Notes to Consolidated Financial Statements
(In thousands, except per share amounts)
Note A – Business
Empire Resources, Inc. (“the Company”)
is engaged principally in the purchase, sale and distribution of value added semi-finished aluminum and steel products to a diverse
customer base located throughout the Americas, Australia, Europe and New Zealand. The Company sells its products through its own
marketing and sales personnel and through independent sales agents located in the U.S., Australia and Europe who receive commissions
on sales. The Company purchases from several suppliers located throughout the world (see Note B [14]).
Note B - Summary of Significant Accounting
Policies
|
[1]
|
Principles of consolidation:
|
The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries, Empire Resources Pacific Ltd., the Company’s sales agent in
Australia, 8911 Kelso Drive, (organized in June 2015) the owner of the warehouse facility in Essex, Maryland, 6900 Quad Avenue,
LLC, the former owner of a warehouse facility in Baltimore, Maryland which was sold in 2015, Empire Resources de Mexico, Imbali
Metals BVBA, and Empire Resources UK Ltd (organized in February 2015), the Company’s operating subsidiaries in Mexico and
Europe. All intercompany balances and transactions have been eliminated on consolidation.
Revenue on product sales is recognized at the
point in time when the product has been shipped or delivered, title and risk of loss has been transferred to the customer, and
the following conditions are met: persuasive evidence of an arrangement exists, the price is fixed and determinable, and collectability
of the resulting receivable is reasonably assured.
Accounts receivable are stated as the outstanding
balance due from customers, net of an allowance for doubtful accounts. The Company maintains a credit insurance policy with a 10%
co-pay provision for most accounts receivable. The Company will provide an allowance for doubtful accounts in the event that it
determines there may be probable losses beyond the credit insurance coverage.
Inventories which consist of purchased semi-finished
metal products are stated at the lower of cost or market. Cost is determined by the specific-identification method. Inventory has
generally been purchased for specific customer orders. The carrying amount of inventory which is hedged by futures contracts designated
as fair value hedges is adjusted to fair value.
|
[5]
|
Property and equipment:
|
Property and equipment are stated at cost and
depreciated by the straight-line method over their estimated useful lives. Impaired assets are written down to their fair value.
The Company recognizes all derivatives in the
balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value through earnings. If the derivative is
a hedge, depending upon the nature of the hedge, changes in the fair value of the derivative are either offset against the change
in fair value of the hedged assets, liabilities or firm commitments through earnings (fair value hedge), or recognized in other
comprehensive income until the hedged item is recognized in earnings (cash flow hedge). The ineffective portion of a derivative’s
change in fair value, if any, is immediately recognized in earnings. When a hedged item in a fair value hedge is sold, the adjustment
in the carrying amount of the hedged item is recognized in earnings (see Note E).
|
[7]
|
Foreign currency translation:
|
The functional currency of Empire Resources
Pacific Ltd., a wholly-owned domestic subsidiary which acts as a sales agent in Australia and New Zealand, is the Australian dollar.
The Company also has wholly owned foreign subsidiaries incorporated in Belgium and England which sell semi-finished metal products
in Europe. The functional currency of the Belgian subsidiary is the Euro and that of the English subsidiary is the British Pound.
Cumulative translation adjustments, which are charged or credited to accumulated other comprehensive income, arise from translation
of functional currency amounts into U.S. dollars.
The Company follows the asset and liability
approach for deferred income taxes. This method provides that deferred tax assets and liabilities are recorded, using currently
enacted tax rates, based upon the difference between the tax bases of assets and liabilities and their carrying amounts for financial
statement purposes.
Deferred tax asset valuation allowances are
recorded when management believes that it is more likely than not that the related deferred tax assets will be not be realized.
Basic earnings per share is computed by dividing
net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share give effect
to all dilutive outstanding stock options, using the treasury stock method and assumed conversion of subordinated debt (see Note
O).
|
[10]
|
Stock - based compensation:
|
Stock-based compensation expense for an award
of equity instruments, including stock options, is recognized over the vesting period based on the fair value of the award at the
grant date.
|
[11]
|
Newly Effective Accounting
Pronouncements
|
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued new accounting guidance, Accounting Standards Update ("ASU") No. 2014-09, Revenue
from Contracts with Customers, on revenue recognition. The new standard provides for a single five-step model to be applied to
all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand
the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to
use either a retrospective approach or cumulative effect adjustment approach to implement the standard. For public entities, this
ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption
permitted for fiscal years and interim periods within those years beginning after December 15, 2016, the original effective date
of the statement. The Company is currently evaluating the impact of the new guidance on its consolidated
financial statements.
