Item 1.
|
Financial Statements
|
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share and per share amounts)
|
|
March 31, 2016
(unaudited)
|
|
|
December 31, 2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,732
|
|
|
$
|
7,315
|
|
Trade accounts receivable (less allowance for doubtful accounts of $1,193 and $1,190)
|
|
|
73,417
|
|
|
|
60,525
|
|
Inventories
|
|
|
139,426
|
|
|
|
157,025
|
|
Deferred tax assets
|
|
|
5,102
|
|
|
|
5,101
|
|
Other current assets, including derivatives
|
|
|
7,037
|
|
|
|
10,601
|
|
Total current assets
|
|
|
233,714
|
|
|
|
240,567
|
|
Property and equipment, net
|
|
|
7,321
|
|
|
|
7,340
|
|
Total assets
|
|
$
|
241,035
|
|
|
$
|
247,907
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable - banks (net of unamortized financing costs of $488 and $629)
|
|
$
|
123,755
|
|
|
$
|
138,517
|
|
Current maturities of mortgage payable
|
|
|
265
|
|
|
|
265
|
|
Subordinated convertible debt net of unamortized discount of $86 and $216
|
|
|
10,914
|
|
|
|
10,784
|
|
Trade accounts payable
|
|
|
40,275
|
|
|
|
35,741
|
|
Income taxes payable
|
|
|
2,624
|
|
|
|
2,092
|
|
Accrued expenses and derivative liabilities
|
|
|
8,670
|
|
|
|
6,177
|
|
Derivative liability for embedded conversion option
|
|
|
241
|
|
|
|
942
|
|
Dividends payable
|
|
|
212
|
|
|
|
213
|
|
Total current liabilities
|
|
|
186,956
|
|
|
|
194,731
|
|
|
|
|
|
|
|
|
|
|
Mortgage payable, net of current maturities
|
|
|
4,903
|
|
|
|
4,969
|
|
Deferred taxes payable
|
|
|
-
|
|
|
|
8
|
|
Total liabilities
|
|
|
191,859
|
|
|
|
199,708
|
|
|
|
|
|
|
|
|
|
|
Commitments (Note 18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Common stock $0.01 par value, 20,000,000 shares authorized and 11,749,651 shares issued at March 31, 2016 and December 31, 2015
|
|
|
117
|
|
|
|
117
|
|
Additional paid-in capital
|
|
|
13,037
|
|
|
|
13,037
|
|
Retained earnings
|
|
|
43,686
|
|
|
|
42,749
|
|
Accumulated other comprehensive loss
|
|
|
(505
|
)
|
|
|
(666
|
)
|
Treasury stock, 3,252,191 and 3,218,691 shares at March 31, 2016 and December 31, 2015
|
|
|
(7,159
|
)
|
|
|
(7,038
|
)
|
Total stockholders' equity
|
|
|
49,176
|
|
|
|
48,199
|
|
Total liabilities and stockholders' equity
|
|
$
|
241,035
|
|
|
$
|
247,907
|
|
See notes to unaudited consolidated financial statements
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Income
(In thousands except per share amounts)
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
122,125
|
|
|
$
|
168,253
|
|
Cost of goods sold
|
|
|
116,872
|
|
|
|
161,077
|
|
Gross profit
|
|
|
5,253
|
|
|
|
7,176
|
|
Selling, general and administrative expenses
|
|
|
2,954
|
|
|
|
3,898
|
|
Operating income
|
|
|
2,299
|
|
|
|
3,278
|
|
Interest expense, net
|
|
|
1,274
|
|
|
|
1,675
|
|
Income before change in value of derivative liability
|
|
|
1,025
|
|
|
|
1,603
|
|
Reduction in value of derivative liability
|
|
|
700
|
|
|
|
996
|
|
Income before income taxes
|
|
|
1,725
|
|
|
|
2,599
|
|
Income taxes
|
|
|
576
|
|
|
|
944
|
|
Net income
|
|
$
|
1,149
|
|
|
$
|
1,655
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,510
|
|
|
|
8,807
|
|
Diluted
|
|
|
11,460
|
|
|
|
11,924
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.19
|
|
Diluted
|
|
$
|
0.07
|
|
|
$
|
0.09
|
|
See notes to unaudited consolidated financial statements
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of
Comprehensive Income
(In thousands)
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net income
|
|
$
|
1,149
|
|
|
$
|
1,655
|
|
Other comprehensive income/(loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
161
|
|
|
|
(385
|
)
|
Comprehensive income
|
|
$
|
1,310
|
|
|
$
|
1,270
|
|
See notes to unaudited consolidated financial statements
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows - operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,149
|
|
|
$
|
1,655
|
|
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
186
|
|
|
|
162
|
|
Reduction in value of derivative liability
|
|
|
(700
|
)
|
|
|
(996
|
)
|
Amortization of convertible note discount
|
|
|
130
|
|
|
|
197
|
|
Imputed interest on vendor advance
|
|
|
-
|
|
|
|
(26
|
)
|
Provision for doubtful accounts
|
|
|
(7
|
)
|
|
|
-
|
|
Amortization of supply agreement
|
|
|
-
|
|
|
|
80
|
|
Deferred income taxes
|
|
|
(9
|
)
|
|
|
9
|
|
Foreign exchange loss and other
|
|
|
152
|
|
|
|
460
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(12,742
|
)
|
|
|
(19,269
|
)
|
Inventories
|
|
|
17,989
|
|
|
|
4,409
|
|
Other current assets
|
|
|
2,923
|
|
|
|
4,959
|
|
Trade accounts payable
|
|
|
4,588
|
|
|
|
(11,217
|
)
|
Income taxes payable
|
|
|
529
|
|
|
|
716
|
|
Accrued expenses and derivative liabilities
|
|
|
3,013
|
|
|
|
804
|
|
Net cash provided by/(used in) operating activities
|
|
|
17,201
|
|
|
|
(18,057
|
)
|
Cash flows - investing activities:
|
|
|
|
|
|
|
|
|
Repayment related to supply agreement
|
|
|
-
|
|
|
|
833
|
|
Purchases of property and equipment
|
|
|
(26
|
)
|
|
|
(116
|
)
|
Net cash (used in) /provided by investing activities
|
|
|
(26
|
)
|
|
|
717
|
|
