Item 1.
|
Financial Statements
|
EMPIRE RESOURCES,
INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(In thousands
except share and per share amounts)
|
|
March
31, 2014
(
Unaudited)
|
|
|
December 31, 2013
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,708
|
|
|
$
|
2,477
|
|
Trade accounts receivable
(less allowance for doubtful accounts of $562 and $562)
|
|
|
78,453
|
|
|
|
52,696
|
|
Inventories
|
|
|
117,641
|
|
|
|
139,752
|
|
Deferred tax assets
|
|
|
3,211
|
|
|
|
3,217
|
|
Advance to supplier, net
of imputed interest of $147 and $176
|
|
|
3,177
|
|
|
|
3,147
|
|
Other
current assets, including derivatives
|
|
|
5,312
|
|
|
|
6,081
|
|
Total current assets
|
|
|
209,502
|
|
|
|
207,370
|
|
Advance to supplier, net
of imputed interest of $31 and $56, and net of current maturities
|
|
|
2,479
|
|
|
|
3,287
|
|
Preferential supply agreement,
net
|
|
|
561
|
|
|
|
641
|
|
Long-term financing costs,
net of amortization
|
|
|
111
|
|
|
|
358
|
|
Property and equipment,
net
|
|
|
3,932
|
|
|
|
3,949
|
|
Deferred
tax assets
|
|
|
431
|
|
|
|
215
|
|
Total
assets
|
|
$
|
217,016
|
|
|
$
|
215,820
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable - banks
|
|
$
|
117,764
|
|
|
$
|
107,922
|
|
Current maturities of mortgage
payable
|
|
|
1,245
|
|
|
|
1,290
|
|
Trade accounts payable
|
|
|
30,283
|
|
|
|
44,058
|
|
Income taxes payable
|
|
|
2,880
|
|
|
|
2,042
|
|
Accrued expenses and derivative
liabilities
|
|
|
5,424
|
|
|
|
2,844
|
|
Dividends
payable
|
|
|
217
|
|
|
|
215
|
|
Total current liabilities
|
|
|
157,813
|
|
|
|
158,371
|
|
|
|
|
|
|
|
|
|
|
Subordinated convertible
debt net of unamortized discount of $1,226 and $1,368 respectively
|
|
|
10,774
|
|
|
|
10,632
|
|
Derivative
liability for embedded conversion option
|
|
|
2,477
|
|
|
|
2,048
|
|
Total Liabilities
|
|
|
171,064
|
|
|
|
171,051
|
|
|
|
|
|
|
|
|
|
|
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, 2014 and December 31, 2013
|
|
|
117
|
|
|
|
117
|
|
Additional paid-in capital
|
|
|
12,200
|
|
|
|
11,937
|
|
Retained earnings
|
|
|
38,987
|
|
|
|
38,178
|
|
Accumulated other comprehensive
income
|
|
|
65
|
|
|
|
51
|
|
Treasury
stock, 3,081,086 and 3,177,708 shares at March 31, 2014 and December 31, 2013, respectively
|
|
|
(5,417
|
)
|
|
|
(5,514
|
)
|
Total
stockholders' equity
|
|
|
45,952
|
|
|
|
44,769
|
|
Total
liabilities and stockholders' equity
|
|
$
|
217,016
|
|
|
$
|
215,820
|
|
See notes to unaudited condensed
consolidated financial statements
EMPIRE RESOURCES,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Income
(Unaudited)
(In thousands
except per share amounts)
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Net sales
|
|
$
|
138,317
|
|
|
$
|
133,430
|
|
Cost of goods sold
|
|
|
131,830
|
|
|
|
126,800
|
|
Gross profit
|
|
|
6,487
|
|
|
|
6,630
|
|
Selling, general and administrative expenses
|
|
|
3,299
|
|
|
|
3,258
|
|
Operating income
|
|
|
3,188
|
|
|
|
3,372
|
|
Other expenses
|
|
|
|
|
|
|
|
|
Change in value of derivative liability
|
|
|
(429
|
)
|
|
|
(2,123
|
)
|
Interest expense, net
|
|
|
(1,091
|
)
|
|
|
(1,113
|
)
|
Income before income taxes
|
|
|
1,668
|
|
|
|
136
|
|
Income taxes
|
|
|
642
|
|
|
|
51
|
|
Net income
|
|
$
|
1,026
|
|
|
$
|
85
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,629
|
|
|
|
8,586
|
|
Diluted
|
|
|
8,886
|
|
|
|
8,852
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
0.01
|
|
See notes to unaudited condensed
consolidated financial statements
EMPIRE RESOURCES,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Net
Income
|
|
$
|
1,026
|
|
|
$
|
85
|
|
Other comprehensive income/(loss) before
tax
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
6
|
|
|
|
(82
|
)
|
Decrease in value of interest rate swap
liability
|
|
|
13
|
|
|
|
16
|
|
Increase in value
of marketable securities
|
|
|
-
|
|
|
|
2
|
|