In April 2015, the FASB issued accounting guidance,
Accounting Standards Update (“ASU”) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance
requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction
from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. The guidance will be
effective for fiscal years beginning after December 15, 2015. The Company does not believe that the new standard will have a material
impact on its consolidated financial statements.
ln July 2015, the FASB issued Accounting Standards
Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11") which changes the measurement
principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net
realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for periods beginning after
December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect that the new guidance will have
on its financial statements and related disclosures.
In February 2016, the FASB issued Accounting
Standards Update 2016-02, Leases (Topic 842): Leases (“ASU 2016-02”) which is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018 with early adoption permitted. Under ASU 2016-02, lessees will be
required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease
payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset that represents the lessee’s
right to use or control the use of a specified asset for the lease term. The Company is currently evaluating the effect
that the new guidance will have on its financial statements and related disclosures.
Authoritative guidance defines fair value as
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The fair value hierarchy consists of three broad levels, as described below:
·
Level
1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or
liabilities.
·
Level
2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly.
·
Level
3 - Inputs that are both significant to the fair value measurement and unobservable.
Derivative contracts consisting of aluminum
future contracts, foreign currency forward contracts, and interest rate swaps are valued using quoted market prices and significant
other observable inputs. These financial instruments are typically exchange-traded and are generally classified within Level 1
or Level 2 of the fair value hierarchy depending on whether the exchange is deemed to be an active market or not. The conversion
option embedded in convertible subordinated notes issued in 2011 is valued using Level 3 inputs.
Major categories of assets and liabilities
measured at fair value at December 31, 2015 and 2014 are classified as follows:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
149,451
|
|
|
|
|
|
|
|
|
|
|
$
|
165,586
|
|
|
|
|
|
|
|
|
|
Aluminum futures contracts
|
|
$
|
3,892
|
|
|
|
|
|
|
|
|
|
|
|
9,769
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,337
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion option
|
|
|
|
|
|
|
|
|
|
$
|
942
|
|
|
|
|
|
|
|
|
|
|
$
|
2,734
|
|
Foreign currency forward contracts
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The preparation of financial statements in
accordance with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from
these estimates.
|
[14]
|
Significant customers
and concentration of suppliers:
|
For the year ended December 31, 2015, one customer
accounted for 10% of sales. For the year ended December 31, 2014, no one customer accounted for sales in excess of 10%.
The Company’s purchase
of metal products is from several suppliers located throughout the world. Three suppliers, PT. Alumindo, Hulamin Ltd and Southeast
Aluminium accounted for 56% of total purchases for the year ended December 31, 2015 as compared to 39% of total purchases during
the year ended December 31, 2014. The Company’s loss of any of its largest suppliers or a material default by any such supplier
in its obligations to the Company would have at least a short-term material adverse effect on the Company’s business.
Note C – Fair Value of Financial Instruments
The carrying amounts of variable rate notes
payable to the banks and the variable rate mortgage payable approximate fair value as of December 31, 2015 and 2014 because
these notes reflect market changes to interest rates. The fair value of the subordinated convertible debt approximates its principal
amount of $11,000 at December 31, 2015 and 2014, which exceeds its carrying amount as a result of the unamortized discount related
to the bifurcation of the embedded conversion option. The carrying amount of the advance to supplier approximated its fair value
at December 31, 2014. Fair value of financial instruments are based on level 2 inputs. Derivative financial instruments are carried
at fair value (see
Note B [12]).
Note D – Property and Equipment
Property and equipment are summarized as follows:
|
|
December 31,
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Estimated Useful Life
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,150
|
|
|
$
|
1,180
|
|
|
|
Buildings and improvements
|
|
|
4,854
|
|
|
|
3,551
|
|
|
10 and 40 years
|
Other equipment
|
|
|
1,707
|
|
|
|
1,508
|
|
|
3 to 5 years
|
|
|
|
8,711
|
|
|
|
6,239
|
|
|
|
Less: Accumulated depreciation
|
|
|
1,371
|
|
|
|
1,981
|
|
|
|
Net Book Value
|
|
$
|
7,340
|
|
|
$
|
4,258
|
|
|
|
During 2015, the Company sold its warehouse
facility in Baltimore, Maryland for $3,768 and realized a loss on the sale of $244. In addition, in 2015, the Company purchased
a new warehouse in Essex, Maryland at a cost of $6,575.
Depreciation expense was $185 and $121 for
the years ended December 31, 2015 and 2014, respectively.
Note E – Derivative Financial Instruments
and Risk Management
The Company uses derivative financial instruments designated as
fair value hedges to manage its exposure to commodity price risk and foreign currency exchange risk inherent in its operations.
It is the Company’s policy to hedge such risks to the extent practicable. The Company enters into high-grade aluminum futures
contracts to limit its gross margin exposure by hedging the metal content element of firmly committed purchase and sales commitments.
The Company also enters into foreign exchange forward contracts to hedge its exposure related to commitments to buy and sell its
products denominated in international currencies, primarily the Australian dollar.
