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EXCEL - IDEA: XBRL DOCUMENT - METALICO INC | Financial_Report.xls |
EX-32.2 - EX-32.2 - METALICO INC | c66257exv32w2.htm |
EX-31.1 - EX-31.1 - METALICO INC | c66257exv31w1.htm |
EX-31.2 - EX-31.2 - METALICO INC | c66257exv31w2.htm |
EX-32.1 - EX-32.1 - METALICO INC | c66257exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Metalico, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 001-32453 | 52-2169780 | ||
(State or other jurisdiction of incorporation or organization) |
(Commission file number) | (I.R.S. Employer Identification No.) |
186 North Avenue East Cranford, NJ |
07016 | (908) 497-9610 | ||
(Address of Principal Executive Offices) | (Zip Code) | (Registrants Telephone Number) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) YES o NO þ
Number of shares of Common stock, par value $.001, outstanding as of November 2, 2011: 47,460,547
METALICO, INC.
Form 10-Q Quarterly Report
Table of Contents
Form 10-Q Quarterly Report
Table of Contents
1
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
METALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2011 and December 31, 2010
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2011 and December 31, 2010
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | (Note 1) | |||||||
($ thousands) | ||||||||
ASSETS | ||||||||
Current Assets |
||||||||
Cash |
$ | 5,861 | $ | 3,473 | ||||
Trade receivables, less allowance for doubtful accounts 2011- $845 and 2010 - $1,027 |
66,420 | 55,112 | ||||||
Inventories |
80,680 | 73,454 | ||||||
Prepaid expenses and other current assets |
6,701 | 6,276 | ||||||
Income taxes receivable |
| 1,386 | ||||||
Deferred income taxes |
3,405 | 4,004 | ||||||
Total current assets |
163,067 | 143,705 | ||||||
Property and equipment, net |
86,166 | 70,215 | ||||||
Goodwill |
73,012 | 69,605 | ||||||
Other intangible assets, net |
40,910 | 38,871 | ||||||
Other assets, net |
5,645 | 6,111 | ||||||
Total assets |
$ | 368,800 | $ | 328,507 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current Liabilities |
||||||||
Short-term debt |
$ | 6,775 | $ | 7,051 | ||||
Current maturities of other long-term debt |
7,450 | 4,196 | ||||||
Accounts payable |
20,335 | 18,386 | ||||||
Accrued expenses and other current liabilities |
6,681 | 4,561 | ||||||
Income taxes payable |
3,232 | | ||||||
Total current liabilities |
44,473 | 34,194 | ||||||
Long-Term Liabilities |
||||||||
Senior unsecured convertible notes payable |
75,058 | 79,940 | ||||||
Other long-term debt, less current maturities |
41,551 | 34,775 | ||||||
Deferred income taxes |
10,509 | 6,726 | ||||||
Accrued expenses and other long-term liabilities |
2,584 | 5,557 | ||||||
Total long-term liabilities |
129,702 | 126,998 | ||||||
Total liabilities |
174,175 | 161,192 | ||||||
Commitments and Contingencies (Note 12) |
||||||||
Stockholders Equity |
||||||||
Common stock, par value $0.001, authorized shares of 100,000,000; issued and
outstanding shares of 47,454,680 and 46,559,878, respectively |
47 | 46 | ||||||
Additional paid-in capital |
181,911 | 175,094 | ||||||
Retained earnings (accumulated deficit) |
12,982 | (7,510 | ) | |||||
Accumulated other comprehensive loss |
(315 | ) | (315 | ) | ||||
Total stockholders equity |
194,625 | 167,315 | ||||||
Total liabilities and stockholders equity |
$ | 368,800 | $ | 328,507 | ||||
See notes to condensed consolidated financial statements.
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METALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 2011 and 2010
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 2011 and 2010
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Unaudited) | ||||||||||||||||
($ thousands, except per share data) | ||||||||||||||||
Revenue |
$ | 168,728 | $ | 136,956 | $ | 529,187 | $ | 415,610 | ||||||||
Costs and expenses Operating expenses |
151,162 | 118,161 | 461,302 | 356,181 | ||||||||||||
Selling, general, and administrative expenses |
7,222 | 6,294 | 22,190 | 19,939 | ||||||||||||
Depreciation and amortization |
3,830 | 3,450 | 10,796 | 10,086 | ||||||||||||
Gain on insurance recovery |
| (513 | ) | | (513 | ) | ||||||||||
162,214 | 127,392 | 494,288 | 385,693 | |||||||||||||
Operating income |
6,514 | 9,564 | 34,899 | 29,917 | ||||||||||||
Financial and other income (expense) |
||||||||||||||||
Interest expense |
(2,245 | ) | (2,243 | ) | (7,110 | ) | (7,537 | ) | ||||||||
Accelerated amortization and other costs
related to refinancing of senior debt |
| | | (3,046 | ) | |||||||||||
Equity in loss of unconsolidated investee |
(92 | ) | (2 | ) | (130 | ) | (2 | ) | ||||||||
Financial instruments fair value adjustments |
2,480 | 107 | 3,044 | 1,222 | ||||||||||||
Gain on debt extinguishment |
243 | 101 | 243 | 101 | ||||||||||||
Other |
99 | 116 | 127 | 13 | ||||||||||||
485 | (1,921 | ) | (3,826 | ) | (9,249 | ) | ||||||||||
Income before income taxes |
6,999 | 7,643 | 31,073 | 20,668 | ||||||||||||
Provision for federal and state income taxes |
1,915 | 3,150 | 10,581 | 8,243 | ||||||||||||
Net income |
$ | 5,084 | $ | 4,493 | $ | 20,492 | $ | 12,425 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.11 | $ | 0.10 | $ | 0.43 | $ | 0.27 | ||||||||
Diluted |
$ | 0.11 | $ | 0.10 | $ | 0.43 | $ | 0.27 | ||||||||
Weighted Average Common Shares Outstanding: |
||||||||||||||||
Basic |
47,447,823 | 46,449,302 | 47,311,971 | 46,440,380 | ||||||||||||
Diluted |
47,453,916 | 46,449,302 | 47,422,727 | 46,440,380 | ||||||||||||
See notes to condensed consolidated financial statements.