Cash flows - financing activities:
|
|
|
|
|
|
|
|
|
(Repayment of)/proceeds from notes payable – banks
|
|
|
(15,343
|
)
|
|
|
22,163
|
|
Repayments of mortgage loan
|
|
|
(66
|
)
|
|
|
-
|
|
Deferred financing costs
|
|
|
-
|
|
|
|
(13
|
)
|
Dividends paid
|
|
|
(213
|
)
|
|
|
(449
|
)
|
Treasury stock purchased
|
|
|
(121
|
)
|
|
|
(741
|
)
|
Net cash (used in)/provided by financing activities
|
|
|
(15,743
|
)
|
|
|
20,960
|
|
Net increase in cash
|
|
|
1,432
|
|
|
|
3,620
|
|
Effect of exchange rate
|
|
|
(15
|
)
|
|
|
(98
|
)
|
Cash at beginning of period
|
|
|
7,315
|
|
|
|
1,130
|
|
Cash at end of period
|
|
$
|
8,732
|
|
|
$
|
4,652
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,147
|
|
|
$
|
1,310
|
|
Income taxes
|
|
$
|
234
|
|
|
$
|
614
|
|
Non cash financing activities:
|
|
|
|
|
|
|
|
|
Dividend declared but not yet paid
|
|
$
|
212
|
|
|
$
|
218
|
|
See notes to unaudited consolidated financial statements
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statement of Stockholders’
Equity
(In thousands, except per share amounts)
|
|
Common
Stock
Number of
Shares
|
|
|
Common
Stock
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
|
Treasury
Stock
|
|
|
Total
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
11,750
|
|
|
$
|
117
|
|
|
$
|
13,037
|
|
|
$
|
42,749
|
|
|
$
|
(666
|
)
|
|
$
|
(7,038
|
)
|
|
$
|
48,199
|
|
Treasury stock acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121
|
)
|
|
|
(121
|
)
|
Net change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161
|
|
|
|
|
|
|
|
161
|
|
Dividends declared ($0.025 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
|
(212
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
1,149
|
|
Balance at March 31, 2016
|
|
|
11,750
|
|
|
$
|
117
|
|
|
$
|
13,037
|
|
|
$
|
43,686
|
|
|
$
|
(505
|
)
|
|
$
|
(7,159
|
)
|
|
$
|
49,176
|
|
See notes to unaudited consolidated financial statements
Empire Resources, Inc. and Subsidiaries.
Notes to Unaudited Consolidated Financial
Statements
(In thousands, except for per share
amounts)
1. The Company
The condensed 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. The Company purchases and sells semi-finished
aluminum and steel products to a diverse customer base located in the Americas, Australia, Europe and New Zealand.
2. Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued new accounting guidance, Accounting Standards Update ("ASU") No. 2014-09, Revenue
from Contracts with Customers, on revenue recognition. The new standard provides for a single five-step model to be applied to
all revenue contracts with customers as well as requiring 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 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. ASU No. 2015-03 requires the new guidance to be applied on a retroactive basis. The Company adopted this guidance
in the quarter ended March 31, 2016 and resulted in the Company reclassifying long term financing costs, net of amortization of
$488 and $629 as of March 31, 2016 and December 31, 2015 respectively, from assets to be shown as a direct deduction from the carrying
amount of the related debt liability.
In 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 November 2015, the FASB issued ASU No.
2015-17, Income Taxes- Balance Sheet Classification of Deferred Taxes. To simplify the presentation of deferred income taxes, the
amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of
financial position. The amendments in this update apply to all entities that present a classified statement of financial position.
The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016,
and interim periods within those annual periods.
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.
3. Interim Financial Statements
The condensed consolidated interim financial
statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”)
for interim reporting. The information and note disclosures normally included in complete financial statements prepared in accordance
with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant
to such rules and regulations. The interim financial statements should be read in conjunction with the Company’s Annual Report
on Form 10-K for the year ended December 31, 2015.
The Company’s management is responsible
for interim financial information. In the opinion of management, the accompanying unaudited condensed consolidated financial statements
contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the Company’s financial
position as of March 31, 2016 and the results of its operations and cash flows for the three months ended March 31, 2016 and 2015.
Interim results may not be indicative of the results that may be expected for the year.
4. Use of Estimates
The preparation of financial statements
in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income
and expenses during the reporting period. Actual results could differ from these estimates.
5. Concentrations
During the three month periods ended March
31, 2016 and March 31, 2015 no one customer accounted for 10% of the Company’s consolidated sales.