The Company’s unrealized assets and liabilities
in respect of its fair value hedges measured at fair value at December 31, 2015 and 2014 are as follows:
Derivatives designated
as fair value hedges
|
|
Balance Sheet Location
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Asset (liability) derivatives:
|
|
|
|
|
|
|
|
|
|
|
Aluminum futures contracts
|
|
Other current assets
|
|
$
|
3,892
|
|
|
|
9,769
|
|
Foreign currency forward contracts
|
|
Other current (liabilities) assets
|
|
|
(348
|
)
|
|
|
1,337
|
|
Total
|
|
|
|
$
|
3,544
|
|
|
$
|
11,106
|
|
For the years ended December 31, 2015, and
2014, hedge ineffectiveness associated with derivatives designated as fair value hedges was insignificant, and no fair value hedges
were derecognized.
The table below summarizes the realized gain
or (loss) on the Company’s derivative instruments and their location in the income statement:
|
|
|
|
|
|
Year Ended
|
|
Derivatives in hedging
|
|
|
|
Location of Gain or
|
|
December 31,
|
|
relationships
|
|
|
|
(Loss) Recognized
|
|
2015
|
|
|
2014
|
|
Foreign currency forward contracts
|
|
(a)
|
|
Cost of goods sold
|
|
$
|
(540
|
)
|
|
$
|
168
|
|
Interest rate swaps
|
|
(b)
|
|
Interest expense, net
|
|
|
-
|
|
|
|
(52
|
)
|
Aluminum futures
|
|
(c)
|
|
Cost of goods sold
|
|
|
24,518
|
|
|
|
(3,272
|
)
|
Total
|
|
|
|
|
|
$
|
23,978
|
|
|
$
|
(3,156
|
)
|
|
(a)
|
Fair value hedge: the related hedged item is accounts receivable and accounts payable denominated
in foreign currency and offsetting gains in 2015 and losses in 2014, in the same respective amounts are included in cost of goods
sold.
|
|
(b)
|
Cash
flow hedge: recognized loss reclassified from accumulated other comprehensive loss in
2014.
|
|
(c)
|
Fair
value hedge: the related hedged item is inventory and offsetting losses in 2015 and gains
in 2014, in the same respective amounts are included in cost of goods sold in 2015 and
2014.
|
Note F – Accrued expenses and derivative
liabilities
Accrued expenses and derivative liabilities
consist of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Accrued expenses
|
|
$
|
5,829
|
|
|
$
|
4,137
|
|
Derivative liabilities
|
|
|
348
|
|
|
|
-
|
|
|
|
$
|
6,177
|
|
|
$
|
4,137
|
|
Note G – Mortgage Payable
In December 2004, the Company entered into
a mortgage in connection with the purchase of a warehouse. The mortgage required monthly payments of approximately $21.6 including
interest, at LIBOR + 1.75% and matured in December 2014.
In connection with the mortgage, the Company
entered into an interest rate swap with a bank which was designated as a cash flow hedge. Effective 2004 through December 29, 2014,
the Company paid a fixed interest rate of 6.37% to the bank on a notional principal equal to the outstanding principal balance
of the mortgage. In return, the bank paid the Company a floating rate, namely, LIBOR, to reset monthly plus 1.75% on the same notional
principal amount. This interest rate swap expired in December 2014.
On October 15, 2015 the Company entered into
a $5,300 ten year mortgage, which matures in 2025 having a twenty year amortization schedule, in connection with the purchase of
a warehouse. The mortgage requires monthly principal payments in the amount of $22.1 plus interest at 1.75% over LIBOR which resets
monthly. The following are the future maturities of the mortgage at December 31, 2015:
Year Ending December 31,
|
2016
|
|
$
|
265
|
|
2017
|
|
|
265
|
|
2018
|
|
|
265
|
|
2019
|
|
|
265
|
|
2020
|
|
|
265
|
|
Thereafter
|
|
|
3,909
|
|
|
|
$
|
5,234
|
|
Note H - Notes Payable
Prior to June 19, 2014, we were a party to
credit agreement with Rabobank International, for itself and as lead arranger and agent, JPMorgan Chase, for itself and as syndication
agent, and ABN AMRO, BNP Paribas, RBS Citizens, Société Générale, and Brown Brothers Harriman which
provided for a $200,000 revolving line of credit, including a commitment to issue letters of credit and a swing-line loan sub facility,
with a maturity date of June 30, 2014.
On June 19, 2014 we entered into an amended
and restated committed credit agreement with Rabobank International, for itself and as lead arranger and agent, BNP Paribas, for
itself and as syndication agent, and Société Générale, ABN AMRO, RB International, and Brown Brothers
Harriman as well as a new uncommitted line of credit with Rabobank International, BNP Paribas and Société Générale.
