Raw Materials Shipments, we isolate the margin that we make on our raw materials procurement and logistics services, and we are better able to evaluate our performance
in terms of the volume of raw materials we procure for our customers and the margin we generate. We refer to this measure as Revenue After Raw Materials Costs, which is a non-GAAP financial measure that we believe is critical in order to
assess and evaluate our business. For additional information on Revenue After Raw Materials Costs, see Key Measures We Use to Evaluate Our CompanyRevenue After Raw Materials Costs below. Tables reconciling Total Revenue to Revenue
After Raw Materials Costs are included in Summary Consolidated Financial Data.
|
The vast
majority of our Revenue After Raw Materials Costs and profitability is tied to our customers production volumes. Factors that impact a steel mills production levels include general economic conditions, North American and global demand
for steel, competition and competitive pricing, and the relative strength of the U.S. dollar.
Over the last five years, we
have expanded from primarily generating our Revenue After Raw Materials Costs and Adjusted EBITDA from North America, to generating approximately 28% and 27% of our first quarter 2013 Revenue After Raw Materials Costs and Adjusted EBITDA,
respectively, outside of the U.S. and Canada. We believe we have substantial international growth opportunities which will be driven by expansion of our market share and continued growth in outsourcing in developing markets, such as Latin America,
Eastern Europe, Africa, Asia and the Middle East.
Certain Line Items Presented
Revenue from Sale of Materials.
Revenue from Sale of Materials is generated by each of our two operating segments as follows:
|
|
|
Our Mill Services Group generates some Revenue from Sale of Materials by buying, processing, and selling scrap for our own account.
|
|
|
|
Our Raw Material and Optimization Group primarily generates Revenue from Sale of Materials through raw materials procurement activities using two
alternative transaction models. In the first type we take no title to the materials being procured and we record only our commission as revenue; in the second type, we take title to the material and sell it to a buyer, typically in a transaction
where a buyer and seller are matched, and we record Revenue from Sale of Materials for the full value of the material based on the amount we invoice to our customer.
|
For the three months ended March 31, 2013, approximately 8% of our Revenue from Sale of Materials was generated by our Mill Services
Group, and approximately 92% of our Revenue from Sale of Materials was generated by the raw materials procurement activities of our Raw Material and Optimization Group.
Service Revenue
. Service Revenue is generated from our two operating segments as follows:
|
|
|
Our Mill Services Group generates Service Revenue from the services we provide to customers at their sites. This Service Revenue is generated from a
combination of: (1) contractually committed base monthly fees; (2) fees for services based on customer production volumes; and (3) revenue from the sale of steel manufacturing co-products sold for our own account, less a royalty fee
paid to the host mill.
|
|
|
|
Our Raw Material and Optimization Group generates Service Revenue by providing our proprietary software-based raw materials cost optimization service,
which calculates the lowest cost blend of raw materials necessary to make a customers specified chemistry of steel. We typically charge an optimization service fee for each ton of scrap used in steel manufacturing.
|
19
For the three months ended March 31, 2013, approximately 99% of our Service Revenue was
generated by our Mill Services Group, and approximately 1% of our Service Revenue was generated by our Raw Material and Optimization Group.
Cost of Raw Materials Shipments
. The activities that generate Revenue from Sale of Materials also incur Cost of Raw Materials Shipments, and are described as follows:
|
|
|
Our Mill Services Group generates Revenue from Sale of Materials by buying, processing and selling scrap for our own account. We record the cost of the
purchase of raw materials as Cost of Raw Materials Shipments upon the sale of said raw materials.
|
|
|
|
Our Raw Material and Optimization Group generates Revenue from Sale of Materials through our raw materials procurement activities. When we arrange to
purchase and sell scrap and other raw materials, the cost of such materials purchased and other direct costs including transportation are recorded as Cost of Raw Materials Shipments.
|
Site Operating Costs
. Our Site Operating Costs are highly variable and largely correlated to the volume of steel produced at our
customer sites. Site Operating Costs are predominantly incurred by our Mill Services Group and consist of employees wages, employee benefits, costs of operating supplies such as fuels and lubricants, repair and maintenance costs and equipment
leasing costs.
Selling, General and Administrative Expenses
. Our Selling, General and Administrative Expenses consist
of labor and related costs of selling and administration, professional fees, insurance costs, management fees, bad debt costs, bank fees and corporate expenses and bonuses.
Depreciation and Amortization
. Our consolidated Depreciation consists of Depreciation expenses related to property, plant and equipment. Our consolidated Amortization consists of Amortization
expenses related to finite life intangibles such as environmental permits, customer related intangibles, patents and unpatented technology, in each case recognized on a straight-line basis over the estimated useful life of the asset.
Income (Loss) from Operations
. Income (Loss) from Operations consists of Total Revenue less Total Costs and Expenses but does not
include loss on modification and early extinguishment of debt, equity investments, Interest Expense, Net and certain other items that we believe are not indicative of future results.
Key Measures We Use to Evaluate Our Company
In addition to the GAAP line
items described above, we also use the following additional financial measures to evaluate and assess our business:
Revenue After Raw Materials Costs
. We measure our sales volume on the basis of Revenue After Raw Materials Costs, which we define
as Total Revenue minus Cost of Raw Materials Shipments. Revenue After Raw Materials Costs is not a recognized financial measure under GAAP, but we believe it is useful in measuring our operating performance because it excludes the fluctuations in
the market prices of the raw materials we procure for and sell to our customers. We subtract the Cost of Raw Materials Shipments from Total Revenue because market prices of the raw materials we procure for and generally concurrently sell to our
customers are offset on our statement of operations. Further, in our raw materials procurement business, we generally engage in two alternative types of transactions that require different accounting treatments for Total Revenue. In the first type,
we take no title to the materials being procured and we record only our commission as revenue; in the second type, we take title to the materials and sell it to a buyer, typically in a transaction where a buyer and seller are matched. By subtracting
the Cost of Raw Materials Shipments, we isolate the margin that we make on our raw materials procurement and logistics services, and we are better able to evaluate our operating performance in terms of the volume of raw materials we procure for our
customers and the margin we generate.
Adjusted EBITDA
. Adjusted EBITDA is not a recognized financial measure under
GAAP, but we believe it is useful in measuring our operating performance. Adjusted EBITDA is used internally to determine our incentive compensation levels, including under our management bonus plan, and it is required, with some additional
adjustments, in certain covenant compliance calculations under our senior secured credit facilities. We also use Adjusted EBITDA to benchmark the performance of our business against expected results, to analyze year-over-year trends and to compare
our operating performance to that of our competitors. We also use Adjusted EBITDA as a performance measure because it excludes the impact of tax provisions and Depreciation and Amortization, which are difficult to compare across periods due to the
impact of accounting for business combinations and the impact of tax net operating losses on cash taxes paid. In addition, we use Adjusted EBITDA as a performance measure of our operating segments in accordance with ASC Topic 280,
Disclosures
About Segments of an Enterprise and Related Information
. We believe that the presentation of Adjusted EBITDA enhances our investors overall understanding of the financial performance of and prospects for our business.