The Company purchases metal products from
a limited number of suppliers throughout the world. Three suppliers, Hulamin Ltd, Southeast Aluminum and PT Alumindo Light Metal
Industry Tbk (“PT. Alumindo”) accounted for an aggregate of 51% of total purchases during the three month period ended
March 31, 2016. For the three month period ended March 31, 2015, two suppliers, PT Alumindo and Southeast Aluminium accounted for
an aggregate of 37% of total purchases.
The loss of any one of the Company’s
largest suppliers or a material default by any such supplier in its obligations to the Company could have a material adverse effect
on the Company’s business.
6. Stock Options
Stock-based compensation for an award of
equity instruments, including stock options, is recognized as an expense over the vesting period based on the fair value of the
award at the grant date. As of March 31, 2016, there were outstanding employee stock options to acquire 50 shares of common stock,
which had vested in prior years. During the three month period ended March 31, 2016, the Company did not grant any stock options.
7. Treasury Stock
On July 22, 2008, the Board of Directors
authorized the Company to repurchase up to 2,000 shares of its common stock. As of March 31, 2016, the Company repurchased a total
of 1,746 shares under the repurchase program for an aggregate cost of $5,338. During the three month periods ended March 31, 2016
and 2015, the Company repurchased 33 and 164 common shares at a cost of $121 and $741, respectively.
8. Inventories
Inventories, which consist of purchased
semi-finished metal products, are stated at the lower of cost or market value. Cost is determined by the specific-identification
method. Inventory is purchased for specific customer orders and the Company’s own inventory. The carrying amount
of inventory which is hedged by futures contracts designated as fair value hedges, is adjusted to fair value.
9. Notes Payable—Banks
On June 19, 2014 the Company entered into
an amended and restated committed credit agreement with Rabobank International, for itself and as lead arranger and agent, BNP
Paribas, for itself and as syndication agent, and Société Générale, ABN AMRO, RB International, and
Brown Brothers Harriman as well as a new uncommitted line of credit with Rabobank International, BNP Paribas and Société
Générale. Both credit lines are secured, asset-based credit facilities. The committed credit facility provided for
amounts up to $150,000, and the uncommitted facility provided for a maximum amount of $75,000. The agreement also allowed for an
additional increase in the committed credit facility of $75,000, for a total of $300,000, subject to certain restrictions and conditions.
On December 18, 2014, these lines were amended and increased the working capital credit agreement by $50,000 increasing the overall
line of credit to $275,000. The amended committed credit agreement has been increased by $35,000 to $185,000, and the uncommitted
credit facility, increased by $15,000 to $90,000. 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. Borrowings under this line of credit are secured by substantially
all of the Company’s assets.
Amounts borrowed bear interest at Eurodollar,
money market or base rates, at our option, plus an applicable margin. The credit agreements 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 March 31, 2016, 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 March 31, 2016 and December 31, 2015, the credit utilized amounted to, respectively, $136,168 and $158,922
(including approximately $22,168 and $27,922 of outstanding letters of credit). As of March 31, 2016 the committed line of credit
had loans outstanding of $101,000 and the uncommitted line of credit had loans outstanding of $13,000. The uncommitted facility
is expected to be renewed for one year with the current lenders.
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$9,105) commitment
for loans and documentary letters of credit. On July 30, 2015, Imbali entered into an uncommitted credit agreement with Rabobank
International for EUR 12,500 (US$14,226) to replace ING and utilized EUR 4,000 (US$4,552) 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 March 31, 2016, the outstanding loan amounted to EUR 9,000 (US$10,243) and letters of credit of $816. As of December 31,
2015, the outstanding loan amounted to EUR 7,500 (US$8,536) and letters of credit of $1,500. As of March 31, 2016, Imbali was in
compliance with all financial covenants.
10. Convertible Subordinated Debt
On June 3, 2011, the Company issued $12,000
principal amount of 10% Convertible Senior Subordinated Notes Due June 1, 2016 in a private placement to selected accredited investors. As
of March 31, 2016, the notes are convertible at the option of the holders into shares of common stock at a conversion rate of 265.82
shares of common stock per $1 principal amount of notes (equivalent to a conversion price of $3.76 per share of common stock),
subject to dilutive adjustment for cash and stock dividends, stock splits and similar transactions, at any time before maturity. The
current conversion price reflects twenty adjustments for dividends declared on the Company’s common stock since the issuance
of the notes. In addition, if the last reported sale price of the Company’s common stock for 30 consecutive trading
days is equal to or greater than $7.00, and a registration statement is effective covering the resale of the shares of common stock
issuable upon conversion of the notes, the Company has the right, in its sole discretion, to require the holders to convert all
or part of their notes at the then applicable conversion rate. Interest on the notes is payable in arrears on the first
day of June and December every year the notes are outstanding. The purchase agreement pursuant to which the notes were issued contains
covenants, including restrictions on the Company’s ability to incur certain indebtedness and create certain liens. As of
March 31, 2016, the Company was in compliance with all covenants. Officers and directors of the Company and certain affiliated
entities purchased $4,000 principal amount of the notes. The notes which mature on June 1, 2016 are scheduled to be repaid in full
on that date.