Other comprehensive income/(loss) before
tax
|
|
|
19
|
|
|
|
(64
|
)
|
Income tax related
to components of other comprehensive income/(loss)
|
|
|
(5
|
)
|
|
|
(7
|
)
|
Other comprehensive
income/(loss), net of tax
|
|
|
14
|
|
|
|
(71
|
)
|
Comprehensive
income
|
|
$
|
1,040
|
|
|
$
|
14
|
|
See notes to unaudited condensed
consolidated financial statements
EMPIRE
RESOURCES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(In
thousands
)
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,026
|
|
|
$
|
85
|
|
Adjustments to reconcile net income
to net cash (used in)/provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
275
|
|
|
|
173
|
|
Change in value of derivative liability
|
|
|
429
|
|
|
|
2,123
|
|
Amortization of convertible note discount
|
|
|
141
|
|
|
|
141
|
|
Imputed interest on vendor advance
|
|
|
(55
|
)
|
|
|
(85
|
)
|
Amortization of supply agreement
|
|
|
80
|
|
|
|
80
|
|
Deferred income taxes
|
|
|
(216
|
)
|
|
|
(866
|
)
|
Foreign exchange (loss)/gain and other
|
|
|
(2
|
)
|
|
|
19
|
|
Stock-based compensation
|
|
|
373
|
|
|
|
-
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(25,743
|
)
|
|
|
(12,512
|
)
|
Inventories
|
|
|
22,124
|
|
|
|
16,355
|
|
Other current assets
|
|
|
769
|
|
|
|
(4,761
|
)
|
Trade accounts payable
|
|
|
(13,776
|
)
|
|
|
4,475
|
|
Income taxes payable
|
|
|
838
|
|
|
|
915
|
|
Accrued expenses
and derivative liabilities
|
|
|
2,584
|
|
|
|
(789
|
)
|
Net cash (used
in)/provided by operating activities
|
|
|
(11,153
|
)
|
|
|
5,353
|
|
Cash flows provided
by investing activities:
|
|
|
|
|
|
|
|
|
Repayment related to supply agreement
|
|
|
833
|
|
|
|
833
|
|
Purchases of property
and equipment
|
|
|
(11
|
)
|
|
|
(9
|
)
|
Net cash provided
by investing activities
|
|
|
822
|
|
|
|
824
|
|
Cash flows provided
by/(used in) financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from/(repayments) of notes
payable – banks
|
|
|
9,833
|
|
|
|
(6,580
|
)
|
Repayments - mortgage payable
|
|
|
(44
|
)
|
|
|
(42
|
)
|
Dividends paid
|
|
|
(215
|
)
|
|
|
-
|
|
Treasury stock
purchased
|
|
|
(13
|
)
|
|
|
(21
|
)
|
Net cash provided
by/(used in) financing activities
|
|
|
9,561
|
|
|
|
(6,643
|
)
|
Net decrease in cash
|
|
|
(770
|
)
|
|
|
(466
|
)
|
Effect of exchange rate
|
|
|
1
|
|
|
|
(6
|
)
|
Cash at beginning of period
|
|
|
2,477
|
|
|
|
3,136
|
|
Cash
at end of the period
|
|
$
|
1,708
|
|
|
$
|
2,664
|
|
Supplemental disclosures
of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,509
|
|
|
$
|
766
|
|
Income taxes
|
|
$
|
241
|
|
|
$
|
110
|
|
Non cash financing
activities:
|
|
|
|
|
|
|
|
|
Dividend declared but not yet paid
|
|
$
|
217
|
|
|
$
|
215
|
|
See notes to unaudited condensed
consolidated financial statements
EMPIRE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement
of Stockholders’ Equity
(Unaudited)
(In thousands, except per share
amounts)
|
|
Common
Stock
Number of
Shares
|
|
|
Common
Stock
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
|
Treasury
Stock
|
|
|
Total
Stockholders'
Equity
|
|
Balance at December 31,
2013
|
|
|
11,750
|
|
|
$
|
117
|
|
|
$
|
11,937
|
|
|
$
|
38,178
|
|
|
$
|
51
|
|
|
$
|
(5,514
|
)
|
|
$
|
44,769
|
|
Treasury stock acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
373
|
|
Net change in cumulative translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
Decrease in value of interest rate swap
liability, net of deferred tax of $5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
Dividends declared ($0.025 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
(217
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
1,026
|
|
Balance at March
31, 2014
|
|
|
11,750
|
|
|
$
|
117
|
|
|
$
|
12,200
|
|
|
$
|
38,987
|
|
|
$
|
65
|
|
|
$
|
(5,417
|
)
|
|
$
|
45,952
|
|
See notes to unaudited condensed
consolidated financial statements
Empire Resources, Inc. and Subsidiaries.