Adjusted EBITDA Margin
. Adjusted EBITDA Margin is not a recognized financial measure under GAAP, but we believe it is useful in
measuring our operating performance. We calculate Adjusted EBITDA Margin by dividing our Adjusted EBITDA by our Revenue After Raw Materials Costs. We use Adjusted EBITDA Margin to measure our profitability and our control of cash operating costs
relative to Revenue After Raw Materials Costs.
20
Capital Expenditures
. We separate our Capital Expenditures into two categories:
(1) Growth Capital Expenditures and (2) Maintenance Capital Expenditures. We separate our Capital Expenditures between these two categories because it helps us to differentiate between the discretionary cash we invest in our growth and the
cash required to maintain our existing business. Growth Capital Expenditures and Maintenance Capital Expenditures are not recognized financial measures under GAAP, but we believe they are useful in measuring our operating performance. We also use
these measures as a component in determining our performance-based compensation.
Growth Capital Expenditures relate to the
establishment of our operations at new customer sites, the performance of additional services or significant productivity improvements at existing customer sites. We incur Growth Capital Expenditures when we win a new contract. Our Mill Services
Group contracts generally require that we acquire the capital equipment necessary to provide the service in advance of receiving revenue from the contract.
We incur Maintenance Capital Expenditures as part of our ongoing operations. Maintenance Capital Expenditures generally include: (1) the cost of normal replacement of capital equipment used at
existing customer sites on existing contracts; (2) any additional capital expenditures made in connection with the extension of an existing contract; and (3) any capital costs associated with acquiring previously leased
equipment. We generally replace our equipment on a schedule that is based on the operating hours of that equipment. We expect Maintenance Capital Expenditures to be greater in periods where our customers production volumes are high, requiring
us to operate more hours. Conversely, when our customers are producing less, we would expect fewer operating hours and reduced Maintenance Capital Expenditures.
Discretionary Cash Flow
. Discretionary Cash Flow is not a recognized financial measure under GAAP. We calculate Discretionary Cash Flow as our Adjusted EBITDA minus our Maintenance Capital
Expenditures, and we believe it is an important measure in analyzing our liquidity. In combination with our available liquidity, we use our Discretionary Cash Flow to assist us in determining our capacity to: (1) invest in Growth Capital
Expenditures; (2) finance changes in our working capital, particularly in our raw materials procurement activities; and (3) voluntarily repay portions of our debt obligations. In addition, we use this measure to help determine how
efficiently we are managing our assets, and we also use it as a component in determining our performance-based compensation.
Application
of Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates and assumptions in applying our critical accounting policies that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. We continually evaluate our judgments and estimates in determining our financial condition and operating
results. Estimates are based upon information available as of the date of the financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting policies and estimates are defined as
those that are both most important to the portrayal of our financial condition and operating results and require managements most subjective judgments. The most critical accounting policies and estimates are described below.
Revenue Recognition
. Revenue includes two categories: (1) Revenue from Sale of Materials and (2) Service Revenue.
Revenue from Sale of Materials is mainly generated by our raw materials procurement business, although it also includes
revenue from our Mill Services Group location where we buy, process and sell scrap for our own account.
We generate Service
Revenue from scrap management, scrap preparation, raw materials optimization, metal recovery and sales, material handling or product handling, slag processing and metal recovery services, surface conditioning and other services. We recognize revenue
when we perform the service or when title and risk of loss pass to the buyer.
Revenue from Sale of Materials
Raw materials procurement and logistics
In our raw materials procurement business, we generally engage in two types of
transactions that require different accounting treatment. We evaluate the accounting treatment for these transactions based on their individual facts and circumstances, and we categorize them into two general groupings:
(1) Transactions where we purchase raw materials from a supplier and sell the raw materials to a customer, for which we invoice the
customer for the full sale price of the goods. In this first type of transaction model, it is common for us to arrange for a sale to our customer and a matching purchase from our vendor almost simultaneously. During the three months ended
March 31, 2013, approximately 91% of the Companys raw material procurement activity by volume was made under this transaction model; and,
21
(2) Transactions where we arrange delivery of raw materials shipments to a customer directly
from a supplier, for which we earn a contractually determined, volume based arranging fee. In this second type of transaction, we invoice the customer for our arranging fee (but not for the sale price of the goods, which is paid directly by the
customer to the vendor). During the three months ended March 31, 2013, approximately 9% of the Companys raw material procurement activity by volume was transacted under this model.
For each individual transaction, we make a determination as to whether we should record revenue for the full value of the shipment, or
alternatively should only record revenue for our contractually determined arranging fee, based on our judgment as to whether we are acting as principal or agent in the transaction based on our consideration of the criteria set forth in ASC 605-45.
We record the full value of the material shipped and invoice that amount as revenue where we determine that we are acting as
a principal in the transaction. In general, we conclude that we are acting as principal in the transaction when (i) we are the primary obligor under the arrangement meaning that we are the party primarily obligated to provide the
material to our customer, and that obligation is not relieved even if our supplier fails to ship the material; (ii) we have general inventory risk in the transaction, even though we may mitigate that risk by entering into a purchase and sale
almost simultaneously; (iii) we have discretion in supplier selection, (iv) we have risk in physical inventory loss; and (v) we have credit risk in the transaction.
If we determine, after evaluating the above factors, that we are the principal in the transaction, we record the full invoiced value of
the transaction as revenue from the sale of materials and record the full cost of the transaction as cost of raw materials shipments. If we determine that we have not met the criteria to be considered a principal in the transaction and are acting as
an agent in the transaction, we will record only the contractually determined fee or margin on the transaction as revenue from the sale of materials.
We recognize revenue from raw materials procurement sales when title and risk of loss pass to the customer, which can be either F.O.B. shipping point or F.O.B. destination depending on terms of sale, or
when we have the right to receive the contractual fee. Revenues from these sources are included in Revenue from Sale of Materials. During the three months ended March 31, 2013, approximately 91% of the Companys raw material procurement
activity by volume was made under the transaction model where the Company purchases raw materials from a supplier and sells the material to the customer acting as a principal in the transaction. During the three months ended March 31, 2013,
approximately 9% of the Companys raw material procurement activity by volume was transacted where the Company arranged for delivery of raw material for a customer directly from a vendor earning a contractually determined volume-based fee
acting as an agent in the transaction. The volume-based fee is recorded as Revenue From Sale of Materials and there is no corresponding Cost of Raw Material Shipment in this transaction model.
The Company also purchases, processes and sells scrap iron and steel inventory for the Companys own account. The Company recognizes
revenue from scrap sales of material when title and risk of loss pass to the customer, which can be either F.O.B. shipping point or destination depending on terms of sale. Revenues from these sources are included in Revenue from Sale of Materials.
Service Revenue
Metal recovery, slag handling, processing, and sales
We generate revenue by removing slag from a furnace and processing it to separate metallic material from other slag components. The
separated metallic material is generally reused in production of steel by the host mill or sold to other end users, and the remaining nonmetallic material is generally sold to third parties as aggregate. The Company recognizes revenue from slag
processing and metal recovery services when it performs the services and revenue from co-product sales when title and risk of loss pass to the customer. Revenues from these sources are included in Service Revenue.