As a result of transactions which cause
adjustments to the conversion rate, the embedded conversion option was bifurcated and recorded as a separate derivative liability
at a fair value at issuance of the notes of $2,829, with a corresponding discount recorded on the notes. The derivative liability
is carried at fair value with changes therein recorded in income. The quarterly mark to market of the derivative liability will
result in non-operating, non-cash gains or losses based on decreases or increases in the Company’s stock price, respectively,
among other factors. The non-cash discount is being amortized as additional interest expense over the term of the notes. During
the three month periods ended March 31, 2016 and 2015, the change in the fair value of the derivative liability resulted in a gain
of $700 and $996, respectively. Amortization of the discount amounted to $130 and $197 for the three month periods end March 31,
2016 and 2015, respectively.
The derivative liability was valued using
a lattice model using unobservable level 3 inputs. This technique was selected because it embodies all of the types of inputs that
the Company expects market participants would consider in determining the fair value of equity linked derivatives embedded in hybrid
debt agreements.
The following table summarizes the significant
inputs resulting from the calculations as of March 31, 2016, December 31, 2015 and issuance:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
June 3, 2011
|
|
|
|
|
|
|
|
|
|
|
|
Equity value
|
|
$
|
27,878
|
|
|
$
|
29,846
|
|
|
$
|
36,811
|
|
Volatility
|
|
|
50
|
%
|
|
|
60
|
%
|
|
|
70
|
%
|
Risk free return
|
|
|
0.21
|
%
|
|
|
0.49
|
%
|
|
|
1.60
|
%
|
Dividend yield
|
|
|
3.05
|
%
|
|
|
2.87
|
%
|
|
|
2.51
|
%
|
Strike price
|
|
$
|
3.76
|
|
|
$
|
3.79
|
|
|
$
|
4.65
|
|
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.
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.
11. Earnings per Share
Basic earnings per share are based upon
weighted average number of shares of common stock outstanding during each period. Diluted earnings per share are based upon the
weighted average number of shares of common stock outstanding during each period, plus potential dilutive shares of common stock
from assumed exercise of the outstanding stock options using the treasury stock method and assumed conversion of subordinated debt.
The following table sets forth the computation
of basic and diluted earnings per share:
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,149
|
|
|
$
|
1,655
|
|
Add back of interest on convertible subordinated debt, net of taxes
|
|
|
170
|
|
|
|
170
|
|
Add back of amortization of discount on convertible subordinated debt, net of taxes
|
|
|
80
|
|
|
|
122
|
|
Adjustment for change in value of convertible note derivative, net of taxes
|
|
|
(651
|
)
|
|
|
(921
|
)
|
Numerator for diluted earnings per share
|
|
$
|
748
|
|
|
$
|
1,026
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic
|
|
|
8,510
|
|
|
|
8,807
|
|
Dilutive effect of convertible subordinated debt
|
|
|
2,924
|
|
|
|
2,850
|
|
Dilutive effect of stock options
|
|
|
26
|
|
|
|
267
|
|
Weighted average shares outstanding-diluted
|
|
|
11,460
|
|
|
|
11,924
|
|
Basic earnings per share
|
|
$
|
0.14
|
|
|
$
|
0.19
|
|
Diluted earnings per share
|
|
$
|
0.07
|
|
|
$
|
0.09
|
|
12. Dividends
On March 23, 2016, the Company announced
a cash dividend of $0.025 per share to stockholders of record at the close of business on April 5, 2016. The dividend, totaling
$212, was paid on April 12, 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.
13. Derivative Financial Instruments
and Risk Management
The Company uses derivative financial instruments
designated as fair value hedges to manage its exposure to commodity price risk and foreign currency exchange risk inherent in its
operations. It is the Company’s policy to hedge such risks to the extent practicable. The Company enters into high-grade
aluminum futures contracts to limit its gross margin exposure by hedging the metal content element of firmly committed purchase
and sales commitments. The Company also enters into foreign exchange forward contracts to hedge its exposure related to commitments
to buy and sell metals as well as its accounts receivable denominated in international currencies.
The Company’s unrealized assets and
liabilities in respect of its fair value hedges measured at fair value are as follows:
|
|
|
|
|
|
Derivatives designated
|
|
|
|
March 31,
|
|
|
December 31,
|
|
as fair value hedges
|
|
Balance Sheet Location
|
|
2016
|
|
|
2015
|
|
Asset (liability) derivatives:
|
|
|
|
|
|
|
|
|
|
|
Aluminum futures contracts
|
|
Other current assets, including derivatives
|
|
$
|
1,097
|
|
|
$
|
3,892
|
|
Aluminum futures contracts
|
|
Accrued expenses and derivative liabilities
|
|
|
(29
|
)
|
|
|
-
|
|
Foreign currency forward contracts
|
|
Accrued expenses and derivative liabilities
|
|
|
(912
|
)
|
|
|
(348
|
)
|
Total
|
|
|
|
$
|
156
|
|
|
$
|
3,544
|
|
For the periods ended March 31, 2016 and
March 31, 2015, hedge ineffectiveness associated with derivatives designated as fair value hedges was insignificant, and no fair
value hedges were derecognized.