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Table of Contents
METALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2011 and 2010
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2011 and 2010
2011 | 2010 | |||||||
(Unaudited) | ||||||||
($ thousands) | ||||||||
Cash Flows from Operating Activities |
||||||||
Net income |
$ | 20,492 | $ | 12,425 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating
activities: |
||||||||
Depreciation and amortization |
11,748 | 10,924 | ||||||
Deferred income tax provision (benefit) |
1,478 | (221 | ) | |||||
Provision for doubtful accounts receivable |
30 | 350 | ||||||
Provision for loss on vendor advances |
158 | | ||||||
Financial instruments fair value adjustments |
(3,044 | ) | (1,222 | ) | ||||
Gain on disposal of property and equipment |
(285 | ) | (724 | ) | ||||
Gain on debt extinguishment |
(243 | ) | (101 | ) | ||||
Equity in loss of unconsolidated investee |
130 | 2 | ||||||
Stock-based compensation expense |
1,727 | 2,129 | ||||||
Excess tax benefit from stock-based compensation |
59 | | ||||||
Deferred financing costs expensed |
| 2,107 | ||||||
Change in assets and liabilities, net of acquisitions: |
||||||||
(Increase) decrease in: |
||||||||
Trade receivables |
(8,814 | ) | (28,532 | ) | ||||
Inventories |
(6,016 | ) | (8,642 | ) | ||||
Income taxes receivable, prepaid expenses and other |
876 | 4,648 | ||||||
Increase in: |
||||||||
Accounts payable, accrued expenses, income taxes payable and other liabilities |
4,928 | 1,717 | ||||||
Net cash provided by (used in) operating activities |
23,224 | (5,140 | ) | |||||
Cash Flows from Investing Activities |
||||||||
Proceeds from sale of property and equipment |
564 | 617 | ||||||
Purchase of property and equipment |
(18,700 | ) | (4,308 | ) | ||||
Cash paid for business acquisition, less cash acquired |
(1,844 | ) | | |||||
Increase in other assets |
(313 | ) | (384 | ) | ||||
Net cash used in investing activities |
(20,293 | ) | (4,075 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Net (payments) borrowings under revolving lines-of-credit |
(1,376 | ) | 4,114 | |||||
Proceeds from other borrowings |
9,421 | 9,068 | ||||||
Principal payments on other borrowings |
(8,855 | ) | (3,385 | ) | ||||
Debt issuance costs paid |
(196 | ) | (1,273 | ) | ||||
Excess tax benefit from stock-based compensation |
(59 | ) | | |||||
Proceeds from issuance of common stock on exercised options |
522 | 74 | ||||||
Net cash (used in) provided by financing activities |
(543 | ) | 8,598 | |||||
Net increase (decrease) in cash and cash equivalents |
2,388 | (617 | ) | |||||
Cash: |
||||||||
Beginning of period |
3,473 | 4,938 | ||||||
End of period |
$ | 5,861 | $ | 4,321 | ||||
See notes to condensed consolidated financial statements.
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METALICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ thousands, except share and per share data)
(Unaudited)
($ thousands, except share and per share data)
(Unaudited)
Note 1 General
Business
Metalico Inc. and subsidiaries (the Company) operates in three distinct business segments:
(a) ferrous and non-ferrous scrap metal recycling (Scrap Metal Recycling), (b) platinum group and
minor metals recycling (PGM and Minor Metals Recycling), and (c) lead metal product fabricating
(Lead Fabricating). Our operating facilities include twenty scrap metal recycling facilities,
including a combined aluminum de-oxidizing plant, six PGM and Minor Metal Recycling facilities and
four lead product manufacturing and fabricating plants.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the
SEC). All significant intercompany accounts, transactions and profits have been eliminated.
Certain information related to the Companys organization, significant accounting policies and
footnote disclosures normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. These unaudited condensed
consolidated financial statements reflect, in the opinion of management, all material adjustments
(which include only normal recurring adjustments) necessary to fairly state the financial position
and results of operations for the periods presented.
Operating results for the interim periods are not necessarily indicative of the results that
can be expected for a full year. These interim financial statements should be read in conjunction
with the Companys audited consolidated financial statements and notes thereto for the year ended
December 31, 2010, included in the Companys Annual Report on Form 10-K as filed with the SEC. The
accompanying condensed consolidated balance sheet as of December 31, 2010 has been derived from the
audited balance sheet as of that date included in the Form 10-K
Reclassifications: Effective January 1, 2011, the Company has identified PGM and Minor Metals
Recycling as a new reportable segment previously grouped in the Scrap Metal Recycling segment.
Certain balance sheet and operating details about the PGM and Minor Metals segment have been
reported in Note 5 Goodwill and Other Intangibles and Note 13 Segment Reporting. As such,
previous year information reported has been adjusted to reflect comparative data.