Notes to
Condensed Consolidated Financial Statements (Unaudited)
(In thousands,
except for per share amounts)
1. The Company
The
condensed consolidated financial statements include the accounts of Empire Resources, Inc. (the “Company”) and
its wholly-owned subsidiaries, including Empire Resources Pacific Ltd., the Company’s sales agent in Australia, 6900
Quad Avenue LLC, the owner of a warehouse facility in Baltimore, Maryland and Imbali Metals BVBA (“Imbali”), the
Company’s operating subsidiary in Europe. All significant inter-company transactions and accounts have been eliminated
on consolidation. The Company purchases and sells semi-finished aluminum and steel products to a diverse customer
base located in the Americas, Australia, Europe and New Zealand.
2. 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, 2013.
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, 2014 and the results of its operations and cash flows for the three months
ended March 31, 2014 and 2013. Interim results may not be indicative of the results that may be expected for the year.
3. 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.
4. Concentrations
During the
three month period ended March 31, 2014 and 2013 no one customer accounted for 10% of our consolidated sales.
The Company
purchases metal products from a limited number of suppliers throughout the world. Two suppliers, PT Alumindo Light Metal Industry
and Hulamin Ltd. accounted for 40% of total purchases during the three month period ended March 31, 2014, as compared to 59% during
the same period ended March 31, 2013.
The loss of
any one of our largest suppliers or a material default by any such supplier in its obligations to us could have a material adverse
effect on our business.
5. 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, 2014, there were outstanding employee stock options to
acquire 410 shares of common stock, which had vested in prior years. During the three month period ended March 31, 2014, the Company
did not grant any stock options.
6. 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, 2014,
the Company repurchased a total of 1,267 shares under the repurchase program for an aggregate cost of $3,299. During the three
month period ended March 31, 2014, the Company purchased 3 common shares at a cost of $13. In January 2014, the Company issued
100 common shares out of treasury stock to a non-executive employee as part of a compensation arrangement.
7. 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.
8. Notes
Payable—Banks
On April 28,
2011, the Company entered into a working capital 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. The $200,000 secured, asset-based credit facility matures on June 30, 2014.
This credit agreement also allows additional increases in the line of credit of up to $50,000, subject to certain restrictions.
Amounts borrowed bear interest (2.66% at March 31, 2014) at Eurodollar, money market or base rates, at our option, plus an applicable
margin. Our borrowings under this credit agreement are secured by substantially all of our assets. The credit
agreement contains financial and other covenants, including but not limited to, covenants requiring maintenance of minimum tangible
net worth and compliance with leverage ratios, as well as an ownership minimum and limitations on other indebtedness, liens, and
investments and dispositions of assets. As of March 31, 2014, the Company was in compliance with all covenants under
this line of credit.
The credit
agreement provides that amounts under the facility may be borrowed and repaid, and re-borrowed, subject to a borrowing base test,
until the maturity date of June 30, 2014. As of March 31, 2014 and December 31, 2013, the credit utilized amounted
to, respectively, $157,137 and $174,605 (including approximately $44,137 and $71,105 of outstanding letters of credit). The Company
is negotiating a new line of credit and anticipates that a new credit agreement will be in effect prior to the expiration of the
current agreement; however there can be no assurances that the Company will be able to successfully conclude a new agreement.
Our wholly
owned Belgian subsidiary, Imbali, maintains a line of credit with ING Belgium S.A./N.V., for a EUR 8,000 (US$11,016) commitment
for loans and documentary letters of credit. Loan advances are limited to a percentage of Imbali’s pledged accounts receivables
and inventory and bear interest at EURIBOR plus 1.75%. This secured credit arrangement is unconditionally guaranteed by the Company.
As of March 31, 2014, the outstanding loan amounted to EUR 3,460 (US $4,764), as compared to EUR 3,217 (US $4,422) on December
31, 2013. As of March 31, 2014 Imbali was in compliance with all financial covenants.
9. Mortgage
Payable
In connection
with the purchase of its Baltimore warehouse, the Company entered into a mortgage loan, which had outstanding balances of $1,245
at March 31, 2014 and $1,290 at December 31, 2013. The loan requires monthly payments of approximately $21.6, including interest
at LIBOR plus 1.75%, and matures in December 2014. Under a related interest rate swap, which has been designated as
a cash flow hedge and remains effective through the maturity of the mortgage loan, the Company pays a monthly fixed interest rate
of 6.37% to the counterparty bank on a notional principal equal to the outstanding principal balance of the mortgage. In
return, the bank pays the Company a floating rate, namely, LIBOR, which resets monthly, plus 1.75% on the same notional principal
amount.