Semi finished material handling; scrap management preparation
We generate revenue from receiving, processing and managing raw
material inputs, primarily scrap, and handling and recording inventory of finished products where all of the production is generally completed at the customers location. Revenues from these sources are included in Service Revenue and are
recognized at the time the service is performed.
Surface conditioning
We generate revenue from removing
imperfections from semi-finished steel processed for use in high-end applications. The Company recognizes revenue from surface conditioning services when it performs the services. Revenues from these sources are included in Service Revenue.
Raw materials optimization
Revenue from optimization fees represents income from determining, through use of its
internally developed and proprietary software, the most economical combination of input materials necessary to make a customers specified chemistry of steel. The Company recognizes income from optimization fees as the optimization service is
provided. Optimization software maintenance fees are recognized in income over the contract life. Revenues from these sources are included in Service Revenue.
Other revenues
We generate from various additional services, including dust and debris management, equipment rental services, mobile equipment maintenance, refractory removal, vacuumation, as
well as revenues from services to customers outside of the normal contractual agreement. The Company recognizes revenue as the service is provided. Machine shop service revenues are recognized as work is performed. Revenues from these sources are
included in Service Revenue.
22
In certain instances, we have contracts under which we provide multiple services at a single
mill site, but each type of service is detailed in a separate scope of work and subject to a separate fee structure within the contract. In those instances, each service that we provide is also provided individually to other customers and other mill
sites, providing evidence that the individual services have stand alone value under ASC 605-25-5(a). We allocate revenue to each individual service based on the specific fee structure laid out in the contract as such fees fall within a consistent
range of similar fees charged where we provide the service as a single service at a mill site. We believe the contractual pricing structure and its relationship to pricing for similar services offered to other customer provides objective evidence of
the prices of the services we provide and, accordingly, our allocation is consistent with the relative selling price method prescribed in ASC 605-25-30-2.
Trade Receivables
. We perform ongoing credit evaluations of our customers and generally do not require our customers to post collateral, although we typically require letters of credit or other
credit assurances in our raw materials procurement business for international transactions. Account balances outstanding longer than the payment terms are considered past due and provisions are made for estimated uncollectible receivables. Our
estimates are based on historical collection experience, a review of the current status of receivables, our judgment of the credit quality of our customer and the condition of the general economy and the industry. Decisions to charge off receivables
are based on managements judgment after consideration of facts and circumstances surrounding potential uncollectible accounts.
Property, Plant and Equipment
. Property, plant and equipment are recorded at cost less accumulated depreciation. Costs in connection with business combinations are based on fair market value at the
time of acquisition. Major components of certain high value equipment are recorded as separate assets with depreciable lives determined independently from the remainder of the asset. Expenditures that extend the useful lives of existing plant and
equipment are capitalized, while expenditures for repairs and maintenance that do not extend the useful lives or improve productivity of the related assets are charged to expenses as incurred. The cost of property, plant and equipment retired or
otherwise disposed of and the related accumulated depreciation are removed from our accounts, and any resulting gain or loss is reflected in current operations.
Depreciation of property, plant and equipment is computed principally on the straight-line method over the estimated useful lives of assets.
Goodwill and Other Intangible Assets
. Goodwill and other indefinite life intangible assets not subject to amortization are
recorded at the lower of cost or implied fair value. Finite life intangible assets subject to amortization are recorded at cost less accumulated amortization provided on a straight-line basis over the intangible assets estimated useful lives.
Goodwill is evaluated for potential impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred. Indefinite life intangibles are evaluated for potential impairment whenever events or changes in
circumstances indicate that an impairment may have occurred. ASC Topic 350,
Goodwill and Other Intangible Assets
, requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment evaluation
used to identify potential impairment compares the estimated fair value of the reporting unit containing goodwill with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting
units goodwill is not considered to be impaired, and the second step of the impairment evaluation is unnecessary. If the reporting units carrying amount exceeds its estimated fair value, the second step of the evaluation must be
performed to measure the goodwill impairment loss, if any. The second step of the evaluation compares the implied fair value of the reporting units goodwill, determined in the same manner as the amount of goodwill recognized in a business
combination, with the carrying amount of such goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair value of the goodwill so calculated, an impairment loss is recognized in an amount equal to the excess.
During 2012, we did not record any impairment charge related to goodwill. We tested for impairment on October 1, 2012,
the annual test date. There were no events that triggered any additional impairment tests during 2012 or the first quarter of 2013. In testing for impairment, we estimate the fair values of our reporting units under the income and market approach.
The income approach was based upon projected future cash flows discounted to present value using factors that consider the
timing and risk associated with the future cash flows. Fair value for each reporting unit was estimated using future cash flow projections based on managements long range estimates of market conditions over a multiple year horizon. A 4%
perpetual growth rate was used to arrive at the estimated future terminal value. A discount rate of 10% was used for the Mill Services Group reporting unit and a discount rate of 12% was used for the Raw Material and Optimization Group reporting
unit which were based upon the cost of capital of other comparable companies adjusted for company specific risks.
The market
approach was based upon an analysis of valuation metrics for companies comparable to our reporting units and the pricing range for the companys publicly traded shares. The fair value of the business enterprise value for both reporting units
was estimated using a range of EBITDA multiples of market participants. We determined the fair value estimate during its testing using the income approach and used the market approach to corroborate the value as determined by the income approach.
23
In May 2009, the continuing economic downturn and a change in our forecast related to
certain customers and sites triggered a goodwill impairment evaluation in advance of our annual impairment evaluation. In performing the first step of the evaluation, we determined that the estimated fair value of our Raw Material and Optimization
Group exceeded its carrying value and that the second step of the evaluation was not necessary for that segment; however, we determined that the estimated fair value of the Mill Services Group was less than its carrying amount and proceeded to the
second step of the evaluation for that segment. In the second step of the impairment evaluation, we determined that the carrying amount of goodwill allocated to our Mill Services Group exceeded its estimated implied fair value of goodwill and,
accordingly, recorded a $55.0 million impairment loss.
In the May 2009 impairment analysis, the income approach was based
upon projected future cash flows discounted to present value using factors that consider the timing and risk associated with the future cash flows. Fair value for each reporting unit was estimated using future cash flow projections based on
managements long range estimates of market conditions over a multiple year horizon. A 3% perpetual growth rate was used to arrive at the estimated future terminal value. An after-tax discount rate of 14.6% was used to discount the projected
cash flows for both reporting units which was based upon the cost of capital of other market participants adjusted for company specific risks. The market approach, which was based upon an analysis of valuation metrics for comparable companies, was
used in the May 2009 impairment test to corroborate the value as determined by the income approach.