Effective January 1, 2011, the Company has also reclassified discontinued operations into
other income (expense) on the Consolidated Statement of Operations for the three and nine months
ended September 30, 2010 as reportable amounts were deemed immaterial for the previous and current
year.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update 2011-08, Testing Goodwill for Impairment, (ASU 2011-08), which amends the
guidance in Accounting Standards Codification (ASC) 350-20, Intangibles Goodwill and Other
Goodwill. Under ASU 2011-08, entities have the option of performing a qualitative assessment before
calculating the fair value of their reporting units when testing goodwill for impairment. If the
fair value of the reporting unit is determined, based on qualitative factors, to be more likely
than not less than the carrying amount of the reporting unit, then entities are required to perform
the two-step goodwill impairment test. An entity also has the unconditional option to bypass the
qualitative assessment and proceed directly to performing the first step of the goodwill impairment
test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011. We are currently evaluating the impact this
guidance may have on our goodwill impairment testing.
In September 2011, the FASB amended its guidance regarding the disclosure requirements for
employers participating in multiemployer pension and other postretirement benefit plans
(multiemployer plans) to improve
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transparency and increase awareness of the commitments and risks
involved with participation in multiemployer plans.
The new accounting guidance requires employers participating in multiemployer plans to provide
additional quantitative and qualitative disclosures to provide users with more detailed information
regarding an employers involvement in multiemployer plans. The provisions of this new guidance are
effective for annual periods beginning with fiscal years ending after December 15, 2011, with early
adoption permitted. The Company does not participate in any multiemployer plans and determined that
there is no impact to our financial statements.
Note 2 Business Acquisition and Capital Expenditures
Business acquisition (scrap metal recycling segment): On January 31, 2011, the Company
acquired 100% of the outstanding capital stock of Goodman Services, Inc., a Bradford,
Pennsylvania-based full service recycling company with additional operations in Jamestown, New York
and Canton, Ohio. The acquisition is consistent with the Companys expansion strategy of
penetrating geographically contiguous markets and benefiting from intercompany and operating
synergies that are available through consolidation. The purchase price included cash and Metalico
common stock among other items of consideration. The financial statements include a preliminary
purchase price allocation. Funding for the acquisition included a drawdown under the Companys
Credit Agreement. As part of the purchase price for the acquisition, the Company issued 782,763
shares of its common stock, par value $0.001 per share having an aggregate value to the sellers of
$4,391 determined at a price per share of $5.61. Unaudited pro forma results are not presented as
they are not material to the Companys overall consolidated financial statements.
Capital Expenditures: On February 18, 2011, the Company purchased a 44-acre parcel of land,
including a 177,500-square-foot building, in suburban Buffalo to house an indoor scrap metal
shredder. The installation will include a new state-of-the-art downstream separation system to
maximize the recovery of valuable non-ferrous products. The Company expects to make a capital
investment of more than $10 million for the acquisition of the property, plant and support
equipment and related improvements for the shredder project. The Company will use proceeds from the
Credit Agreement and available cash to fund the expenditures. The facility is expected to be
operational by the end of 2011.
Note 3 Major Customer
Revenues for the three and nine months ended September 30, 2011 and 2010, include revenue from
net sales to a particular customer of our PGM and Minor Metals Recycling segment (which at times
has accounted for 10% or more of the total revenue of the Company), together with trade receivables
due from such customer as of September 30, 2011 and December 31, 2010.
Net sales to Customer | ||||||||||||||||||||||||
as a percentage of Total Revenues | Trade Receivable Balance as of | |||||||||||||||||||||||
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | September 30, | December 31, | |||||||||||||||||||
September 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | 2011 | 2010 | |||||||||||||||||||
Customer A |
15% | 19% | 18% | 22% | $ | 1,611 | $ | 7,994 |
Note 4 Inventories
Inventories as of September 30, 2011 and December 31, 2010 were as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Raw materials |
$ | 6,139 | $ | 8,125 | ||||
Work-in-process |
4,041 | 3,927 | ||||||
Finished goods |
8,353 | 6,735 | ||||||
Ferrous scrap metal |
27,705 | 24,093 | ||||||
Non-ferrous scrap metal |
34,442 | 30,574 | ||||||
$ | 80,680 | $ | 73,454 | |||||
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Note 5 Goodwill and Other Intangibles
The Companys goodwill resides in multiple reporting units. The carrying amount of goodwill
and indefinite-lived intangible assets are tested annually as of December 31 or whenever events or
circumstances indicate that impairment may have occurred. No indicators of impairment were
identified for the nine months ended September 30, 2011. Changes in the carrying amount of
goodwill, by segment for the nine months ended September 30, 2011 were as follows:
Scrap Metal | PGM and Minor Metal | Lead | ||||||||||||||
Recycling | Recycling | Fabricating | Consolidated | |||||||||||||
December 31, 2010 |
$ | 39,585 | $ | 24,652 | $ | 5,368 | $ | 69,605 | ||||||||