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, 2014, the notes are convertible at the option of the holders into
shares of common stock at a conversion rate of 252.15 shares of common stock per $1,000 principal amount of notes (equivalent
to a conversion price of $3.97 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 ten 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, 2014, 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.
As a result
of transactions which cause adjustments to the conversion rate, the embedded conversion option has been bifurcated and recorded
as a separate derivative liability at a fair value at issuance of the notes of $2,829, with a corresponding discount recorded
on the notes. The derivative liability is carried at fair value with changes therein recorded in income. The quarterly mark to
market of the derivative liability will result in non-operating, non-cash gains or losses based on decreases or increases in the
Company’s stock price, respectively, among other factors. The non-cash discount is being amortized as additional interest
expense over the term of the notes. During the three month period ended March 31, 2014, the increase in the fair value of the
derivative liability resulted in a loss of $429. During the three month period ended March 31, 2014 and 2013, amortization of
the discount amounted to $141. During the three month period ended March 31, 2013, the increase in the fair value of the derivative
liability resulted in a loss of $2,123.
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, 2014, December 31, 2013 and issuance:
|
|
March 31,
2014
|
|
|
December
31, 2013
|
|
|
June 3,
2011
|
|
|
|
|
|
|
|
|
|
|
|
Equity value
|
|
$
|
35,170
|
|
|
$
|
30,708
|
|
|
$
|
36,811
|
|
Volatility
|
|
|
40
|
%
|
|
|
45
|
%
|
|
|
70
|
%
|
Risk free return
|
|
|
0.44
|
%
|
|
|
0.38
|
%
|
|
|
1.60
|
%
|
Dividend Yield
|
|
|
2.44
|
%
|
|
|
2.79
|
%
|
|
|
2.51
|
%
|
Strike Price
|
|
$
|
3.97
|
|
|
$
|
3.99
|
|
|
$
|
4.65
|
|
The majority
of the proceeds from the notes were earmarked for a long term advance in connection with a supply agreement with the Indonesian
company PT. Alumindo Light Metal Industry Tbk (“PT. Alumindo”), a leading producer of high quality semi-finished aluminum
products, and its affiliates, as described below. The Company provided a $10 million non-interest bearing loan to an affiliate
of PT. Alumindo to enable the expansion of capacity within that group of companies’ production network. Agreements
entered into in connection with this loan also provide for a long term, multi-year substantial and preferential supply position
from PT. Alumindo's premier aluminum rolling mill located in Surabaya, Indonesia. The pre-payment advance became repayable
to us beginning on January 1, 2013 in monthly installments of $278. As of May 14, 2014, the payments are up to date and current.
If the Company and PT. Alumindo are unable to agree on a product price under the supply agreement for any given quarter, the monthly
re-payment obligation will increase to $556 and the outstanding balance will accrue interest, at the one month U.S. dollar LIBOR
rate plus 3.5% per annum, per month. The entire remaining balance, if any, must be repaid on January 1, 2016. As consideration
for this loan, PT. Alumindo agreed to make available a committed and significant tonnage of production to the Company on a guaranteed
and long-term basis, which should help the Company lessen the risk of an interruption in the sources of its metal supply from
PT. Alumindo’s mill in Surabaya, Indonesia, with which the Company has had substantial experience. The supply agreement
calls for increased supply and minimum tonnages.
Interest at
the rate of 3.74%, based on the interest rate chargeable in the agreement in the event the supplier does not meet its supply commitments,
has been imputed on the non-interest bearing advance and the resulting discount which amounted to $962 has been ascribed to the
preferential supply agreement. Imputed interest is recorded in income over the term of the advance by use of the interest
method. The preferential supply agreement is being amortized by the straight line method over three years starting from January
1, 2013, the date that the increased supply began. During the three month periods ended March 31, 2014 and 2013 amortization
amounted to $80 in each period.
11. Earnings
per Share
Basic earnings
per share are based upon weighted average number of shares of common stock outstanding during each period. Diluted earnings per
share are based upon the weighted average number of shares of common stock outstanding during each period, plus potential dilutive
shares of common stock from assumed exercise of the outstanding stock options using the treasury stock method and assumed conversion
of subordinated debt.
The following
table sets forth the computation of basic and diluted earnings per share:
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,026
|
|
|
$
|
85
|
|
Numerator for
diluted earnings per share
|
|
$
|
1,026
|
|
|
$
|
85
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic
|
|
|
8,629
|
|
|
|
8,586
|
|
Dilutive effect
of stock options
|
|
|
257
|
|
|
|
266
|
|
Weighted average shares outstanding-diluted
|
|
|
8,886
|
|
|
|
8,852
|
|
Basic Earnings per Share
|
|
$
|
0.12
|
|
|
$
|
0.01
|
|
Diluted Earnings per Share
|
|
$
|
0.12
|
|
|
$
|
0.01
|
|
In computing
diluted earnings per share for the three months ended March 31, 2014 and 2013, respectively, no effect has been given to the 3,026
and 2,950 common shares issuable upon conversion of subordinated debt as the effect thereof is anti-dilutive.