As of March 31,
2013, the Mill Services Group and the Raw Material and Optimization Group had $161.5 million and $80.1 million of goodwill, respectively. The 2012 annual goodwill impairment test, as of October 1, 2012, indicated that the estimated fair value
of our Mill Services Group and our Raw Material and Optimization Group exceeded their carrying values by approximately 86% and 153%, respectively. The estimates of fair value of a reporting unit under the income approach are based on a discounted
cash flow analysis which requires us to make various judgmental assumptions, including assumptions about the timing and amount of future cash flows, growth rates and discount rates. If business conditions change or other factors have an adverse
effect on our estimates of discounted future cash flows, assumed growth rates or discount rates, future tests of goodwill impairment may result in additional impairment charges.
Equity Investment.
We account for investments in entities where we exert significant influence, but do not control the entity,
using the equity method of accounting under ASC 323-10. We record our initial investment at cost and record a proportional share of net income of the entity in our consolidated statement of operations.
Impairment of Long-Lived Assets
. Long-lived assets, including property, plant and equipment and amortizable intangible assets, are
reviewed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC Topic 360,
Accounting for the Impairment or Disposal of
Long-Lived Asset
s. Impairment is assessed when the undiscounted expected cash flow derived from an asset is less than its recorded amount. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its fair
value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment evaluation, the undiscounted cash flow used to assess impairments and the fair value of an impaired asset.
Foreign Currency Translation
. The financial statements of our foreign subsidiaries are generally measured using the
local currency as the functional currency. Assets and liabilities of our foreign subsidiaries are translated at the exchange rate as of the balance sheet date. Resulting translation adjustments are recorded in the cumulative translation adjustment
account, a separate component of other comprehensive income (loss). Income and expense items are translated at average monthly exchange rates. During 2012, we substantially liquidated the assets of one of our foreign subsidiaries. ASC 830-30-40-1
requires that upon substantial liquidation, amounts that had previously been charged to the cumulative translation adjustment be reported in current earnings. Accordingly, we recorded a $0.4 million charge in the fourth quarter of 2012.
Grants from Government Agencies
. We recognize receivables for grants from government agencies when we are
reasonably assured that the amounts will be received and when the conditions necessary to receive that grant have been fully achieved. We recognize the benefit of government grants in our statement of operations on a systematic and rational basis
over the periods of consumption or commitment as applicable. In 2012, we received direct notice from the Department of Trade and Industry of the Republic of South Africa that we have met the conditions and will receive grants totaling approximately
$5.2 million. The grant was for a combination of asset investment and job creation and saving and because there were multiple conditions to receiving the grant, we determined the appropriate treatment for the grant is to record the amount as
deferred revenue and recognize it in revenue ratably over the life of our service contracts. For the three months ended March 31, 2013, we recognized $0.8 million and in the fourth quarter of 2012, we recognized $0.7 million related to the
first year of our seven year contracts.
Health Insurance
. We provide health insurance to a portion of our employees
through premium-based indemnity plans or nationalized health care plans that may require employer contributions. We provide health insurance to the rest of our employees under a self-insurance plan that uses a third-party administrator to process
and administer claims. We have stop-loss coverage through an insurer, in excess of a stated self-insured limit per employee. We maintain an accrual for unpaid claims and claims incurred but not reported. In March 2010, the Patient Protection and
Affordable Care Act and Health Care and Education Reconciliation Act were signed into law. To date, we have not seen a material financial impact as a result of these Acts. However, we are continuing to evaluate the impact of this comprehensive
legislation on our self-insured health plans and our business, financial condition and results of operations as additional provisions of the Acts become effective over time.
24
Workers Compensation
. We self-insure our workers compensation insurance
under a large deductible program. Under this program, the maximum exposure per claim is $1.0 million and stop-loss coverage is maintained for amounts above this limit. The aggregate maximum exposure is limited to a percentage of payroll for
each open policy. We accrue for this expense in amounts that include estimates for incurred but not reported claims, as well as estimates for the ultimate cost of all known claims.
Share-Based Compensation
. We established our Long-Term Incentive Plan in 2011. We account for share based payments under the plan
at the fair value of the award on the date of grant or the date of modification of a grant. For grants that are subject to time-based vesting only, we recognize expense over the vesting period. For grants that are subject to time based vesting and a
market condition, we recognize expense over the estimate requisite service period.
The Long-Term Incentive Plan also provides
for the issuance of restricted shares. In July 2012, we issued 21,486 shares of Class A Common Stock to independent members of our board of directors. The grant date fair value of the shares was $0.2 million and the expense is being recognized
over the requisite service period.
Results of Operations
Quarter ended March 31, 2013 compared to Quarter ended March 31, 2012
The following table sets forth each of the line items in our statement of operations for each of the periods indicated and the changes between the periods in terms of dollar amounts and percentage
changes. The table also provides a reconciliation of Total Revenue to Revenue after Raw Materials Costs for each of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
March
31,
|
|
|
Variances
|
|
(dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from Sale of Materials
|
|
$
|
453,630
|
|
|
$
|
612,659
|
|
|
$
|
(159,029
|
)
|
|
|
-26.0
|
%
|
Service Revenue
|
|
|
135,965
|
|
|
|
134,299
|
|
|
|
1,666
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
589,595
|
|
|
|
746,958
|
|
|
|
(157,363
|
)
|
|
|
-21.1
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Raw Materials Shipments
|
|
|
433,791
|
|
|
|
591,058
|
|
|
|
(157,267
|
)
|
|
|
-26.6
|
%
|
Site Operating Costs
|
|
|
101,668
|
|
|
|
101,846
|
|
|
|
(178
|
)
|
|
|
-0.2
|
%
|
Selling, General and Administrative Expenses
|
|
|
15,821
|
|
|
|
17,261
|
|
|
|
(1,440
|
)
|
|
|
-8.3
|
%
|
Depreciation and Amortization
|
|
|
18,879
|
|
|
|
16,219
|
|
|
|
2,660
|
|
|
|
16.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
570,159
|
|
|
|
726,384
|
|
|
|
(156,225
|
)
|
|
|
-21.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
19,436
|
|
|
|
20,574
|
|
|
|
(1,138
|
)
|
|
|
-5.5
|
%
|
Interest Expense, Net
|
|
|
(5,973
|
)
|
|
|
(8,101
|
)
|
|
|
2,128
|
|
|
|
-26.3
|
%
|
Loss from equity investment
|
|
|
(43
|
)
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
Loss on Early Extinguishment of Debt
|
|
|
(1,102
|
)
|
|
|
(12,300
|
)
|
|
|
11,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
12,318
|
|
|
|
173
|
|
|
|
12,145
|
|
|
|
|
|
Income Tax Expense
|
|
|
(4,261