Acquisitions/additions
during the period |
3,407 | | | 3,407 | ||||||||||||
September 30, 2011 |
$ | 42,992 | $ | 24,652 | $ | 5,368 | $ | 73,012 | ||||||||
The Company tests all finite-lived intangible assets and other long-lived assets, such as
property and equipment, for impairment only if circumstances indicate that possible impairment
exists. Estimated useful lives of intangible assets are determined by reference to both contractual
arrangements such as non-compete covenants and current and projected cash flows for supplier and
customer lists. At September 30, 2011, no adjustments were made to the estimated lives of
finite-lived assets. Other intangible assets as of September 30, 2011 and December 31, 2010
consisted of the following:
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
September 30, 2011 |
||||||||||||
Covenants not-to-compete |
$ | 4,106 | $ | (791 | ) | $ | 3,315 | |||||
Trademarks and tradenames |
6,075 | | 6,075 | |||||||||
Supplier relationships |
39,130 | (8,015 | ) | 31,115 | ||||||||
Know-how |
397 | | 397 | |||||||||
Patents and databases |
94 | (86 | ) | 8 | ||||||||
$ | 49,802 | $ | (8,892 | ) | $ | 40,910 | ||||||
December 31, 2010 |
||||||||||||
Covenants not-to-compete |
$ | 4,310 | $ | (3,120 | ) | $ | 1,190 | |||||
Trademarks and tradenames |
6,075 | | 6,075 | |||||||||
Supplier relationships |
37,500 | (6,322 | ) | 31,178 | ||||||||
Know-how |
397 | | 397 | |||||||||
Patents and databases |
94 | (63 | ) | 31 | ||||||||
$ | 48,376 | $ | (9,505 | ) | $ | 38,871 | ||||||
The changes in the net carrying amount of amortizable intangible assets by classifications for
the nine months ended September 30, 2011 were as follows:
Covenants | ||||||||||||
Not-to- | Supplier | Patents and | ||||||||||
Compete | Relationships | Databases | ||||||||||
Balance, December 31, 2010 |
$ | 1,190 | $ | 31,178 | $ | 31 | ||||||
Acquisitions/additions |
2,427 | 1,630 | | |||||||||
Amortization |
(302 | ) | (1,693 | ) | (23 | ) | ||||||
Balance, September 30, 2011 |
$ | 3,315 | $ | 31,115 | $ | 8 | ||||||
Amortization expense on finite-lived intangible assets for the three and nine months ended
September 30, 2011 was $682 and $2,018, respectively. Amortization expense on finite-lived
intangible assets for the three and nine months ended September 30, 2010 was $704 and $2,121,
respectively. Estimated aggregate amortization expense on amortizable intangible and other assets
for each of the periods listed below is as follows:
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Years Ending December 31: | Amount | |||
Remainder of 2011 |
$ | 810 | ||
2012 |
2,823 | |||
2013 |
2,948 | |||
2014 |
2,885 | |||
2015 |
2,883 | |||
Thereafter |
22,089 | |||
$ | 34,438 | |||
Note 6 Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of September 30, 2011 and December 31, 2010
consisted of the following:
September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
Current | Long-Term | Total | Current | Long-Term | Total | |||||||||||||||||||
Environmental monitoring and response costs |
$ | 183 | $ | 1,348 | $ | 1,531 | $ | 216 | $ | 1,348 | $ | 1,564 | ||||||||||||
Payroll and employee benefits |
3,590 | 424 | 4,014 | 1,194 | 424 | 1,618 | ||||||||||||||||||
Interest and bank fees |
1,026 | | 1,026 | 1,134 | | 1,134 | ||||||||||||||||||
Put warrant liability |
| 741 | 741 | | 3,785 | 3,785 | ||||||||||||||||||
Other |
1,882 | 71 | 1,953 | 2,017 | | 2,017 | ||||||||||||||||||
$ | 6,681 | $ | 2,584 | $ | 9,265 | $ | 4,561 | $ | 5,557 | $ | 10,118 | |||||||||||||
Note 7 Stock Options and Stock-Based Compensation
Stock-based compensation expense was $427 and $683 for the three months ended September 30,
2011 and 2010, respectively, and $1,727 and $2,129 for the nine months ended September 30, 2011 and
2010, respectively. Compensation expense is recognized on a straight-line basis over the employees
vesting period.
The fair value of the stock options granted in the nine months ended September 30, 2011 and
2010 was estimated on the date of the grant using a Black-Scholes option-pricing model that uses
the assumptions noted in the following table.
Black-Scholes Valuation Assumptions (1) | September 30, 2011 | September 30, 2010 | ||||||
Weighted average expected life (in years) (2) |
5.0 | 5.0 | ||||||
Weighted average expected volatility (3) |
84.12 | % | 84.23 | % | ||||
Weighted average risk free interest rates (4) |
2.13 | % | 1.59 | % | ||||
Expected dividend yield |
| |
(1) | Forfeitures are estimated based on historical experience. | |
(2) | The expected life of stock options is estimated based on historical experience. | |
(3) | Expected volatility is based on the average of historical volatility. The historical volatility is determined by observing actual prices of the Companys stock over a period commensurate with the expected life of the awards. | |
(4) | Based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options. |
Changes in the Companys stock options for the nine months ended September 30, 2011 were
as follows:
Number of | Weighted Average | |||||||
Stock Options | Exercise Price | |||||||
Options outstanding, beginning of period |
2,350,993 | $ | 7.19 | |||||
Granted |
87,500 | $ | 5.91 | |||||
Exercised |
(104,039 | ) | $ | 5.02 | ||||
Forfeited or expired |
(128,610 | ) | $ | 6.47 | ||||
Options outstanding, end of period |
2,205,844 | $ | 7.28 | |||||
Options exercisable, end of period |
1,633,711 | $ | 8.46 | |||||
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The weighted average fair value for the stock options granted during the nine months ended
September 30, 2011 was $4.15. The weighted average remaining contractual term and the aggregate
intrinsic value of options outstanding as of September 30, 2011 was 2.6 years and $202,
respectively. The weighted average remaining contractual term and the aggregate intrinsic value of
options exercisable as of September 30, 2011 was 2.2 years and $76, respectively.