12. Dividends
On March 25,
2014, our Board of Directors announced a cash dividend of $0.025 per share to stockholders of record at the close of business
on April 7, 2014. The dividend, totaling $217, was paid on April 14, 2014. 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.
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 denominated in international currencies.
The Company’s
unrealized assets and liabilities in respect of its fair value hedges measured at fair value are as follows:
Derivatives
designated
as fair value hedges
|
|
Balance Sheet Location
|
|
March 31,
2014
|
|
|
December
31,
2013
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
|
Aluminum futures contracts
|
|
Other current assets
|
|
$
|
276
|
|
|
|
1,047
|
|
Foreign currency
forward contracts
|
|
Other current assets
|
|
|
-
|
|
|
|
316
|
|
Total
|
|
|
|
$
|
276
|
|
|
$
|
1,363
|
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Accrued expenses and derivative liabilities
|
|
$
|
560
|
|
|
$
|
-
|
|
Aluminum futures
contracts
|
|
Accrued expenses
and derivative liabilities
|
|
|
461
|
|
|
|
-
|
|
Total
|
|
|
|
$
|
1,021
|
|
|
$
|
-
|
|
For the periods
ended March 31, 2014 and December 31, 2013, hedge ineffectiveness associated with derivatives designated as fair value hedges
was insignificant, and no fair value hedges were derecognized.
The Company
has entered into interest rate swaps to convert the mortgage for its Baltimore warehouse from a variable rate to a fixed rate
obligation. The swap has been designated as a cash flow hedge and the Company’s unrealized liabilities relating to it measured
at fair value are as follows:
Derivatives
designated
as cash flow hedges
|
|
Balance Sheet Location
|
|
March 31,
2014
|
|
|
December
31,
2013
|
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap contracts
|
|
Accrued
expenses and derivative liabilities
|
|
$
|
39
|
|
|
$
|
52
|
|
A corresponding
debit, net of deferred taxes, is reflected in accumulated other comprehensive income in the accompanying balance sheets.
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
|
|
2014
|
|
|
2013
|
|
Foreign currency forward
contracts
|
(a)
|
Cost of goods sold
|
|
$
|
27
|
|
|
$
|
247
|
|
Interest rate swaps
|
(b)
|
Interest expense, net
|
|
|
(14
|
)
|
|
|
(16
|
)
|
Aluminum futures
|
(c)
|
Cost of goods sold
|
|
|
1,644
|
|
|
|
(88
|
)
|
Total
|
|
|
|
$
|
1,657
|
|
|
$
|
143
|
|
|
a)
|
Fair
value hedge: the related hedged item is accounts receivable and offsetting losses in
2014 and 2013 are included in cost of goods sold in the same respective amounts.
|
|
b)
|
Cash
flow hedge: recognized losses reclassified from accumulated other comprehensive loss.
|
|
c)
|
Fair
value hedge: the related hedged item is inventory and offsetting losses in 2014 and gains
in 2013 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, 2014 and December 31, 2013 are classified as follows:
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
98,240
|
|
|
|
|
|
|
|
|
|
|
$
|
106,903
|
|
|
|
|
|
|
|
|
|
Aluminum futures contracts
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
Foreign Currency forward contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
316
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
|
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
$
|
52
|
|
|
|
|
|
Aluminum futures contracts
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion option
|
|
|
|
|
|
|
|
|
|
$
|
2,477
|
|
|
|
|
|
|
|
|
|
|
$
|
2,048
|
|
15. Fair
Value of Financial Instruments
The carrying
amounts of variable rate notes payable to the banks and the variable rate mortgage payable approximate fair value as of March
31, 2014 and December 31, 2013, because these notes reflect market changes to interest rates. The fair value of the subordinated
convertible debt approximates its principal amount of $12,000 at March 31, 2014 and December 31, 2013, which exceeds its carrying
amount as a result of the unamortized discount related to the bifurcation of the embedded conversion option. The fair value of
the advance to supplier approximates its carrying value. Derivative financial instruments are carried at fair value (see Note
14).