|
)
|
|
|
(60
|
)
|
|
|
(4,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
8,057
|
|
|
$
|
113
|
|
|
$
|
7,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue After Raw Materials Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
589,595
|
|
|
$
|
746,958
|
|
|
$
|
(157,363
|
)
|
|
|
|
|
Cost of Raw Materials Shipments
|
|
|
(433,791
|
)
|
|
|
(591,058
|
)
|
|
|
157,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue After Raw Materials Costs
|
|
$
|
155,804
|
|
|
$
|
155,900
|
|
|
$
|
(96
|
)
|
|
|
-0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill Services Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
172,351
|
|
|
$
|
180,070
|
|
|
$
|
(7,719
|
)
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
March
31,
|
|
|
Variances
|
|
(dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Cost of Raw Materials Shipments
|
|
|
(35,389
|
)
|
|
|
(43,711
|
)
|
|
|
8,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue After Raw Materials Costs
|
|
$
|
136,962
|
|
|
$
|
136,359
|
|
|
$
|
603
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw Material and Optimization Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
417,190
|
|
|
$
|
566,872
|
|
|
$
|
(149,682
|
)
|
|
|
|
|
Cost of Raw Materials Shipments
|
|
|
(398,394
|
)
|
|
|
(547,339
|
)
|
|
|
148,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue After Raw Materials Costs
|
|
$
|
18,796
|
|
|
$
|
19,533
|
|
|
$
|
(737
|
)
|
|
|
-3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
54
|
|
|
$
|
16
|
|
|
$
|
38
|
|
|
|
|
|
Cost of Raw Materials Shipments
|
|
|
(8
|
)
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue After Raw Materials Costs
|
|
$
|
46
|
|
|
$
|
6
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
8,057
|
|
|
$
|
113
|
|
|
$
|
7,944
|
|
|
|
|
|
Income Tax Expense
|
|
|
4,261
|
|
|
|
60
|
|
|
|
4,201
|
|
|
|
|
|
Interest Expense, Net
|
|
|
5,973
|
|
|
|
8,101
|
|
|
|
(2,128
|
)
|
|
|
|
|
Loss on Early Extinguishment of Debt
|
|
|
1,102
|
|
|
|
12,300
|
|
|
|
(11,198
|
)
|
|
|
|
|
Depreciation and Amortization
|
|
|
18,879
|
|
|
|
16,219
|
|
|
|
2,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
38,272
|
|
|
$
|
36,793
|
|
|
$
|
1,479
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA by Operating Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill Services Group
|
|
$
|
32,750
|
|
|
$
|
32,417
|
|
|
$
|
333
|
|
|
|
1.0
|
%
|
Raw Materials and Optimization Group
|
|
|
13,769
|
|
|
|
14,615
|
|
|
|
(846
|
)
|
|
|
-5.8
|
%
|
Administrative
|
|
|
(8,247
|
)
|
|
|
(10,239
|
)
|
|
|
1,992
|
|
|
|
-19.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,272
|
|
|
$
|
36,793
|
|
|
$
|
1,479
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA Margin
|
|
|
24.6
|
%
|
|
|
23.6
|
%
|
|
|
|
|
|
|
|
|
Revenue from Sale of Materials
. Revenue from Sale of Materials was $453.6 million for the first
quarter of 2013 compared to $612.7 million for the first quarter of 2012. Revenue from Sale of Materials is primarily generated from raw material procurement activities, which produced $415.5 million or 92% of the Revenue from Sale of Materials
in the first quarter of 2013, and $565.0 million or 92% in the first quarter of 2012. The remaining Revenue from Sale of Materials of $38.1 million in the first quarter of 2013 and $47.7 million in the first quarter of 2012 was primarily
generated by our Mill Services Group location where we buy, process and sell raw material for our own account.
Revenue from
the Sale of Materials decreased 26.0%, and the cost to procure the materials decreased by 26.6% in the first quarter of 2013 compared to the first quarter of 2012. The decrease was driven by both a decrease in the market price of the raw materials
we procure for and sell to our customers and by a decrease in the volume of material we procured or arranged for our customers. The market price of #1 heavy melt, an indicative grade of scrap, decreased approximately 14% in the first quarter of 2013
compared to the first quarter of 2012. The volume of material we procured or arranged for our customers also decreased driven by a 20% decrease in large vessel shipments and a decrease in our non-contractual domestic activity caused by lower steel
production year-over-year.
Service Revenue
. Service Revenue was $136.0 million in the first quarter of 2013 compared
to $134.3 million in the first quarter of 2012, an increase of 1.2%. Service Revenue is primarily generated by our Mill Services Group which produced $134.2 million and $132.4 million in the first quarter of 2013 and 2012, respectively. The Mill
Services Group accounted for approximately 99% of service revenue in each period, with the remainder generated by optimization services from our Raw Material and Optimization Group.
Our Service Revenue is largely generated on the basis of the volume of steel our customers produce, although service contracts typically
include base monthly fees and/or tiered pricing arrangements. Our service revenue increased 1.2% year-over-year despite a drop in steel production by our customers of approximately 6% on a same site basis. The increase in our service revenue was
largely driven by $6.7 million in revenue from new sites and services which was partially offset by a decrease of $2.0 million related to an Arbitration Award that was recognized in the first quarter of 2012. Factors that impact the year-over-year
change in Service Revenue also impact the change in Revenue After Raw Materials Costs and are discussed below.
Cost of Raw
Materials Shipments
. Similar to the 26.0% decrease in Revenue from the Sale of Materials, the Cost of Raw Materials Shipments decreased 26.6% due predominantly to a decrease in the price of materials we procured for and sold to our customers and
a market-driven volume decrease.
26
Revenue After Raw Materials Costs.
The Revenue After Raw Materials Costs for our Mill
Services Group increased $0.6 million, or 0.4%, in the first quarter of 2013 compared to the first quarter of 2012. Year-over-year Revenue After Raw Materials Costs increased due to new sites and services which contributed $6.7 million of
incremental revenue, $4.7 million of which was generated from new international sites and services. This increase was partially offset by a $1.2 million decrease in Service Revenue related to three contracts in the U.S. and Canada that were not
renewed and a $0.4 million decrease from the cancellation of a contract in Serbia after our customer sold the mill to the Serbian government. Additionally, in the first quarter of 2012 we recognized $2.0 million of Revenue After Raw Materials Costs
related to an arbitration award settlement stemming from the shutdown of operations at a previous customer site prior to the end of our service contract. The remaining decline of $1.3 million was partially the result of a decrease in our
customers steel production volumes of approximately 6%.
The Revenue After Raw Materials Costs for our Raw Material and
Optimization group decreased $0.7 million, or 3.8%, to $18.8 million. The volume of material we procured for our customers decreased approximately 17%. Approximately 33% of the overall decline in volume related to non-exclusive domestic customers
due in part to a decrease in domestic steel production volumes which was down about 6% year-over-year. Additionally, a contractual change with a customer for whom we are the exclusive purchaser of scrap drove approximately 60% of the total volume
decrease. However, the contractual change with that customer also improved our per ton margins which helped to offset the impact on our Revenue After Raw Materials Costs. Including a $1.1 million favorable non-recurring adjustment related to a
true-up adjustment for certain accrued costs, our per ton margin increased by approximately 15%, largely offsetting the impact of lower volumes in the first quarter of 2013. Excluding that adjustment, our per ton margin would have increased
approximately 8%.