Both credit lines are secured, asset-based credit facilities. The committed credit facility provided for amounts up to $150,000,
and the uncommitted facility provided for a maximum amount of $75,000. The agreement also allowed for an additional increase in
the committed credit facility of $75,000, for a total of $300,000, subject to certain restrictions and conditions. On December
18, 2014, we amended and increased this working capital credit agreement by $50 million increasing our overall line of credit to
$275 million. The amended committed credit agreement has been increased by $35 million to $185 million, and the uncommitted credit
facility, increased by $15 million to $90 million. There are no changes to the interest rate or to the maturity date of the committed
facility, which remains June 19, 2017. Subsequent to these amendments the additional increase available under the term of these
agreements is $25,000, subject to certain restrictions and conditions. Our borrowings under this line of credit are secured by
substantially all of our assets.
Amounts borrowed bear interest at Eurodollar,
money market or base rates, at our option, plus an applicable margin. The credit agreements contain financial
and other covenants, including but not limited to, covenants requiring maintenance of minimum tangible net working capital and
compliance with leverage ratios, as well as an ownership minimum and limitations on other indebtedness, liens, distributions or
dividends, and investments and dispositions of assets. As of December 31, 2015, the Company was in compliance with
all covenants under this credit agreement.
Both credit agreements provide that amounts
under the facilities may be borrowed and repaid, and re-borrowed, subject to a borrowing base test. The committed line of credit
matures June 19, 2017 and the uncommitted credit agreement must be repaid by the Company on or before June 18, 2016 unless otherwise
agreed to. As of December 31, 2015 and 2014, the credit utilized amounted to, respectively, $158,922 and $229,386 (including
approximately $27,922 and $36,586 of outstanding letters of credit).
The Company’s wholly owned Belgian subsidiary,
Imbali, maintained a line of credit with ING Belgium S.A./N.V., (“ING”) for a EUR 8,000 (US$9,679) commitment for loans
and documentary letters of credit. At December 31, 2014, outstanding borrowings under the credit line amounted to EUR6,850 ($8,288).
On July 30, 2015, Imbali entered into an uncommitted credit agreement with Rabobank International for EUR 12,500 (US$13,576) to
replace ING and utilized EUR 4,000 (US$4,344) of borrowings under the Rabobank facility to repay the outstanding balance due to
ING. Loan advances are limited to a percentage of Imbali’s pledged accounts receivables and inventory and bear interest at
EURIBOR plus 1.9% This secured credit arrangement is unconditionally guaranteed by the Company. As of December 31, 2015, the outstanding
loan amounted to EUR 7,500 (US$8,146) and letters of credit $1,500, as compared to EUR6,850 (US$8,288) at December 31, 2014. As
of December 31, 2015, Imbali was in compliance with all financial covenants.
Note I – Convertible Subordinated
Debt
On June 3, 2011, the Company sold $12,000 principal
amount of 10% Convertible Senior Subordinated Notes (the “Notes”) Due June 1, 2016 in a private placement to selected
accredited investors. As of December 31, 2015, the notes are convertible at the option of the holders into shares of
common stock at a conversion price of 263.79 shares of common stock per $1 principal amount of notes (equivalent to a conversion
price of $3.79 per share of common stock), subject to dilutive adjustment for cash and stock dividends, stock splits and similar
transactions, at any time before maturity. As of December 31, 2014, the notes were convertible at the option of the
holders into shares of common stock at a conversion price of 257.56 shares of common stock per $1principal amount of notes (equivalent
to a conversion price of $3.88 per share of common stock), subject to dilutive adjustment for cash and stock dividends, stock splits
and similar transactions. The conversion price at December 31, 2015 reflects nineteen adjustments for dividends declared on common
stock subsequent to the issuance of the notes through such date. In addition, if the last reported sale price of the
Company’s common stock for 30 consecutive trading days is equal to or greater than $7.00, and a registration statement is
effective covering the resale of the shares of common stock issuable upon conversion of the notes, the Company has the right, in
its sole discretion, to require the holders to convert all or part of their notes at the then applicable conversion rate. Interest
on the notes is payable in arrears on the first day of June and December every year the notes are outstanding. The note contains
covenants, including restrictions on the Company’s ability to incur certain indebtedness and create certain liens. Officers
and directors of the Company and certain affiliated entities purchased $4,000 principal amount of the notes.
On August 18, 2014, a note holder converted
$1,000 principal amount of notes into 254 shares of common stock, having a fair value on such date of $1,507. The carrying value
of the note converted was $916, and the carrying value of the related embedded conversion option was $427 resulting in a loss on
extinguishment of the debt of $164.