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,
|
|
|
|
2014
|
|
|
2013
|
|
United States
|
|
$
|
74,968
|
|
|
$
|
83,938
|
|
Latin America
|
|
|
33,171
|
|
|
|
21,401
|
|
Canada
|
|
|
11,696
|
|
|
|
12,187
|
|
Australia & New Zealand
|
|
|
10,913
|
|
|
|
11,668
|
|
Europe
|
|
|
7,569
|
|
|
|
4,236
|
|
|
|
$
|
138,317
|
|
|
$
|
133,430
|
|
17. Accumulated
Other Comprehensive Income/(Loss)
Changes in
accumulated other comprehensive income/(loss)
by component on an after tax basis are as follows:
Three Months ended March 31, 2014
|
|
Foreign
Currency
Translation
|
|
|
Interest
Rate Swap
Contract
|
|
|
Available
for Sale
Marketable
Securities
|
|
|
Total
|
|
Beginning
balance
|
|
$
|
84
|
|
|
$
|
(33
|
)
|
|
|
-
|
|
|
$
|
51
|
|
Other comprehensive
income before reclassification
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
Loss reclassified
to operations
|
|
|
-
|
|
|
|
8
|
(a)
|
|
|
-
|
|
|
|
8
|
|
Net current period
other comprehensive income
|
|
|
6
|
|
|
|
8
|
|
|
|
-
|
|
|
|
14
|
|
Ending balance
|
|
$
|
90
|
|
|
$
|
(25
|
)
|
|
$
|
-
|
|
|
$
|
65
|
|
(a) Reclassified to following line items
in the statement of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Net of tax
|
|
|
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2013
|
|
Foreign
Currency
Translation
|
|
|
Interest
Rate Swap
Contract
|
|
|
Available
for Sale
Marketable
Securities
|
|
|
Total
|
|
Beginning
balance
|
|
$
|
(48
|
)
|
|
$
|
(68
|
)
|
|
$
|
(20
|
)
|
|
$
|
(136
|
)
|
Other comprehensive (loss)/income before
reclassification
|
|
|
(82
|
)
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
(81
|
)
|
Loss reclassified
to operations
|
|
|
-
|
|
|
|
10
|
(a)
|
|
|
-
|
|
|
|
10
|
|
Net current period
other comprehensive (loss)/ income
|
|
|
(82
|
)
|
|
|
9
|
|
|
|
2
|
|
|
|
(71
|
)
|
Ending balance
|
|
$
|
(130
|
)
|
|
$
|
(59
|
)
|
|
$
|
(18
|
)
|
|
$
|
(207
|
)
|
(a) Reclassified to following line items
in the statement of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Net of tax
|
|
|
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
18. Commitments
The Company
had $44,137 in outstanding letters of credit to certain of its suppliers at March 31, 2014.
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
You should
read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial
statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our 10-K filed with the Securities
and Exchange Commission on March 31, 2014. All numbers used in this discussion are in thousands, except for per share information.
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, 2013 that was filed with the Securities
and Exchange Commission on March 31, 2014, and those described from time to time in our other reports filed with the Securities
and Exchange Commission. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified
in their entirety by this cautionary statement. We do not undertake any obligation to publicly update any forward-looking statement
to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated
events.
Our Business
We are engaged
in the purchase, sale and distribution of semi-finished aluminum and steel products to a diverse customer base located in the
Americas, Europe, Australia and New Zealand. We sell our products through our own marketing and sales personnel as well as through
commission based independent sales agents located in North America and Europe. We purchase products from suppliers located throughout
the world. Our two largest suppliers furnished approximately 40% of our products during the first three months of 2014 as compared
to 59% of our products during the same period in 2013. While we generally place orders with our suppliers based upon orders that
we receive from our customers, we also purchase material for our own stock, which we typically use for shorter term deliveries
to our customers.
Critical Accounting Policies
and Estimates
The following
discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with generally accepted accounting principles in the U.S. The preparation of financial
statements in accordance with generally accepted accounting principles in the U.S. requires us to make estimates and assumptions
that affect the amounts reported in our financial statements. The financial statements include estimates based on currently available
information and our judgment as to the outcome of future conditions and circumstances. Significant estimates in these financial
statements include allowance for doubtful accounts and the derivative liability for the embedded conversion option in our 10%
Convertible Senior Subordinated Notes Due June 1, 2016 in the principal amount of $12,000. 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, 2014, we had $78,453 in trade receivables, after an allowance for doubtful accounts of $562. We report accounts receivable,
net of an allowance for doubtful accounts, to represent our estimate of the amount that ultimately will be realized in cash. We
review the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical collection trends, age of receivables,
as well as review of specific accounts, and make adjustments in the allowance that we believe are necessary. We maintain a credit
insurance policy on the majority of our customers. In general, this policy has a 10% deductible; however there are some instances
where the co-insurance may vary and instances where we may exceed the insured values. Changes in economic conditions could have
an impact on the collection of existing receivable balances or future allowance considerations. In addition, changes in the credit
insurance environment could affect the availability of credit insurance and our ability to secure it.
Accruals for Inventory Claims
Generally,
our exposure on claims for defective material is relatively small, as we usually refer all claims on defects back to our suppliers.
If we do not believe that a supplier will honor a material claim for a defective product, we will record an allowance for inventory
adjustments.