Site Operating Costs
. Site Operating Costs are primarily the costs incurred by our Mill Services
Group in providing services to our customers. Site Operating Costs are largely variable and generally vary in line with our customers production and our service revenue. Site operating costs decreased $0.2 million year-over-year, or 0.2%. New
sites and contracts contributed $3.8 million of additional site operating costs in the first quarter of 2013 compared to the first quarter of 2012. Site operating costs related to other sites and contracts decreased $4.0 million, or approximately
4%, which was substantially driven by a decrease in our customers steel production volumes.
27
Selling, General and Administrative Expenses
. Selling, General and Administrative
Expenses for the first quarter of 2013 were $15.8 million, compared to $17.3 million in the first quarter of 2012, a decrease of $1.4 million. A non-recurring benefit of $0.9 million related to insurance recoveries on legacy workers
compensation costs contributed to the decrease. Additionally our administrative salaries and wages decreased by $0.4 million driven by a reduction in internal labor costs including a $0.2 million decrease in severance costs related to a senior
executive who retired on December 31, 2012.
Adjusted EBITDA.
Adjusted EBITDA for the first quarter of 2013 was
$38.3 million compared to $36.8 million for the first quarter of 2012, an increase of 4.0%.
Our Mill Services
Groups Adjusted EBITDA increased $0.3 million, or 1.0%, to $32.8 million. Year-over-year, the volume of steel produced by our Mill Services Group customers decreased by approximately 6%, but we had $2.9 million of additional Adjusted EBITDA
from new operating contracts and services. Additionally, we generated $2.0 million of incremental adjusted EBITDA at two international sites where we began operating on January 1, 2012, but experienced losses in the first quarter of 2012 during
the ramp-up of those operations. Additionally, three large domestic sites generated $1.0 million of additional Adjusted EBITDA. These positive items helped to offset the impact of a decrease in our customers production and a decrease of $1.7
million related to an Arbitration Award that was recognized in the first quarter of 2012. Additionally, we incurred $0.4 million of negative Adjusted EBITDA at a site where we began operating late in the first quarter of 2013. We typically incur
some pre-operating losses when we begin operating in a new location as we put operating and administrative infrastructure in place to support our services prior to earning run-rate revenues.
Our Raw Material and Optimization Groups Adjusted EBITDA decreased $0.8 million or 5.8% year-over-year, driven by a slight decrease
in the volume of material we procured for and sold to our customers. Domestic steel production volume was down approximately 6% in the first quarter of 2013 compared to the first quarter of 2012 and contributed to the decrease in our procurement
volume as did a 20% decrease in our large volume vessel shipments, which can be sporadic quarter to quarter. Overall, our per ton margins improved, helping to mitigate the loss of volume. The per ton margins benefited from a $1.1 million favorable
non-recurring adjustment related to the true-up of certain accrued costs. However, even excluding that adjustment, our per ton margin would have increased approximately 8%.
Our Administrative net expenses decreased $2.0 million, or 19.5%, in the first quarter of 2013 compared to the first quarter of 2012. The decrease was primarily due to a non-recurring benefit of $0.9
million related to insurance recoveries on legacy workers compensation costs and a $0.9 million dollar decrease in our accrual for incentive compensation.
Adjusted EBITDA Margin
. Adjusted EBITDA margin in the first quarter of 2013 was 24.6% compared to 23.6% in the first quarter of 2012. A variety of factors impact our Adjusted EBITDA margin
including the relative contributions of the Mill Services Group and Raw Material and Optimization Group, which have different margin characteristics, and the relationship of the Administrative Segment expenses to consolidated Revenue After Raw
Materials Costs. The year-over-year increase was driven by positive contributions from our new sites and services and by the decrease in our Administrative net expenses. These were partially offset by the decrease in Adjusted EBITDA of the Raw
Material and Optimization Group.
Depreciation and Amortization
. Depreciation and amortization expense during the first
quarter of 2013 was $18.9 million compared to $16.2 million in the first quarter of 2012, an increase of approximately 16.4%. The increase was driven by the depreciation expenses associated with higher capital expenditures in 2012 and
2013. Much of that capital was expended at new sites in contracts where we began operation in 2012 and the first quarter of 2013. Depreciation expense at those sites amounted to $3.9 million in the first quarter of 2013 compared to $1.9 million in
the first quarter of 2012; an increase of $2.0 million. Amortization expense for the first quarter of 2013 was comparable to that incurred in the first quarter of 2012.
Interest Expense, Net
. Interest Expense, Net for the first quarter of 2013 was $6.0 million, compared to
$8.1 million in the first quarter of 2012, a decrease of $2.1 million. The decrease resulted from lower average outstanding debt balances and lower underlying interest rates resulting from our March 20, 2012 refinancing. In that
refinancing we reduced our outstanding indebtedness by $80.2 million and reduced our overall interest rate by repaying our senior secured notes which carried a fixed rate of 9
3
/
4
%.
On March 21, 2013, we completed an amendment to re-price our term
loan. The amendment reduced the applicable margin on LIBOR borrowings from 4.50% to 3.75% and reduced the LIBOR floor from 1.25% to 1.00%. We expect that the re-pricing will save approximately $3.0 million of interest expense annually, but it did
not have a significant impact in the first quarter of 2013 because it occurred late in the period.
28
Loss on Modification and Early Extinguishments of Debt
. On March 21, 2103, we
completed an amendment to re-price our term loan reducing our applicable margin by 0.75% and reducing our LIBOR floor by 0.25%. In connection with the transaction, we recorded a $1.1 million Loss on the Modification and Early Extinguishment of Debt.
The charge consisted of $0.7 million in fees incurred in the transaction and $0.4 million to write-off deferred debt issuance costs and original issue discount associated with individual lenders who exited the facility in connection with the
transaction.
In March 2012, we entered into a new $300.0 million term loan facility and paid off our obligations under our
previous term loan facility due 2014 and our senior subordinated notes due 2015. In connection with the refinancing, we incurred a $12.3 million loss in the early extinguishment of debt which consisted of the $5.4 million senior note redemption
premium, $1.8 million of interest payable to holders through the redemption date, $5.0 million to write-off the unamortized deferred issuance costs on the extinguished indebtedness and $0.1 million in miscellaneous legal and administrative charges.
29
Income Tax Expense
. Income Tax Expense for the first quarter of 2013 was $4.3
million, or 34.6% of our pre-tax income, compared to a $0.1 million expense, or 34.7% of our pre-tax income, in the first quarter of 2012. The Income Tax Expense for the first quarter of 2013 is based on an estimated annual effective rate,
which requires us to make our best estimate of expected pre-tax income for the year. The income tax expense for the first quarter of 2013 was based on an annualized effective rate of 30.2%, but is adjusted to include a $0.7 million charge associated
with the immediate recognition of the anticipated cost associated with a tax law change in South Africa.
Liquidity and Capital Resources
The eligible accounts receivable, inventory and equipment that comprise the collateral under the ABL facility as of
March 31, 2013 supported a gross borrowing base of approximately $275.5 million. Our excess available balance was $212.8 million as we had outstanding borrowing of $13.5 million and $49.2 million of outstanding letters of credit. The gross
borrowing base was approximately $74.5 million below the $350.0 million limit of the ABL facility. The Company expects to add an additional approximately $20 million of equipment related borrowing base capacity upon the resolution of certain
collateral access and other administrative agreements with the agent for the ABL lenders.