The majority of proceeds of the convertible
subordinated debt was earmarked for a long term advance in connection with a supply agreement with the Indonesian company PT. Alumindo
Light Metal Industry Tbk, (PT. Alumindo) a leading producer of high quality semi-finished aluminum products, and its affiliates,
as described below. The agreement called for, and the Company provided a $10,000 non-interest bearing loan to an affiliate
of PT. Alumindo to enable the expansion of capacity within that group of companies’ production network. The agreements
also provided for a long term, multi-year substantial and preferential supply position from PT. Alumindo's premier aluminum rolling
mill located in Surabaya, Indonesia. The loan was being repaid to the Company beginning on January 1, 2013 in monthly
installments of $278 and was fully repaid on December 1, 2015.
Interest at the rate of 3.69%, based on the
interest rate chargeable in the agreement in the event the supplier did not meet its supply commitments, had been imputed on the
non-interest bearing advance and the resulting discount which amounted to $962, had been ascribed to the preferential supply agreement.
Imputed interest income has been recognized over the term of the advance by use of the interest method and amounted to $56 and
$177 during 2015 and 2014 respectively, and is included in interest expense, net. The preferential supply agreement has been amortized
by the straight line method over three years starting from January 1, 2013, the date that the increased supply began. Amortization
expense for each of the years 2015 and 2014 amounted to $321.
As a result of transactions which cause adjustments
to the conversion rate, the embedded conversion option has been bifurcated and recorded as a separate derivative liability at a
fair value at issuance of the notes of $2,829, with a corresponding discount recorded on the notes. The derivative liability is
carried at fair value with changes therein recorded in income. The quarterly mark to market of the derivative liability will result
in non-operating, non-cash gains or losses based on decreases or increases in the Company’s stock market price, respectively,
among other factors. The non-cash discount is being amortized as additional interest expense over the term of the notes. During
the years ended December 31, 2015 and December 31, 2014, the change in the fair value of the derivative liability resulted in a
gain of $1,792 and a loss of $1,113, respectively, and amortization of the discount amounted to $586 and $481 in the years ended
December 31, 2015 and 2014, respectively.
The derivative liability was valued using a
lattice model using Level 3 inputs. This technique was selected because it embodies all of the types of inputs that the Company
expects market participants would consider in determining the fair value of equity linked derivatives embedded in hybrid debt agreements.
The following table summarizes the significant
inputs resulting from the calculations at issuance and year end:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
June 3, 2011
|
|
|
|
|
|
|
|
|
|
|
|
Equity value
|
|
$
|
29,846
|
|
|
$
|
41,738
|
|
|
$
|
36,811
|
|
Volatility
|
|
|
60
|
%
|
|
|
35
|
%
|
|
|
70
|
%
|
Risk free return
|
|
|
0.49
|
%
|
|
|
0.67
|
%
|
|
|
1.60
|
%
|
Dividend yield
|
|
|
2.87
|
%
|
|
|
2.15
|
%
|
|
|
2.51
|
%
|
Strike price
|
|
$
|
3.79
|
|
|
$
|
3.88
|
|
|
$
|
4.65
|
|
Note J - Stock Options
The Company’s 2006 Stock Option Plan
(the “2006 Plan”), as amended, provides for the granting of options to purchase not more than an aggregate of 559,000
shares of common stock. Under the 2006 Plan, all canceled or terminated options are available for grants. All officers, directors
and employees of the Company and other persons who perform services for the Company are eligible to participate in the 2006 Plan.
Some or all of the options may be “incentive stock options” within the meaning of the Internal Revenue Code of 1986,
as amended.
The 2006 Plan provides that it is to be administered
by the Board of Directors, or by a committee appointed by the Board, which will be responsible for determining, subject to the
provisions of the 2006 Plan, to whom the options are granted, the number of shares of common stock subject to an option, whether
an option shall be incentive or non-qualified, the exercise price of each option (which, other than in the case of incentive stock
options, may be less than the fair market value of the shares on the date of grant), the period during which each option may be
exercised and the other terms and conditions of each option. No options may be granted under the 2006 Plan after June 26, 2016.
The following is a summary of stock option
activity for the years ended December 31, 2015 and 2014:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
contractual
term
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding and exercisable at December 31, 2013
|
|
|
410
|
|
|
$
|
1.52
|
|
|
|
5.55
|
|
|
$
|
844
|
|
Options canceled
|
|
|
(6
|
)
|
|
$
|
3.64
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(4
|
)
|
|
$
|
3.64
|
|
|
|
|
|
|
|
|
|
Options outstanding and exercisable at December 31, 2014
|
|
|
400
|
|
|
|
|
|
|
|
4.73
|
|
|
$
|
1,258
|
|
Options repurchased
|
|
|
(350
|
)
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
Options outstanding and exercisable at December 31, 2015
|
|
|
50
|
|
|
$
|
1.63
|
|
|
|
3.72
|
|
|
$
|
93
|
|
Options available for grant under 2006 Plan at December 31, 2015
|
|
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation for an award of equity
instruments, including stock options, is recognized as an expense over the vesting period based on the fair value of the award
at the grant date. On May 19 and May 20, 2015 the Company repurchased 350 fully vested employee stock options at the market value
on the date of repurchase less the exercise price. The purchase price of $922 was charged to additional paid in capital. The repurchase
resulted in a tax deduction which exceeded the cumulative compensation cost for the options recognized for financial reporting
purposes resulting in an excess tax benefit of $281 which was credited to additional paid in capital. As of December 31, 2015 there
were outstanding employee stock options to acquire 50 shares of common stock, which had vested in prior years. During 2015 and
2014, there were no stock option grants.