Results of Operations
General
We are engaged
in the purchase, sale and distribution of semi-finished aluminum and steel products which we purchase from producing mills around
the world. The market prices of materials we purchase, as well as the market price of materials we sell, fluctuate constantly
in world markets. Our cost of sales is composed of metal content, which in part is determined on world metal exchanges,
plus a unique fabrication premium charged by each producer to convert the raw metal to a semi-finished product. In turn,
we typically sell to our customers either on a fixed price basis or based on metal content plus a premium which includes supplier
fabrication margin, and costs of importation, warehousing, and delivery of material to customers. Since metal content costs
are the largest component of cost of sales and selling price, our sales pricing trends and cost of sales trends generally track
consistently.
Comparison of Three Months
Ended March 31, 2014 and 2013
During the
three months ended March 31, 2014, net sales increased by $4,887, from $133,430 to $138,317 or 3.7% from the same period in 2013. This
increase was due to improved sales in Latin America and Europe offset by a decline in sales in North America and the Pacific Rim
during the period ending March 31, 2014 as compared to the same period in 2013.
Gross profit
decreased by $143, to $6,487 during the three months ended March 31, 2014 from $6,630 in the same period of 2013, representing
a 2.2% decrease. This decrease is attributable to an increase in insurance and agent costs, offset by declines in freight, processing
and storage charges.
Selling, general
and administrative expenses increased 1.3% or $41, to $3,299 during the three months ended March 31, 2014, from $3,258 in the
same period in 2013. Increased payroll was offset by reductions in legal costs and travel expenses during the quarter.
During the
three months ended March 31, 2014, interest expense decreased 2% or $22, to $1,091 from $1,113 for the same period in 2013 as
a result of a lower interest rate environment during the first three months of 2014. During the three months ended
March 31, 2014 and 2013, interest on our 10% Convertible Senior Subordinated Notes Due June 1, 2016 and amortization of the debt
discount in connection with these notes totaled $441 in both periods.
Our 10% Convertible
Senior Subordinated Notes Due June 1, 2016 have an embedded conversion option which has been bifurcated and recorded as a separate
derivative liability at a fair value at issuance of the notes. The derivative liability is carried at fair value with changes
in mark to market recorded in income. The changes in the fair value of the derivative liability resulted in a non-cash non-operating
loss of $429 during the three month period ended March 31, 2014, as compared to a $2,123 non-cash non-operating loss during the
same period in 2013.
Net income
increased by $941, from $85 during the three months ended March 31, 2013 to $1,026 during the three months ended March 31, 2014,
mainly due to a decrease of $1,694 in the non-cash non-operating loss in mark to market of the derivative liability, compared
to the three months ended March 31, 2013.
Liquidity and Capital Resources
Overview
At March 31,
2014, we had cash of $1,708, net accounts receivable of $78,453, senior secured debt of $113,000, junior secured debt of $4,764,
and subordinated debt of $12,000. Management believes that cash from operations, together with funds available under
our credit facility will be sufficient to fund the cash requirements relating to our existing operations for the next twelve months.
However, we will require additional debt or equity financing in connection with the future expansion of our operations.
Comparison of Periods Ended
March 31, 2014 and 2013
Net cash used
in operating activities was $11,153 during the three months ended March 31, 2014, as compared to net cash provided by operating
activities of $5,353 during the same period in 2013, resulting from increases in trade accounts receivable of $25,743, decreases
in trade accounts payable of $13,776, offset by reduction in inventories of $22,124. During the first three months of 2014, we
have continued to focus on decreasing inventory and improving inventory turns. However, at this point, we believe that we have
likely reduced inventories to prudent levels relative to sales. We focus on our days’ sales outstanding and our inventory
turnover rate to manage working capital, because accounts receivable and inventory are the two most significant elements of our
working capital.
Our days sales
outstanding increased from 44 days in March 2013 to 51 days in March 2014 attributable to continued expansion of sales in Latin
America, which has longer payment cycles. Our inventory in warehouses, available for delivery to customers, as of March 31, 2014
was approximately 44 days of sales as compared to 52 days as of the same date in 2013. Our inventory turn rate, including materials
in transit, was about 4.7 times as of March 31, 2014 (or 77 days on hand), compared to our March 2013 rate of about 4.1 times
(or 87 days on hand).
The days payable
outstanding decreased to 25 days as of March 31, 2014, as compared to 33 days as of the same date last year. This decrease resulted
from continued managed inventory reduction.
Cash flows
provided by investing activities during the three months ended March 31, 2014 and March 31, 2013, amounted to $822 and $824 respectively,
which reflects the monthly repayment by PT. Alumindo Light Metal Industry of the advance related to our supply agreement with
PT. Alumindo Light Metal Industry.