We believe that cash flow from
operations, together with availability under our new ABL facility, will be sufficient to fund our operating, capital and debt service requirements for at least the next 12 months.
Cash Flow
The nature of our procurement activities is such that the
amount we invest in inventories and our accounts receivable may significantly vary at any given point in time. Cash flow provided by operating activities in the three-month period ending March 31, 2013 was $14.8 million compared to cash
provided by operations of $9.8 million in the three-month period ending March 31, 2012. Working capital items used $14.8 million of cash in the first three months of 2013 compared to using $21.2 million in the first three months of 2012.
Significant changes in working capital items generally relate to our raw material procurement activities and, while we work to manage the timing of disbursements and collections, our working capital levels fluctuate, sometimes significantly, over
reporting periods. At March 31, 2013, we had paid $13.7 million for large ocean-going vessel inventories for which we were paid by our customers in April of 2013. Additionally, we paid incentive compensation in March 2013 related to 2012
performance.
Net cash used in investing activities in the three-month period ending March 31, 2013 was $22.9 million, of
which $10.3 million funded Growth Capital Expenditures and $10.2 million funded Maintenance Capital Expenditures. Net cash used in investing activities in the three-month period ending March 31, 2012 was $33.1 million, of which $24.5 million
funded Growth Capital Expenditures and $7.8 million funded Maintenance Capital Expenditures. Maintenance Capital Expenditures will vary with our customer production as the schedule of assets and major components replacement is highly correlated with
equipment operating hours.
Net cash provided by financing activities in the first three months of 2013 was $11.8 million, and
primarily consisted of $13.5 million in net borrowings on our revolving credit facility. In addition, the Company received $2.25 million in proceeds in connection with the Amendment to TCIMSs outstanding senior secured Term Loan B credit
agreement. Net cash used for financing activities in the first three months of 2012 was $70.3 million, mainly comprised of amounts paid to reduce our overall indebtedness as part of our March 2012 refinancing and the issuance and termination fees
associated with that refinancing. In the March 2012 refinancing, we received $297.0 million in proceeds from our new Term Loan Facility and paid off $223.0 million of senior subordinated notes and $157.2 million outstanding on our senior secured
term loan due 2014. We also incurred $13.6 million of debt issuance and termination fees associated with the transaction. In addition to the proceeds of our new senior secured term loan, we used available cash and a $30.0 million draw on our ABL
facility to consummate the March 20, 2012 refinancing.
30
Discretionary Cash Flow
During the three-month period ending March 31, 2013 we generated $28.0 million of Discretionary Cash Flow compared to $29.1 in the
first three months of 2012. We define Discretionary Cash Flow as Adjusted EBITDA less Maintenance Capital Expenditures and it is calculated as follows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
2013
|
|
|
March 31,
2012
|
|
Adjusted EBITDA
|
|
$
|
38,272
|
|
|
$
|
36,793
|
|
Maintenance Capital Expenditures
|
|
|
(10,238
|
)
|
|
|
(7,696
|
)
|
|
|
|
|
|
|
|
|
|
Discretionary Cash Flow
|
|
$
|
28,034
|
|
|
$
|
29,097
|
|
|
|
|
|
|
|
|
|
|
The $2.5 million increase in Maintenance Capital Expenditures was primarily due to timing differences in
spend in comparison to the prior year same quarter. Offsetting this increase was an increase in Adjusted EBITDA of $1.5 million.
The table below reconciles Discretionary Cash Flow to cash flow provided by (used in) operating activities, for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
2013
|
|
|
March 31,
2012
|
|
Discretionary Cash Flow
|
|
$
|
28,034
|
|
|
$
|
29,097
|
|
Maintenance Capital Expenditures
|
|
|
10,238
|
|
|
|
7,696
|
|
Cash interest expense
|
|
|
(5,090
|
)
|
|
|
(15,382
|
)
|
Cash income taxes
|
|
|
(619
|
)
|
|
|
(1,005
|
)
|
Change in accounts receivable
|
|
|
308
|
|
|
|
(47,247
|
)
|
Change in inventory
|
|
|
(8,436
|
)
|
|
|
(14,257
|
)
|
Change in accounts payable
|
|
|
410
|
|
|
|
48,905
|
|
Change in other current assets and liabilities
|
|
|
(7,347
|
)
|
|
|
(595
|
)
|
Other operating cash flows
|
|
|
(2,694
|
)
|
|
|
2,578
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
14,804
|
|
|
$
|
9,790
|
|
|
|
|
|
|
|
|
|
|
Working Capital
Our current assets and liabilities, particularly our accounts receivable, inventory and accounts payable, vary significantly with changes in underlying business conditions including the volume and price
of raw materials we procure for our customers. The volume and per ton price of the raw materials we buy from our vendors and sell to our customers will impact our Revenue from the Sale of Materials and our Cost of Raw Materials shipments. The same
factors will typically impact our accounts receivable, inventory and accounts payable in comparable fashion. We generally expect that those increases will have offsetting effects and that any resulting impact to cash flows is temporary and not
material. However, because of the purchasing scale of our raw material procurement business, changes in the timing of collection of receivables or payment of accounts payable can have significant impacts on our cash flow from operations in a given
period. We generally expect that these impacts will be temporary. From time to time, we may also decide to invest in our working capital to take advantage of opportunities to realize higher than normal margins in our raw materials and optimization
activities. The chart below shows the weighted average price of #1 Heavy Melt Scrap based on published prices of the commodity weighted by our monthly volume of raw materials shipments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
3 months -2012
|
|
|
3 months -2013
|
|
Weighted average per ton price of #1 Heavy Melt Scrap
|
|
$
|
209
|
|
|
$
|
332
|
|
|
$
|
411
|
|
|
$
|
411
|
|
|
$
|
353
|
|
New site start-ups in our mill services business also impact working capital movements as we fund the
operating costs for some period of time before receiving the first cash payments for our services.
31
Our accounts receivable and inventory provide collateral for our senior secured ABL
facility, and changes in those balances may affect the amount we are eligible to borrow under such facility. In periods when the volume and selling price of the raw materials we procure for our customers increase, we will usually experience
increased accounts receivable and inventory balances and the amount available to be borrowed under the senior secured ABL facility may increase. Likewise, in periods when the volume and selling price of raw materials we procure for our customers
decrease, we will usually experience decreased accounts receivable and inventory balances and the amount available to be borrowed under the senior secured ABL facility may decrease.
During the three-month period ending March 31, 2013, our accounts receivable decreased $0.3 million, or 0.1%, and our accounts
payable increased $0.4 million, or 0.2%. The slight improvement in working capital from these balances were offset by a larger increase in our inventory of $8.4 million, or 16.7%. The increase in inventory generally reflects an increase in the
volume of inventory that we have in transit to our customers.