Note
K - Treasury Stock
On July 22, 2008, the Board of Directors authorized
the Company to repurchase up to 2,000 shares of its common stock. As of December 31, 2015, the Company repurchased a total of 1,713
shares under the repurchase program for an aggregate cost of $5,222. During the year ended December 31, 2015, the Company purchased
375 common shares at a cost of $1,583. In January 2014 and August 2014, the Company issued a total of 150 common shares out of
treasury stock to a non-executive employee as part of a compensation arrangement and in August 2014 issued 254 common shares out
of treasury stock on conversion of debt. In addition, in June 2014 the Company issued 4 shares out of treasury stock in connection
with the exercise of stock options by employees.
During 2014, the Company purchased 74 common
shares under the program at a cost of $352.
Note
L – Accumulated other comprehensive income/(Loss)
Changes in accumulated other comprehensive
income/(loss) for the years ended December 31, 2015 and 2014 on an after tax basis is as follows:
Year ended December 31, 2015
|
|
Foreign
Currency
Translation
|
|
|
Interest
Rate Swap
Contract
|
|
|
Total
|
|
Beginning balance
|
|
$
|
(334
|
)
|
|
$
|
-
|
|
|
$
|
(334
|
)
|
Other comprehensive loss
|
|
|
(332
|
)
|
|
|
-
|
|
|
|
(332
|
)
|
Net current period other comprehensive loss
|
|
|
(332
|
)
|
|
|
-
|
|
|
|
(332
|
)
|
Ending balance
|
|
$
|
(666
|
)
|
|
$
|
-
|
|
|
$
|
(666
|
)
|
Year ended December 31, 2014
|
|
Foreign
Currency
Translation
|
|
|
Interest
Rate Swap
Contract
|
|
|
Total
|
|
Beginning balance
|
|
$
|
84
|
|
|
$
|
(33
|
)
|
|
$
|
51
|
|
Other comprehensive loss before reclassification
|
|
|
(418
|
)
|
|
|
-
|
|
|
|
(418
|
)
|
Loss reclassified to operations
|
|
|
-
|
|
|
|
33
|
(a)
|
|
$
|
33
|
|
Net current period other comprehensive (loss)/income
|
|
|
(418
|
)
|
|
|
33
|
|
|
|
(385
|
)
|
Ending balance
|
|
$
|
(334
|
)
|
|
$
|
-
|
|
|
$
|
(334
|
)
|
(a) Reclassified to following line items in the statement of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
$
|
52
|
|
|
|
|
|
Income taxes
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
Net of tax
|
|
|
|
|
|
$
|
33
|
|
|
|
|
|
Note
M - Income Taxes
The components of income before income taxes
were as follows:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
U.S.
|
|
$
|
3,259
|
|
|
$
|
5,837
|
|
Foreign
|
|
|
625
|
|
|
|
1,222
|
|
|
|
$
|
3,884
|
|
|
$
|
7,059
|
|
Income tax expense (benefit) consists of the
following:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Current
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
1,476
|
|
|
$
|
3,039
|
|
State and local
|
|
|
607
|
|
|
|
416
|
|
Foreign
|
|
|
225
|
|
|
|
318
|
|
|
|
|
2,308
|
|
|
|
3,773
|
|
Deferred
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
(1,099
|
)
|
|
|
(399
|
)
|
State and local
|
|
|
(134
|
)
|
|
|
(49
|
)
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(1,233
|
)
|
|
|
(448
|
)
|
|
|
$
|
1,075
|
|
|
$
|
3,325
|
|
The U.S. statutory rate can be reconciled to
the effective tax rate as follows:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Provision for taxes at statutory rate of 34%
|
|
$
|
1,321
|
|
|
$
|
2,400
|
|
State and local taxes, net of federal tax effect
|
|
|
312
|
|
|
|
242
|
|
Permanent differences (a)
|
|
|
(426
|
)
|
|
|
854
|
|
Reversal of prior year unrecognized tax benefits
|
|
|
(103
|
)
|
|
|
(79
|
)
|
Other
|
|
|
(29
|
)
|
|
|
(92
|
)
|
|
|
$
|
1,075
|
|
|
$
|
3,325
|
|
(a) Prinicipally related to the change in the
value of derivative liability for the embedded conversion option
Deferred tax assets and liabilities are composed
of the following:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deferred current tax assets
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
447
|
|
|
$
|
215
|
|
Accrued expenses
|
|
|
478
|
|
|
|
72
|
|
Inventories
|
|
|
4,176
|
|
|
|
3,544
|
|
Derivative liability for embedded conversion option
|
|
|
82
|
|
|
|
-
|
|
Stock Options
|
|
|
-
|
|
|
|
80
|
|
|
|
|
5,183