The weighted average fair value for the stock options granted during the nine months ended
September 30, 2010 was $2.53. The weighted average remaining contractual term and the aggregate
intrinsic value of options outstanding as of September 30, 2010 was 3.2 years and $254,
respectively. The weighted average remaining contractual term and the aggregate intrinsic value of
options exercisable as of September 30, 2010 was 2.4 years and $100, respectively.
The total intrinsic value of stock options exercised during the nine months ended September
30, 2011 and 2010 was $92 and $37, respectively.
On April 19, 2011, the Company granted 247,800 shares of deferred common stock to employees
with a fair value of $5.37 per share. The stock will vest annually over a three year period.
One-third of the granted shares will be issued to eligible employees on each annual vesting date.
The Company will recognize compensation expense ratably over the three year period. The first
annual vesting date will occur on March 1, 2012. At September 30, 2011, all 247,800 shares remained
unvested and unissued.
On June 1, 2010, the Company granted 7,500 shares of restricted common stock to a Company
employee with a fair value of $4.78 per share. The shares vest quarterly over a three-year period.
At September 30, 2011, there were 3,750 restricted shares remaining unvested with a grant date fair
value of $4.78 per share of which 625 shares with a weighted average grant date fair value of $4.78
per share are expected to vest by December 31, 2011.
As of September 30, 2011, total unrecognized stock-based compensation expense related to stock
options, restricted stock, and deferred stock was $1,445; $18 and $1,011, respectively, which is
expected to be recognized over a weighted average period of 1.5 years; 1.8 years and 2.5 years,
respectively.
Note 8 Short and Long-Term Debt
On March 2, 2010, the Company entered into a Credit Agreement dated as of February 26, 2010
(the Credit Agreement) with a syndicate of lenders led by JPMorgan Chase Bank, N.A and including
RBS Business Capital and Capital One Leverage Finance Corp. The three-year facility consisted of
senior secured credit facilities in the aggregate amount of $65,000, including a $57,000 revolving
line of credit (the Revolver) and an $8,000 machinery and equipment term loan facility (Initial
Term Loan). The Revolver provides for revolving loans which, in the aggregate, were not to exceed
the lesser of $57,000 or a Borrowing Base amount based on specified percentages of eligible
accounts receivable and inventory and bears interest at the Base Rate (a rate determined by
reference to the prime rate) plus 1.25% or, at the Companys election, the current LIBOR rate plus
3.5% (reduced to 3.25% per the Second Amendment described below). The Initial Term Loan bears
interest at the Base Rate plus 2% or, at the Companys election, the current LIBOR rate plus 4.25%
(reduced to 3.75% per the Second Amendment described below). Under the Credit Agreement, the
Company is subject to certain operating covenants and is restricted from, among other things,
paying cash dividends, repurchasing its common stock over certain stated thresholds, and entering
into certain transactions without the prior consent of the lenders. In addition, the Credit
Agreement contains certain financial covenants, including minimum EBITDA, minimum fixed charge
coverage ratios, and maximum capital expenditures covenants. Obligations under the Credit Agreement
are secured by substantially all of the Companys assets other than real property, which is subject
to a negative pledge. The proceeds of the Credit Agreement are used for present and future
acquisitions, working capital, and general corporate purposes.
On January 27, 2011, the Company entered into a Second Amendment (the Amendment) to the
Credit Agreement. The Amendment provided for an increase in the maximum amount available under the
Credit Agreement to $85,000, including $70,000 under the Revolver (up from $57,000) and an
additional term loan (Term Loan I) to be available in multiple draws in the aggregate amount of
$9,000 earmarked for capital expenditures, primarily the shredder project in suburban Buffalo, New
York. The original term loan funded at the closing of the Credit Agreement continues to amortize.
The Amendment increases the advance rate for inventory under the Revolvers borrowing base formula.
LIBOR-based interest rates have been reduced to the current LIBOR rate plus 3.25% (an effective
rate of 3.76% as of September 30, 2011) for revolving loans and the current LIBOR rate plus 3.75%
(an effective rate of 4.16% as of September 30, 2011) for term loans. Term Loan I bears interest at
the LIBOR Rate plus 3.75% (an effective rate of
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4.15% as of September 30, 2011). The Amendment also adjusted the definition of Fixed Charges
and several covenants, allowing for increases in permitted indebtedness, capital expenditures, and
permitted acquisition baskets and extends the Credit Agreements maturity date from March 1, 2013
to January 23, 2014. The remaining material terms of the Credit Agreement remain unchanged by the
Amendment. As of September 30, 2011, the Revolver had $33,890 available for borrowing and $2,233
outstanding letters of credit. The outstanding balance under the Credit Agreement at September 30,
2011 and December 31, 2010 was $42,769 and $41,253, respectively.
Listed below are the material debt covenants as prescribed by the Credit Agreement. As of
September 30, 2011, the Company was in compliance with such covenants.
Fixed Charge Coverage Ratio trailing twelve month period ended on September 30, 2011 must
not be less than covenant.