During the three-month period ending March 31, 2012, our
accounts receivable increased $47.0 million, or 16.1%, and our inventory increased $14.3 million, or 25.3%. The increase in accounts receivable generally reflects the increase in our revenue in the first quarter of 2012 compared to the fourth
quarter of 2011; there were no significant impacts from collectability or valuation issued. The increase in inventory generally reflects an increase in the volume of inventory that we have in transit to our customers. The increases in accounts
receivable and inventory were partially offset by a $48.9 million increase in accounts payable. Additionally, our net working capital increase in the first quarter of 2012 includes $14.2 million decrease in accrued expenses primarily resulting from
$13.7 million in interest payments on our senior subordinated notes as well as the March 2012 payment of incentive compensation which had been accrued for in 2011. The net working capital increase during the first quarter of 2012 also reflects the
impact of significant new sites in our mill services business where we fund our operations before receiving cash payments for our services.
Forward Looking Statements
This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, with respect to
our financial condition, results of operations and business and our expectations or beliefs concerning future events. Such forward-looking statements include the discussions of our business strategies, estimates of future global steel production and
other market metrics and our expectations concerning future operations, margins, profitability, liquidity and capital resources. Forward-looking statements may be preceded by, followed by or include the words may, will,
believe, expect, anticipate, intend, plan, estimate, could, might, or continue or the negative or other variations thereof or comparable
terminology. Forward-looking statements are not guarantees of performance. You should understand that the following important factors, in addition to those discussed in Item 1A of Part I of this report, could affect our future results and could
cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates and
assumptions. Actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward- looking statements. Any forward-looking statement speaks only as of
the date on which it is made, and we undertake no obligation to update any such statement to reflect new information, or the occurrence of future events or changes in circumstances.
Many factors could cause actual results to differ materially from those indicated by the forward-looking statements or could contribute
to such differences, including:
|
|
|
North American and global steel production volumes and demand for steel are impacted by regional and global economic conditions and by conditions in
our key end-markets, including automotive, consumer appliance, industrial equipment and construction markets;
|
|
|
|
we rely on a number of significant customers and contracts, the loss of any of which could have a material adverse effect on our results of operations;
|
|
|
|
some of our operations are subject to market price and inventory risk arising from changes in commodity prices;
|
|
|
|
if we fail to make accurate estimates in bidding for long-term contracts, our profitability and cash flow could be materially adversely affected;
|
|
|
|
operating in various international jurisdictions subjects us to a variety of risks;
|
|
|
|
our international expansion strategy may be difficult to implement and may not be successful;
|
32
|
|
|
our business involves a number of personal injury and other operating risks, and our failure to properly manage these risks could result in liabilities
and loss of future business not fully covered by insurance and loss of future business and could have a material adverse effect on results of operations;
|
|
|
|
we are subject to concentrated credit risk and we could become subject to constraints on our ability to fund our planned capital investments and/or
maintain adequate levels of liquidity and working capital under our senior secured ABL facility as a result of concentrated credit risk, declines in raw material selling prices or declines in steel production volumes;
|
|
|
|
if we experience delays between the time we procure raw materials and the time we sell them, we could become subject to constraints on our ability to
maintain adequate levels of liquidity and working capital;
|
|
|
|
our estimates of future production volumes may not result in actual revenue or translate into profits;
|
|
|
|
counterparties to agreements with us may not perform their obligations;
|
|
|
|
exchange rate fluctuations or decreases in exports of steel may materially adversely impact our business;
|
|
|
|
an increase in our debt service obligations may materially adversely affect our earnings and available cash and could make it more difficult to
refinance our existing debt;
|
|
|
|
the terms of our credit facilities may restrict our current and future operations, particularly our ability to finance additional growth or take some
strategic or operational actions;
|
|
|
|
we expend significant funds and resources to embed ourselves at our customers sites, but we may not receive significant profits for a period of
time following such efforts;
|
|
|
|
increases in costs of maintenance and repair of our equipment or increases in energy prices could increase our operating costs and reduce
profitability;
|
|
|
|
higher than expected claims under our self-insured health plans, under which we retain a portion of the risk, and our large deductible workers
compensation program could adversely impact our results of operations and cash flows;
|
|
|
|
we are exposed to work stoppages and increased labor costs resulting from labor union activity among our employees and those of our customers;
|
|
|
|
we could be exposed to unknown or unmanaged risks or losses due to employee misconduct or fraud;
|
|
|
|
certain of our pension and other post-employment benefit plans are currently underfunded or unfunded, and we have to make cash payments, which may
reduce the cash available for our business;
|
|
|
|
higher than expected claims that are in excess of the amount of our coverage under insurance policies would increase our costs;
|
|
|
|
equipment failure, failure of our computer, information processing, or communications hardware, software, systems or infrastructure, or other events
could cause business interruptions that could have a material adverse effect on our results of operations;
|
|
|
|
we are subject to acquisition risks. If we are not successful in integrating companies that we acquire or have acquired, we may not achieve the
expected benefits, and our profitability and cash flow could suffer. In addition, the cost of evaluating and pursuing acquisitions may not result in a corresponding benefit;
|
|
|
|
our business is subject to environmental and health and safety regulations that could expose us to liability, increase our cost of operations, or
otherwise have a material adverse effect on our results of operations;
|
|
|
|
failure to comply with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar regulations could subject us to penalties and other
adverse consequences;
|
|
|
|
we may see increased costs arising from health care reform;
|
|
|
|
rapidly growing supply in China and other developing economies may grow faster than demand in those economies, which may result in additional excess
worldwide capacity and falling steel prices;
|
|
|
|
a downgrade in our credit ratings would make it more difficult for us to raise capital and would increase the cost of raising capital;
|
|
|
|
we face significant competition in the markets we serve;
|
|
|
|
we may not be able to sustain our competitive advantages in the future;
|
|
|
|
we may not be able to successfully adapt to changes in the scrap trading industry;
|
|
|
|
the future success of our business depends on retaining existing and attracting new key personnel;
|
|
|
|
future conditions might require us to make substantial write-downs in our assets, including requiring us to incur goodwill impairment charges, which
could materially adversely affect our balance sheet and results of operations;
|
33
|
|
|
we may be subject to potential asbestos-related and other liabilities associated with former businesses;
|
|
|
|
certain of our operations are dependent on access to freight transportation;
|
|
|
|
our tax liabilities may substantially increase if the tax laws and regulations in the jurisdictions in which we operate change or become subject to
adverse interpretations or inconsistent enforcement;
|
|
|
|
increased use of materials other than steel may have a material adverse effect on our business;
|
|
|
|
regulation of greenhouse gas emissions and climate change issues may materially adversely affect our operations and markets; and
|
|
|
|
if we fail to protect our intellectual property and proprietary rights adequately or infringe the intellectual property of others, our business could
be materially adversely affected.
|
These factors should not be construed as exhaustive and should be read in
conjunction with the other cautionary statements that are included in this Quarterly Report and in our most recent Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. We assume no obligation to update any
forward-looking statements after the date of this Quarterly Report as a result of new information, future events or developments except as required by federal securities laws.
34