|
|
|
|
3,911
|
|
Deferred current tax liabilities
|
|
|
|
|
|
|
|
|
Unamortized debt discount
|
|
|
(82
|
)
|
|
|
-
|
|
|
|
|
(82
|
)
|
|
|
-
|
|
Net deferred current tax assets
|
|
|
5,101
|
|
|
|
3,911
|
|
|
|
|
|
|
|
|
|
|
Deferred long-term tax assets
|
|
|
|
|
|
|
|
|
Derivative liability for embedded conversion option
|
|
|
-
|
|
|
|
306
|
|
|
|
|
-
|
|
|
|
306
|
|
Deferred long-term tax liabilities
|
|
|
|
|
|
|
|
|
Property and Equipment
|
|
|
(8
|
)
|
|
|
(51
|
)
|
Unamortized debt discount
|
|
|
-
|
|
|
|
(306
|
)
|
|
|
|
(8
|
)
|
|
|
(357
|
)
|
Net deferred long-term tax liabilities
|
|
|
(8
|
)
|
|
|
(51
|
)
|
Net deferred tax assets
|
|
$
|
5,093
|
|
|
$
|
3,860
|
|
Foreign income and related foreign
income taxes primarily relates to the Company’s subsidiaries in Belgium, Imbali Metals BVBA, Empire Resources (UK)
Limited and Empire Resources de Mexico. For US income tax purposes, the Company has elected to treat Imbali as a disregarded
entity and include its taxable income in the Company’s consolidated federal income tax return and separate state income
tax returns. Empire Resources de Mexico is taxed as a corporation in Mexico and Empire Resources (UK) is likewise taxable as
a company in the United Kingdom. Due to U.S. tax rules dealing with constructive repatriation of earnings, such earnings are
also currently included in the Company’s consolidated federal income tax return and separate state income tax return.
Federal income taxes attributable to the subsidiaries taxable income are offset by tax credits for foreign taxes paid by the
subsidiaries. Undistributed earnings of Imbali amounted to approximately $3,895 while those of Empire Resources de Mexico
were approximately $594 at December 31, 2015. Empire Resources (UK) had no undistributed earnings at December 31,
2015. Upon distribution of Imbali’s earnings in the form of dividends, the Company would be required to pay Belgian
withholding tax at the rate of 5%. As the Company intends to indefinitely reinvest such earnings, no provision for such
withholding tax has been provided. Mexico does not have a withholding tax on dividends paid from Mexican corporations. For
federal income tax purposes, foreign tax credits would be available to the Company for the withholding tax, subject to
limitations.
The Company recognizes a tax benefit from
an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such
a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate
settlement.
A reconciliation of the beginning and ending
amounts of unrecognized tax benefits for the years ended December 31, 2015 and 2014 is as follows:
|
|
|
|
2015
|
|
|
2014
|
|
Balance at January 1
|
|
|
|
$
|
170
|
|
|
$
|
249
|
|
Reductions from settlements or filings with state tax authorities
|
|
|
|
|
-
|
|
|
|
-
|
|
Reductions from lapse of statute of limitations
|
|
|
|
|
(20
|
)
|
|
|
(69
|
)
|
Settlements
|
|
|
|
|
-
|
|
|
|
-
|
|
Net (decrease) for tax positions of prior years
|
|
|
|
|
(83
|
)
|
|
|
(10
|
)
|
Balance at December 31
|
|
(a)
|
|
$
|
67
|
|
|
$
|
170
|
|
|
(a)
|
Liability included in income taxes payable in the consolidated balance sheets.
|
The total amount of unrecognized tax benefits
at December 31, 2015 and 2014 would impact the Company’s effective tax rate, if recognized. The Company recognizes interest
accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company reversed approximately
$44 and $41 of accrued interest related to unrecognized tax benefits in the years ended December 31, 2015 and 2014 as the result
of the reduction in unrecognized benefits. Interest related to unrecognized tax benefits accrued in the Company’s balance
sheet at December 31, 2015 and 2014 amounted to approximately $22 and $66, respectively.
The Company files a consolidated federal income
tax return and also files income tax returns in various state jurisdictions. With certain exceptions, the Company is no longer
subject to U.S. federal, state or local income tax examinations by taxing authorities for years before 2012.