Covenant |
1:1 to 1:0 | |||
Actual |
1.7 to 1:0 |
Year 2011 Capital Expenditures Year 2011 annual capital expenditures must not exceed covenant
Covenant |
$ | 22,000 | ||
Actual year to date |
$ | 18,700 |
Senior Unsecured Notes Payable:
On April 23, 2008, the Company entered into a Securities Purchase Agreement with
accredited investors (Note Purchasers) which provided for the sale of $100 million of Senior
Unsecured Convertible Notes (the Notes) convertible into shares of the Companys common stock
(Note Shares). The Notes are convertible to common stock at all times. The initial and current
conversion price of the Notes is $14.00 per share. The Notes bear interest at 7% per annum, payable
in cash, and will mature in April 2028. In addition, the Notes contain (i) an optional repurchase
right exercisable by the Note Purchasers on the sixth, eighth and twelfth anniversary of the date
of issuance of the Notes, whereby each Note Purchaser will have the right to require the Company to
redeem the Notes at par and (ii) an optional redemption right exercisable by the Company beginning
on May 1, 2011, the third anniversary of the date of issuance of the Notes, and ending on the day
immediately prior to the sixth anniversary of the date of issuance of the Notes, whereby the
Company shall have the option but not the obligation to redeem the Notes at a redemption price
equal to 150% of the principal amount of the Notes to be redeemed plus any accrued and unpaid
interest thereon, limited to 30% of the aggregate principal amount of the Notes as of the issuance
date, and from and after the sixth anniversary of the date of issuance of the Notes, the Company
shall have the option to redeem any or all of the Notes at a redemption price equal to 100% of the
principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon.
The Notes also contain (i) certain repurchase requirements upon a change of control, (ii)
make-whole provisions upon a change of control, (iii) weighted average anti-dilution protection,
subject to certain exceptions, (iv) an interest make-whole provision in the event that the Note
Purchasers are forced to convert their Notes between the third and sixth anniversary of the date of
issuance of the Notes whereby the Note Purchasers would receive the present value (using a 3.5%
discount rate) of the interest they would have earned had their Notes so converted been outstanding
from such forced conversion date through the sixth anniversaries of the date of issuance of the
Notes, and (v) a debt incurrence covenant which limits the ability of the Company to incur debt,
under certain circumstances.
Listed below is the material debt covenant as prescribed by the Notes. As of September 30,
2011, the Company was in compliance with such covenant.
Consolidated Funded Indebtedness to trailing twelve month EBITDA must not exceed covenant,
Covenant |
3.5 to 1.0 | |||
Actual |
0.9 to 1.0 |
In connection with the convertible note issuance described above, the Note Purchasers
also received a total of 250,000 warrants (Put Warrants) for shares of the Companys common stock
at an exercise price of $14.00 per share (subject to adjustment) with a term of six years. The
initial fair value of the put warrants was $1,652 which was recorded as a debt discount and is
being amortized over the life of the Notes. At September 30, 2011 and December 31, 2010, the
unamortized discount was $1,052 and $1,170, respectively. In the event of a change of control, at
the request of the Note Purchaser delivered before the ninetieth (90th) day after the consummation
of such change in control, the Company (or
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its successor entity) shall purchase the Put Warrants from the holder by paying the holder,
within five (5) business days of such request (or, if later, on the effective date of the change of
control), cash in an amount equal to the Black-Scholes Value of the remaining unexercised portion
of the Put Warrant on the date of such change of control.
On September 28, 2011, the Company repurchased convertible notes totaling $5,000 for $4,463
using proceeds of the Revolver described above resulting in a gain of $243 net of $68 in
unamortized warrant discount and $226 in unamortized deferred financing costs.
As of September 30, 2011 and December 31, 2010, the outstanding balance on the Notes was
$75,058 and $79,940, respectively (net of $1,052 and $1,170, respectively in unamortized discount
related to the original fair value warrants issued with the Notes).
Aggregate annual maturities, excluding discounts, required on all debt outstanding as of
September 30, 2011, are as follows:
Twelve months ending September 30: | Amount | |||
2012 |
$ | 14,225 | ||
2013 |
5,738 | |||
2014 |
107,579 | |||
2015 |
2,255 | |||
2016 |
1,347 | |||
Thereafter |
742 | |||
$ | 131,886 | |||
Note 9 Stockholders Equity
A reconciliation of the activity in Stockholders Equity accounts for the nine months ended
September 30, 2011 is as follows:
Retained Earnings/ | ||||||||||||||||||||
Common | Additional | (Accumulated | Accumulated Other | Total Stockholders | ||||||||||||||||
Stock | Paid-in Capital | Deficit) | Comprehensive Loss | Equity | ||||||||||||||||
Balance December 31, 2010 |
$ | 46 | $ | 175,094 | $ | (7,510 | ) | $ | (315 | ) | $ | 167,315 | ||||||||
Net income |
| | 20,492 | | 20,492 | |||||||||||||||
Issuance of 104,039
shares of common stock in
exchange for options
exercised |
| 522 | | | 522 | |||||||||||||||
Stock-based compensation
expense, net of deferred
tax effect |
| 1,668 | | | 1,668 | |||||||||||||||
Issuance of 782,763
shares of common stock
for acquisition, net of
issuance costs |
1 | 4,627 | | | 4,628 | |||||||||||||||
Balance September 30, 2011 |
$ | 47 | $ | 181,911 | $ | 12,982 | $ | (315 | ) | $ | 194,625 | |||||||||
Comprehensive income for the three months ended September 30, 2011 and 2010 was $5,084
and $4,493, comprised entirely of net income.
Comprehensive income for the nine months ended September 30, 2011 was $20,492, comprised
entirely of net income. Comprehensive income for the nine months ended September 30, 2010 was
$12,797, representing net income of $12,425, plus the effect of a terminated interest rate swap
contract of $372.