The table below summarizes the realized
gains or (losses) of the Company’s derivative instruments and their location in the income statement:
Derivatives in hedging
|
|
Location of Gain or
|
|
Three Months Ended
March 31,
|
|
relationships
|
|
(Loss) Recognized
|
|
2016
|
|
|
2015
|
|
Foreign currency forward contracts
|
|
(a) Cost of goods sold
|
|
$
|
(465
|
)
|
|
$
|
674
|
|
Aluminum futures
|
|
(b) Cost of goods sold
|
|
|
3,803
|
|
|
|
4,260
|
|
Total
|
|
|
|
$
|
3,338
|
|
|
$
|
4,934
|
|
|
a)
|
Fair value hedge: the related hedged item is accounts receivable and offsetting gains in the three
months ended March 31, 2016 and losses in the three months ended March 31, 2015 are included in cost of goods sold in the same
respective amounts.
|
|
b)
|
Fair value hedge: the related hedged item is inventory
and offsetting losses in 2016 and 2015 are included in cost of goods sold in the same respective amounts.
|
14. Fair Value
Authoritative guidance defines fair value
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The fair value hierarchy consists of three broad levels, as described below:
|
·
|
Level 1 - Unadjusted quoted prices in active
markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
·
|
Level 2 - Inputs other than quoted prices
included within Level 1 that are observable for the asset or liability, either directly or indirectly.
|
|
·
|
Level 3 - Inputs that are both significant to the fair
value measurement and unobservable.
|
Derivative contracts consisting of aluminum
contracts, foreign currency contracts and interest rates swaps are valued using quoted market prices and significant other observable
inputs. These financial instruments are typically exchange-traded and are generally classified within Level 1 or Level 2 of the
fair value hierarchy depending on whether the exchange is deemed to be an active market or not.
Major categories of assets and liabilities
measured at fair value at March 31, 2016 and December 31, 2015 are classified as follows:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
134,014
|
|
|
|
|
|
|
|
|
|
|
$
|
149,451
|
|
|
|
|
|
|
|
|
|
Aluminum futures contracts
|
|
$
|
1,097
|
|
|
|
|
|
|
|
|
|
|
$
|
3,892
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
912
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
Embedded conversion option
|
|
|
|
|
|
|
|
|
|
$
|
241
|
|
|
|
|
|
|
|
|
|
|
$
|
942
|
|
Aluminum futures contracts
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Fair Value of Financial Instruments
The carrying amounts of variable rate notes
payable to the banks approximate fair value as of March 31, 2016 and December 31, 2015, because these notes reflect market changes
to interest rates. The fair value of the subordinated convertible debt approximates its principal amount of $11,000 at March 31,
2016 and December 31, 2015, which exceeds its carrying amount as a result of the unamortized discount related to the bifurcation
of the embedded conversion option. Derivative financial instruments are carried at fair value (see Note 13).
16. Business Segment and Geographic
Area Information
The Company’s only business segment
is the sale and distribution of metals. Sales are attributed to countries based on location of customers as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
88,996
|
|
|
$
|
117,912
|
|
Europe
|
|
|
13,231
|
|
|
|
10,566
|
|
Australia & New Zealand
|
|
|
10,392
|
|
|
|
12,609
|
|
Canada
|
|
|
9,287
|
|
|
|
13,960
|
|
Latin America
|
|
|
219
|
|
|
|
13,206
|
|
|
|
$
|
122,125
|
|
|
$
|
168,253
|
|
17. Accumulated Other Comprehensive
(Loss)
Changes in accumulated other comprehensive (loss) on an after
tax basis are as follows:
Three Months ended March 31, 2016
|
|
Foreign Currency
Translation
|
|
|
Total
|
|
Beginning balance
|
|
$
|
(666
|
)
|
|
$
|
(666
|
)
|
Other comprehensive income for the period
|
|
|
161
|
|
|
|
161
|
|
Ending balance
|
|
$
|
(505
|
)
|
|
$
|
(505
|
)
|
Three Months ended March 31, 2015
|
|
Foreign Currency
Translation
|
|
|
Total
|
|
Beginning balance
|
|
$
|
(334
|
)
|
|
$
|
(334
|
)
|
Other comprehensive loss for the period
|
|
|
(385
|
)
|
|
|
(385
|
)
|
Ending balance
|
|
$
|
(719
|
)
|
|
$
|
(719
|
)
|
18. Commitments
The Company had $22,984 in outstanding
letters of credit to certain of its suppliers at March 31, 2016 and $29,422 at December 31, 2015.
19. Income Taxes
For interim income tax reporting, the Company
estimates its annual effective tax rate and applies it to its year to date ordinary income. The effect on the tax rate related
to income or loss attributable to the change in value of the derivative liability is separately computed and recognized as such
income or loss occurs. The disproportionate relationship between income taxes and pre-tax income for the three months ended March
31, 2016 and 2015, results primarily from no deferred tax being provided on the non-taxable gain resulting from the change in the
value of the derivative liability to the extent such gains exceeds the $130 and $197 amortization of the related debt discount,
for which a deferred tax benefit is provided.
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
You should read the following discussion
of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto
included elsewhere in this Quarterly Report on Form 10-Q and our 10-K filed with the Securities and Exchange Commission on March
30, 2016. All numbers used in this discussion are in thousands, except for per share information and percentages.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains
“forward-looking statements,” which include information relating to future events, future financial performance, strategies,
expectations, competitive environment and regulation. Words such as “may,” “should,” “could,”
“would,” “predict,” “potential,” “continue,” “expect,” “anticipate,”
“future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions,
as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a
guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved.