Note N - Employee Retirement Benefits
The Company has implemented a salary reduction
employee benefit plan, under Section 401(k) of the Internal Revenue Code. Employees may contribute up to the maximum amount allowable
by law and the Company will provide a matching contribution of 50% of employee contributions, limited to 2% of employee compensation.
The plan covers all employees who have attained age 18, and most of the eligible employees have elected to participate.
Each employee’s pre-tax contributions
are immediately vested upon participation in the plan. The employees’ vesting of the Company’s matching contribution
is based upon length of service as follows:
Years of service
|
|
Vested
|
|
1
|
|
|
25
|
%
|
2
|
|
|
50
|
%
|
3
|
|
|
75
|
%
|
4
|
|
|
100
|
%
|
Employees who terminate prior to 100% vesting
forfeit their non-vested portion of the Company’s matching contribution, and those funds are used to reduce future matching
contributions. Employees in active service on the effective date of the plan were granted retroactive service credit for the purpose
of determining their vested percentage. Company matching contributions amounted to $75 in both 2015 and 2014.
Note O – Per Share Data
The following is the reconciliation of the
numerators and denominators of the basic and diluted earnings per share:
|
|
Year Ended Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,809
|
|
|
$
|
3,734
|
|
Add back of interest on convertible subordinated debt, net of taxes
|
|
|
680
|
|
|
|
|
|
Add back of amortization of discount on convertible subordinated debt, net of taxes
|
|
|
363
|
|
|
|
|
|
Adjustment for change in value of convertible note derivative, net of taxes
|
|
|
(1,569
|
)
|
|
|
|
|
Numerator for diluted earnings per share
|
|
$
|
2,283
|
|
|
$
|
3,734
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic
|
|
|
8,669
|
|
|
|
8,768
|
|
Dilutive effect of convertible subordinated debt
|
|
|
2,902
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
114
|
|
|
|
262
|
|
Weighted average shares outstanding-diluted
|
|
|
11,685
|
|
|
|
9,030
|
|
Basic earnings per share
|
|
$
|
0.32
|
|
|
$
|
0.43
|
|
Diluted earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.41
|
|
In computing diluted earnings per share for
the year ended December 31, 2014, no effect has been given to the 2,833 common shares issuable upon conversion of subordinated
debt as the effect is anti-dilutive.
Note
P – D
ividends
On March 19, 2015, the Company announced a
cash dividend of $0.025 per share to stockholders of record at the close of business on April 3, 2015. The dividend, totaling $218,
was paid on April 13, 2015. On June 19, 2015, the Company announced a cash dividend of $0.025 per share to stockholders of record
at the close of business on July 2, 2015. The dividend, totaling $217, was paid on July 17, 2015. On September 17, 2015, the Company
announced a cash dividend of $0.025 per share to stockholders of record at the close of business on September 30, 2015. The dividend
totaling $217 was paid on October 14, 2015. On December 18, 2015 the Company announced a cash dividend of $0.025 per share to stockholders
of record at the close of business on December 31, 2015. The dividend totaling $213 was paid on January 20, 2016. The Board of
Directors will review its dividend policy on a quarterly basis, and make a determination regarding future dividends subject to
the profitability and free cash flow and the other requirements of the business.
The Board of Directors will review its dividend
policy on a quarterly basis, and make a determination subject to the profitability and free cash flow and the other requirements
of the business.
Note
Q –
Business Segment and Geographic Area Information
The Company’s only business segment is
the sale and distribution of non-ferrous and ferrous metals. Sales are attributed to countries based on location of customer. Sales
to domestic and foreign customers were as follows:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
$
|
385,729
|
|
|
$
|
350,510
|
|
Latin America
|
|
|
15,604
|
|
|
|
103,294
|
|
Canada
|
|
|
42,522
|
|
|
|
46,048
|
|
Australia & New Zealand
|
|
|
39,312
|
|
|
|
42,750
|
|
Europe
|
|
|
38,569
|
|
|
|
39,677
|
|
|
|
$
|
521,736
|
|
|
$
|
582,279
|
|
Note R - Commitments and Contingencies
The Company currently leases office facilities
under a lease expiring in May 2025. The minimum non-cancelable scheduled rentals under this lease are as follows:
Year Ending December 31,
|
2016
|
|
|
346
|
|
2017
|
|
|
353
|
|
2018
|
|
|
361
|
|
2019
|
|
|
368
|
|
2020
|
|
|
361
|
|
Thereafter
|
|
|
1,477
|
|
|
|
$
|
3,266
|
|
Rent expense for the years ended December 31,
2015 and 2014 was $317 and $306, respectively.
Outstanding letters of credit at December 31,
2015, amounted in total to approximately $29,422 all of which expire prior to April 30, 2016. Outstanding letters of credit at
December 31, 2014 amounted to approximately $36,586.