Cash flows
provided by financing activities during the three months ended March 31, 2014, amounted to $9,561, as compared to cash flows used
in financing activities of $6,643 during the same period in 2013. During the first quarter of 2014, we funded the reduction
in accounts payable with borrowings from our line of credit. In addition, we acquired 3 additional common shares at a cost of
$13 during the period ended March 31, 2014.
Credit
Agreements and Other Debt
On April 28,
2011, we entered into a working capital 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. The $200,000 secured, asset-based credit facility matures on June 30, 2014. The agreement also allows
additional increases in the line of credit of up to $50,000, subject to certain restrictions. Amounts borrowed bear interest of
Eurodollar, money market or base rates, at our option, plus an applicable margin. Our borrowings under this line of credit are
secured by substantially all of our assets. The credit agreement contains financial and other covenants including but not limited
to, covenants requiring maintenance of minimum tangible net worth of $25,000 plus an aggregate amount equal to 25% of our positive
net earnings and compliance with a leverage ratio of not more than 6.00 to 1, as well as an ownership minimum and limitations
on other indebtedness, liens, and investments and dispositions of assets. The credit agreement provides that amounts under the
facility may be borrowed and repaid, and re-borrowed, subject to a borrowing base test, until the maturity date of June 30, 2014. As
of March 31, 2014, we had direct borrowings of $113,000 outstanding under the credit agreement, bearing interest at 2.66%, and
letters of credit of $44,137 to some suppliers, leaving an availability of approximately $42,863 on our credit agreement, or approximately
21%. All of the letters of credit will expire on or before June 30, 2014. As of March 31, 2014, we were in compliance with all
financial covenants under this credit agreement.
Our wholly-owned
Belgian subsidiary, Imbali Metals BVBA (“Imbali”), operates under a line of credit with ING Belgium S.A./N.V., with
a EUR 8,000 ($11,016) commitment for loans and documentary letters of credit. Loan advances are limited to a percentage of Imbali’s
pledged accounts receivables and inventory. This secured credit arrangement is unconditionally guaranteed by us. As of March 31,
2014, Imbali had borrowings of EUR 3,460 ($4,764) under this line of credit, bearing interest at EURIBOR plus 1.75%, leaving an
availability of approximately EUR4,540 ($6,252) or approximately 57%. As of March 31, 2014 we were in compliance with all financial
covenants under this line of credit.
In addition,
we are a party to a mortgage and an interest rate swap that we entered into in 2004 in connection with the purchase of our Baltimore
warehouse. The mortgage loan, which had an outstanding balance of $1,245 at March 31, 2014, requires monthly payments of approximately
$21.6, including interest at LIBOR plus 1.75%, and matures in December 2014. Under the related interest rate swap, which has been
designated as a cash flow hedge and remains effective through the maturity of the mortgage loan, we will pay a monthly fixed interest
rate of 6.37% to the counterparty bank on a notional principal equal to the outstanding principal balance of the mortgage. In
return, the bank will pay us a floating rate, namely, LIBOR, to reset monthly, plus 1.75% on the same notional principal amount.
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. The notes are currently convertible at the option of the holders into shares of common
stock at a conversion rate of 252.15 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
ten adjustments for dividends. In addition, if the last reported sale price of the common stock for 30 consecutive
trading days is equal to or greater than $7.00, and a registration statement is effective covering the resale of the shares of
common stock issuable upon conversion of the notes, we have the right, in our sole discretion, to require the holders to convert
all or part of their notes at the then applicable conversion rate. Interest on the notes is payable in arrears on the
first day of June and December every year the notes are outstanding.
Derivative
Financial Instruments
Inherent in
our business is the risk of matching the timing of our purchase and sales contracts. The prices of the aluminum products we buy
and sell are based on a constantly moving terminal market price determined by the London Metal Exchange. Were we not to hedge
such exposures, we could be exposed to significant losses due to the continually changing aluminum prices.
We use aluminum
futures contracts to manage our exposure to this commodity price risk. It is generally our policy to hedge such risks to the extent
practicable. We enter into hedges to limit our exposure to volatile price fluctuations that we believe would impact our gross
margins on firm purchase and sales commitments. As an example, if we enter into fixed price contracts with our suppliers and variable
priced sales contracts with our customers, we will generally enter into a futures contract to sell the aluminum for future delivery
in the month when the aluminum is to be priced and delivered to the customer and repurchase this position once the pricing has
been fixed with our customer. If the underlying metal price increases, we suffer a hedging loss and have a derivative
liability, but the sales price to the customer is based on a higher market price and offsets the loss. Conversely, if the metal
price decreases, we have a hedging gain and recognize a derivative asset, but the sales price to the customer is based on the
lower market price and offsets the gain.
We also enter
into foreign exchange forward contracts to hedge our exposure related to commitments to purchase or sell metals 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.