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Note 10 Statements of Cash Flows Information
The following describes the Companys noncash investing and financing activities:
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, 2011 | September 30, 2010 | |||||||
Issuance of common stock for business acquisitions (see Note 2) |
$ | 4,391 | $ | | ||||
Issuance of short and long-term debt for business acquisition |
4,964 | | ||||||
Repayment of debt with new borrowings |
| 44,109 | ||||||
Trade-in allowances on new equipment purchases |
87 | 504 | ||||||
Reduction of seller note payable on settlement of final working
capital receivable |
125 | 350 |
The Company paid $6,548 and $7,022 in cash for interest expense in the nine months ended
September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011, the
Company made cash income tax payments of $4,701 and received cash refunds of $217. For the nine
months ended September 30, 2010, the Company made cash income tax payments of $4,639 and received
cash refunds of $1,333.
Note 11 Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted average
common shares outstanding. Diluted EPS reflects the potential dilution that could occur from the
exercise of stock options and warrants which are accounted for under the treasury stock method and
convertible notes which are accounted for under the if-converted method. Following is information
about the computation of EPS for the three and nine months ended September 30, 2011 and 2010 ($,
thousands, except share data).
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | |||||||||||||||||||||||
Income | Shares | Per Share | Income | Shares | Per Share | |||||||||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | |||||||||||||||||||
Basic EPS |
||||||||||||||||||||||||
Net income |
$ | 5,084 | 47,447,823 | $ | 0.11 | $ | 4,491 | 46,449,302 | $ | 0.10 | ||||||||||||||
Effect of Dilutive Securities |
||||||||||||||||||||||||
Deferred common stock |
| 6,093 | | | ||||||||||||||||||||
Stock options |
| | | | ||||||||||||||||||||
Diluted EPS |
||||||||||||||||||||||||
Net income |
$ | 5,084 | 47,453,916 | $ | 0.11 | $ | 4,491 | 46,449,302 | $ | 0.10 | ||||||||||||||
The Company excludes stock options, warrants and convertible notes with exercise or
conversion prices that are greater than the average market price from the calculation of diluted
EPS because their effect would be anti-dilutive. For the three months ended September 30, 2011,
there were 2,218,071 options, 1,419,231 warrants and 5,785,797 shares issuable upon conversion of
convertible notes excluded from the computation of diluted EPS because their effect would have been
anti-dilutive. For the three months ended September 30, 2010, there were 2,197,669 options,
1,424,231 warrants and 5,815,344 shares issuable upon conversion of convertible notes were excluded
in the computation of diluted EPS because their effect would have been anti-dilutive.
Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | |||||||||||||||||||||||
Income | Shares | Per Share | Income | Shares | Per Share | |||||||||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | |||||||||||||||||||
Basic EPS |
||||||||||||||||||||||||
Net income |
$ | 20,492 | 47,311,971 | $ | 0.43 | $ | 12,425 | 46,440,380 | $ | 0.27 | ||||||||||||||
Effect of Dilutive Securities |
||||||||||||||||||||||||
Deferred common stock |
| 28,843 | | | ||||||||||||||||||||
Stock options |
| 81,913 | | | ||||||||||||||||||||
Diluted EPS |
||||||||||||||||||||||||
Net income |
$ | 20,492 | 47,422,727 | $ | 0.43 | $ | 12,425 | 46,440,380 | $ | 0.27 | ||||||||||||||
The Company excludes stock options, warrants and convertible notes with exercise or
conversion prices that are greater than the average market price from the calculation of diluted
EPS because their effect would be anti-dilutive. For the nine months ended September 30, 2011,
there were 2,196,448 options, 1,419,231 warrants and 5,790,944 shares issuable upon conversion of
convertible notes excluded from the computation of diluted EPS because their effect would have been
anti-dilutive. For the nine months ended September 30, 2010, there were 2,026,455 options,
1,424,231 warrants and 5,824,610 shares issuable upon conversion of convertible notes were excluded
in the computation of diluted net income per share because their effect would have been
anti-dilutive.
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Note 12 Commitments and Contingencies
Environmental Remediation Matters
The Companys General Smelting & Refining, Inc. (GSR) and Metalico-College Grove, Inc.
(MCG) subsidiaries formerly conducted secondary lead smelting and refining operations in
Tennessee. Operations ceased at GSR in December 1998 and at MCG in 2003.
For the GSR site, as of September 30, 2011 and December 31, 2010, estimated remaining
environmental monitoring costs reported as a component of accrued expenses were $979 and $1,006,
respectively. Of the $979 accrued as of September 30, 2011, $140 is reported as a current liability
and the remaining $839 is estimated to be paid as follows: $131 from 2012 through 2014 and $708
thereafter. These costs include the post-closure monitoring and maintenance of the landfills at the
former GSR facility. While changing environmental regulations might alter the accrued costs,
management does not currently anticipate a material adverse effect on estimated accrued costs.
The Company does not carry, and does not expect to carry for the foreseeable future,
significant insurance coverage for environmental liability because the Company believes that the
cost for such insurance is not economical. Accordingly, if the Company were to incur liability for
environmental damage in excess of accrued environmental remediation liabilities, its financial
position, results of operations, and cash flows could be materially adversely affected. The Company
and its subsidiaries are at this time in material compliance with all of their pending remediation
obligations.
Employee Matters
As of September 30, 2011, approximately 10% of the Companys workforce was covered by
collective bargaining agreements at two of the Companys operating facilities. Fifty-seven
employees located at the Companys Lead Fabricating facility in Granite City, Illinois were
represented by the United Steelworkers of America and twenty-three employees located at the scrap
processing facility in Akron, Ohio were represented by the Chicago and Midwest Regional Joint
Board. On May 9, 2011, the Company ratified a new three-year agreement with the United Steelworkers
of America which will expire on March 15, 2014. On July 8, 2011, the Company ratified a new
three-year agreement with the Regional Joint Board which will expire on June 25, 2014.