Forward-looking statements are based on information we have when those statements are made or our management’s good faith
belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance
or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that
could cause such differences include, but are not limited to:
|
·
|
loss or default of one or more suppliers;
|
|
·
|
loss or default of one or more significant customers;
|
|
·
|
default by the counterparties to our derivative financial
instruments;
|
|
·
|
changes in general, national or regional economic conditions;
|
|
·
|
an act of war or terrorism that disrupts international
shipping;
|
|
·
|
changes in laws, regulations and tariffs;
|
|
·
|
the imposition of anti-dumping duties on the products we
import;
|
|
·
|
changes in the size and nature of our competition;
|
|
·
|
changes in interest rates, foreign currencies or spot prices
of aluminum;
|
|
·
|
loss of one or more key executives;
|
|
·
|
increased credit risk from customers;
|
|
·
|
our failure to grow internally or by acquisition; and
|
|
·
|
failure to improve operating margins and efficiencies.
|
For a discussion of these and other risks
that relate to our business and investing in shares of our common stock, you should carefully review the risk factors and other
cautionary statements in our Annual Report on Form 10-K for the year ended December 31, 2015 that was filed with the Securities
and Exchange Commission on March 30, 2016, and those described from time to time in our other reports filed with the Securities
and Exchange Commission. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified
in their entirety by this cautionary statement. We do not undertake any obligation to publicly update any forward-looking statement
to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated
events.
Our Business
We are engaged in the purchase, sale and
distribution of semi-finished aluminum and steel products to a diverse customer base located in the Americas, Europe, Australia
and New Zealand. We sell our products through our own marketing and sales personnel as well as through commission based independent
sales agents located in North America and Europe. We purchase products from suppliers located throughout the world. Our three largest
suppliers furnished approximately 51% of our products during the first three months of 2016 as compared to an aggregate of 37%
of our products during the same period in 2015. We place orders with our suppliers based upon orders that we receive from our customers
and also purchase material for our own stock, which we typically use for shorter term deliveries to our customers.
Critical Accounting Policies and Estimates
The following discussion and analysis of
our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared
in accordance with generally accepted accounting principles in the U.S. The preparation of financial statements in accordance with
generally accepted accounting principles in the U.S. requires us to make estimates and assumptions that affect the amounts reported
in our financial statements. The financial statements include estimates based on currently available information and our judgment
as to the outcome of future conditions and circumstances. Significant estimates in these financial statements include allowance
for doubtful accounts and the derivative liability for the embedded conversion option in our 10% Convertible Senior Subordinated
Notes Due June 1, 2016 in the principal amount of $11,000. Changes in the status of certain facts or circumstances could result
in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the
estimates and assumptions.
Among the significant judgments made by
management in the preparation of our financial statements are the following:
Allowance for Doubtful Accounts
As of March 31, 2016, we had $73,417 in
trade receivables, after an allowance for doubtful accounts of $1,193. We report accounts receivable, net of an allowance for doubtful
accounts, to represent our estimate of the amount that ultimately will be realized in cash. We review the adequacy of our allowance
for doubtful accounts on an ongoing basis, using historical collection trends, age of receivables, as well as review of specific
accounts, and make adjustments in the allowance that we believe are necessary. We maintain credit insurance policies on the majority
of our customers. In general, this policy has a 10% deductible; however there are some instances where the co-insurance may vary
and instances where we may exceed the insured values. Changes in economic conditions could have an impact on the collection of
existing receivable balances or future allowance considerations. In addition, changes in the credit insurance environment could
affect the availability of credit insurance and our ability to secure it.
Accruals for Inventory Claims
Generally, our exposure on claims for defective
material is relatively small, as we usually refer all claims on defects back to our suppliers. If we do not believe that a supplier
will honor a material claim for a defective product, we will record an allowance for inventory adjustments.
Results of Operations
General
We are engaged in the purchase, sale and
distribution of semi-finished aluminum and steel products which we purchase from producing mills around the world. The market
prices of materials we purchase, as well as the market price of materials we sell, fluctuate constantly in world markets.
Our cost of sales is composed of metal content, which in part is determined on world metal exchanges, plus a unique fabrication
premium charged by each producer to convert the raw metal to a semi-finished product. In turn, we typically sell to our customers
either on a fixed price basis or based on metal content plus a premium which includes supplier fabrication margin, and costs of
importation, warehousing, and delivery of material to customers. Since metal content costs are the largest component of cost
of sales and selling price, our sales pricing trends and cost of sales trends generally track consistently.
Comparison of Three Months Ended March 31, 2016 and 2015
During the three months ended March 31,
2016, net sales decreased by $46,128, from $168,253 to $122,125 or 27.4% from the same period in 2015. The Latin American
economy, particularly Brazil, has suffered a precipitous drop in local currencies adding to economic stresses. We determined that
the markets were unstable and did not enter into new contracts with local customers resulting in a decline of Latin American sales
of $12,987 in the three month period ended March 31, 2016 as compared to the same period in 2015.
Additionally,
our sales in North America declined by $28,916 comprised of a decline in our steel sales offset by an increase in our aluminum
sales.
Gross profit decreased by $1,923, to $5,253
during the three months ended March 31, 2016, from $7,176 in the same period of 2015, representing a 26.8% decrease, attributable
to decreased sales.
Selling, general and administrative expenses
during the three months ended March 31, 2016 decreased by $944 from $3,898 to $2,954 primarily as a result of lower compensation
costs and consulting expenses.
During the three months ended March 31,
2016, interest expense decreased 23.9% or $401 to $1,274 from $1,675 for the same period in 2015 as a result of decreased bank
loans due to reduced inventory levels. During the three months ended March 31, 2016 and 2015, interest on our 10% Convertible Senior
Subordinated Notes Due June 1, 2016 totaled $275 and $275, respectively.
Amortization of the debt
discount in connection with these notes totaled $130 for the three months ended March 31, 2016 and $197 for March 31, 2015.
During the three months ended March 31,
2016 income before other expenses declined by $578 from $1,603 to $1,025 or 36%. This decline is primarily due to the decline in
sales and gross profit, offset by the decrease in selling, general and administrative expenses described above.
Our 10% Convertible Senior Subordinated
Notes Due June 1, 2016 have an embedded conversion option which was bifurcated and recorded as a separate derivative liability
at a fair value at issuance of the notes. The derivative liability is carried at fair value with changes in mark to market recorded
in income. The changes in the fair value of the derivative liability resulted in a non-cash non-operating gain of $700 during the
three month period ended March 31, 2016 as compared to a $996 non-cash non-operating gain during the same period in 2015. The valuation
has numerous inputs, however, these changes are driven primarily by the change in the stock price at the end of both quarters.
Fair value accounting requires changes
in derivative liabilities related to our convertible notes to be charged or credited to income during each accounting period. Such
losses are not tax deductible, and likewise any recoveries of such losses are not taxable upon recovery. Accordingly, no tax effect
was given to the non-cash, non-operating gains of $700 and $996 during the quarters ended March 31, 2016 and 2015, respectively.
Accordingly, the tax rate for the quarter ended March 31, 2016 was 33% and 36% for the quarter ended March 31, 2015.
Net income decreased to $1,149 during the three months ended
March 31, 2016 from a $1,655 during the three months ended March 31, 2015. The decrease in net income of $506 is primarily a function
of reduced sales for the quarter.
Liquidity and Capital Resources
Overview
At March 31, 2016, we had cash of $8,732,
net accounts receivable of $73,417, senior secured debt of $124,243, and subordinated debt of $11,000. Management believes
that cash from operations, together with funds available under our credit facility will be sufficient to fund the cash requirements
relating to our existing operations for the next twelve months and the repayment of the convertible debt due in June 2016, if not
converted. However, we will require additional debt or equity financing in connection with future expansion of operations.
Comparison of Three Month Periods
Ended March 31, 2016 and 2015
Net cash provided by operating activities
was $17,201 during the three months ended March 31, 2016, as compared to $18,057 used in operating activities during the same period
in 2015. In the three months ended March 31, 2016 cash provided by operating activities resulted primarily from decreases in inventories
of $17,989, increases in accounts payable of $4,588, offset by increases in trade accounts receivable of $12,742.
Our days sales outstanding decreased from
58 days in March 2015 to 54 days in March 2016 attributable to reduced sales in Latin America which has longer payment cycles.
Our inventory in warehouses, available for delivery to customers, as of March 2015 was approximately 71 days of sales as compared
to 75 days as of the same date in 2016. Total inventory levels have been reduced by $17,989 since December 2015, as we continue
to manage our inventory downwards to align with our sales volume. Our inventory turn rate, including materials in transit, was
3.6 times or 100 days on hand, as of March 31, 2015 as compared to 3.5 times or 103 days on hand as of March 31, 2016. The days
payable outstanding was 37 days as of March 2016, as compared to 18 days for the same period in 2015.
Cash flows used in and provided by investing
activities during the three months ended March 31, 2016 and 2015, amounted to $26 and $717 respectively. During 2015, this was
primarily the monthly repayment by PT. Alumindo of the advance related to our supply agreement, which was paid in full as of the
end of 2015.
Cash flows used in financing activities
during the three months ended March 31, 2016, amounted to $15,743, as compared to cash provided by financing activities of $20,960
during the same period in 2015. During the first three months of 2016, we reduced notes payable to banks by $15,343 as compared
to an increase of $22,163 in notes payable during the first three months of 2015.
Credit Agreements and Other Debt
On June 19, 2014, we entered into an amended
and restated committed credit agreement with Rabobank International, for itself and as lead arranger and agent, BNP Paribas, for
itself and as syndication agent, and Société Générale, ABN AMRO, RB International, and Brown Brothers
Harriman as well as a new uncommitted line of credit with Rabobank International, BNP Paribas and Société Générale.
Both credit lines are secured, asset-based credit facilities. The committed credit facility provided for amounts up to $150,000,
and the uncommitted facility provided for a maximum amount of $75,000. The agreement also allowed for an additional increase in
the committed credit facility of $75,000, for a total of $300,000, subject to certain restrictions and conditions. On December
18, 2014, we amended and increased these credit lines by an aggregate of $50,000, increasing our overall line of credit to $275,000.
The amended committed credit agreement was increased by $35,000 to $185,000, and the uncommitted credit facility, increased by
$15,000 to $90,000. There were no changes to the interest rate or to the maturity date of the committed facility, which remains
June 19, 2017. Subsequent to these amendments the additional increase available under the term of these agreements is $25,000,
subject to certain restrictions and conditions. Our borrowings under these lines of credit are secured by substantially all of
our assets.
Amounts borrowed bear interest at Eurodollar,
money market or base rates, at our option, plus an applicable margin. The credit agreements contain financial
and other covenants, including but not limited to, covenants requiring maintenance of minimum tangible net working capital and
compliance with leverage ratios, as well as an ownership minimum and limitations on other indebtedness, liens, distributions or
dividends, and investments and dispositions of assets. As of March 30, 2016, we were in compliance with all covenants
under these lines of credit.
Both credit agreements provide that amounts
under the facilities may be borrowed and repaid, and re-borrowed, subject to a borrowing base test. On June 11, 2015 the Company
entered into a Second Amendment to the Uncommitted Credit Agreement which amended the termination date to June 18, 2016 from June
19, 2015. As of March 31, 2016 and December 31, 2015, the credit utilized amounted to, respectively, $136,168 and $158,922 (including
approximately $22,168 and $27,922 of outstanding letters of credit). As of March 31, 2016, the committed line of credit had loans
outstanding of $101,000 and the uncommitted line of credit had loans outstanding of $13,000.
Our wholly owned Belgian subsidiary, Imbali,
maintained a line of credit with ING Belgium S.A./N.V., for a EUR 8,000 (US$9,105) commitment for loans and documentary letters
of credit. On July 30, 2015 Imbali entered into a credit agreement with Rabobank to replace the line of credit with ING Belgium
for a line of credit of EUR 12,500(US$14,226). Imbali utilized EUR 4,000 (US$4,552) under the Rabobank facility to repay the outstanding
balance due to ING. Loan advances are limited to a percentage of Imbali’s pledged accounts receivables and inventory and
bear interest at EURIBOR plus 1.9%. This secured credit arrangement is unconditionally guaranteed by us. As of March 31, 2016,
the outstanding loan amounted to EUR 9,000 (US $10,243), as compared to loans outstanding of EUR 7,500 (US $8,536) on December
31, 2015. As of March 31, 2016, Imbali was in compliance with all financial covenants.
On June 3, 2011, we issued $12,000 principal
amount of 10% Convertible Senior Subordinated Notes Due June 1, 2016 in a private placement to selected accredited investors. On
August 18, 2014, a note holder converted $1,000 of notes into common stock. The notes are currently convertible at the option
of the holders into shares of common stock at a conversion rate of 265.82 shares of common stock per $1 principal amount of notes,
subject to adjustment for cash and stock dividends, stock splits and similar transactions, at any time before maturity. The
current conversion price reflects twenty adjustments for dividends. In addition, if the last reported sale price of
the common stock for 30 consecutive trading days is equal to or greater than $7.00, and a registration statement is effective covering
the resale of the shares of common stock issuable upon conversion of the notes, we have the right, in our sole discretion, to require
the holders to convert all or part of their notes at the then applicable conversion rate. Interest on the notes is payable
in arrears on the first day of June and December every year the notes are outstanding. The notes which mature on June 1, 2016 are
scheduled to be repaid in full on that date.
Derivative Financial Instruments
Inherent in our business is the risk of
matching the timing of our purchase and sales contracts. The prices of the aluminum products we buy and sell are based on a constantly
moving terminal market price determined by the London Metal Exchange. Were we not to hedge such exposures, we could be exposed
to significant losses due to the continually changing aluminum prices.
We use aluminum futures contracts to manage
our exposure to this commodity price risk. It is generally our policy to hedge such risks to the extent practicable. We enter into
hedges to limit our exposure to volatile price fluctuations that we believe would impact our gross margins on firm purchase and
sales commitments. As an example, if we enter into fixed price contracts with our suppliers and variable priced sales contracts
with our customers, we will generally enter into a futures contract to sell the aluminum for future delivery in the month when
the aluminum is to be priced and delivered to the customer and repurchase this position once the pricing has been fixed with our
customer. If the underlying metal price increases, we suffer a hedging loss and have a derivative liability, but the
sales price to the customer is based on a higher market price and offsets the loss. Conversely, if the metal price decreases, we
have a hedging gain and recognize a derivative asset, but the sales price to the customer is based on the lower market price and
offsets the gain.
We also enter into foreign exchange forward
contracts to hedge our exposure related to commitments to purchase or sell metals and accounts receivable denominated in some international
currencies. In such cases, we will purchase or sell the foreign currency through a bank for an approximate date when we anticipate
making a payment to a supplier or receiving payment from the foreign customer.
In accordance with generally accepted accounting
principles in the U.S., we designate these derivative contracts as fair value hedges and recognize them on our balance sheet at
fair value. We also recognize offsetting changes in the fair value of the related firm purchase and sales commitment
to which the hedge is attributable in earnings upon revenue recognition, which occurs at the time of delivery to our customers.
The potential for losses related to our
hedging activities, given our hedging methodology, arises from counterparty defaults with banks for our foreign exchange hedging,
the London Metal Exchange for our aluminum hedges, or customer defaults. In the event of a customer default, we might be forced
to sell the material in the open market and absorb losses for metal or foreign exchange hedges that were applied to the defaulting
customers’ transactions. Our results of operations could be materially impacted by any counterparty or customer default,
as we might not be able to collect money owed to us and/or our hedge might effectively be cancelled.
We use futures and forward contracts as
hedges, for no purpose other than to avoid exposure to changes in aluminum prices and foreign currency rates between when we buy
a shipment of aluminum from a supplier and when we deliver it to a customer. Our derivatives are not for purposes of
trading in the futures market. We earn our gross profit margin through our business operations and not from the movement of aluminum
prices.
As part of our business we also engage
in the purchase, sale and distribution of steel products. If we do not have a matching sales contract related to such products,
(for example, any steel products that are unsold in our inventory), we have price risk that we currently do not or are unable to
hedge. As such, any decline in pricing for such products may adversely impact our profitability.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.