Other Matters
The Company is involved in certain other legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such other proceedings
and litigation will not materially affect the Companys financial position, results of operations,
or cash flows.
Note 13 Segment Reporting
Effective January 1, 2011, the Company has defined three reportable segments: Scrap Metal
Recycling, PGM and Minor Metals Recycling and Lead Fabricating. The component operations of the PGM
and Minor Metals Recycling segment were previously reported under the Scrap Metal Recycling segment
for the three and nine months ended September 30, 2010 and the information reported below has been
adjusted to reflect comparative information. The segments are distinguishable by the nature of
their operations and the types of products sold. Corporate and Other includes the cost of providing
and maintaining corporate headquarters functions, including salaries, rent, legal, accounting,
travel and entertainment expenses, depreciation, utility costs, outside services and interest cost
other than direct equipment financing and income (loss) from equity investments. Listed below is
financial data as of or for the three and nine months ended September 30, 2011 and 2010 for these
segments:
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PGM and Minor | ||||||||||||||||||||
Scrap Metal | Metals | Corporate | ||||||||||||||||||
Recycling | Recycling | Lead Fabricating | and Other | Consolidated | ||||||||||||||||
For the three months ended September 30, 2011 | ||||||||||||||||||||
Revenues from external customers |
$ | 97,294 | $ | 50,729 | $ | 20,705 | $ | | $ | 168,728 | ||||||||||
Operating income (loss) |
4,223 | 1,596 | 854 | (159 | ) | 6,514 | ||||||||||||||
For the three months ended September 30, 2010 | ||||||||||||||||||||
Revenues from external customers |
$ | 79,133 | $ | 41,163 | $ | 16,660 | $ | | $ | 136,956 | ||||||||||
Operating income |
6,450 | 2,031 | 1,068 | 15 | 9,564 |
PGM and Minor | ||||||||||||||||||||
Scrap Metal | Metals | Corporate | ||||||||||||||||||
Recycling | Recycling | Lead Fabricating | and Other | Consolidated | ||||||||||||||||
As of and for the nine months ended September 30, 2011 | ||||||||||||||||||||
Revenues from external customers |
$ | 313,251 | $ | 157,360 | $ | 58,576 | $ | | $ | 529,187 | ||||||||||
Operating income (loss) |
25,466 | 8,113 | 2,459 | (1,139 | ) | 34,899 | ||||||||||||||
Total assets |
238,581 | 76,550 | 44,268 | 9,401 | 368,800 |
As of and for the nine months ended September 30, 2010 | ||||||||||||||||||||
Revenues from external customers |
$ | 229,234 | $ | 137,306 | $ | 49,070 | $ | | $ | 415,610 | ||||||||||
Operating income (loss) |
21,322 | 8,544 | 680 | (629 | ) | 29,917 | ||||||||||||||
Total assets |
205,189 | 66,474 | 38,408 | 11,249 | 321,320 |
Note 14 Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state
income tax examinations by tax authorities for years before 2007. The Companys interim period
income tax provisions (benefits) are recognized based upon projected effective income tax rates for
the fiscal year in its entirety and, therefore, requires management to make estimates of future
income, expense and differences between financial accounting and income tax requirements in the
jurisdictions in which the Company is taxed. The Companys effective income tax rate for the three
and nine months ended September 30, 2011 was 27% and 34%, respectively. The effective rate may differ from the blended expected
statutory income tax rate of 39% due to permanent differences between income for tax purposes and
income for book purposes. The Companys permanent differences include fair value adjustments to
financial instruments, certain stock-based compensation, Domestic Production Activities Deduction,
amortization of certain intangibles and certain other non-deductible expenses.
Note 15 Financial Instruments Liabilities
In connection with the $100,000 of Notes issued on April 23, 2008, the Company issued 250,000
Put Warrants. The Company also issued 1,169,231 Put Warrants in connection with the issuance of
common stock on March 27, 2008. These warrants are free-standing financial instruments which, upon
a change in control of the Company, may require the Company to repurchase the warrants at their
then-current fair market value. Accordingly, the warrants are accounted for as long-term
liabilities and marked-to-market each balance sheet date with a charge or credit to Financial
instruments fair value adjustments in the statements of operations.
At September 30, 2011 and December 31, 2010, the estimated fair value of warrants outstanding
on those dates was $741 and $3,785, respectively. The change in fair value of the Put Warrants
resulted in income of $2,480 and $3,044 for the three and nine months ended September 30, 2011. The
change in fair value of the Put Warrants resulted in income of $107 and $1,222 for the three and
nine months ended September 30, 2010.
The recorded liability as described above would only require cash settlement in the case of a
change in control, as defined in the warrants, during the term of the warrants. Any recorded
liability existing at the date of exercise or expiration would be reclassified as an increase in
additional paid-in capital.
Note 16 Fair Value Disclosure
ASC Topic 820 Fair Value Measurements and Disclosures (ASC Topic 820) requires disclosure
of fair value information about financial instruments, whether or not recognized in the balance
sheet, for which it is practicable to estimate the value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated
14
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by comparison to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument.
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents, trade receivables, accounts payable and accrued expenses: The
carrying amounts approximate the fair value due to the short maturity of these instruments.
Notes payable and long-term debt: The carrying amount is estimated to approximate fair value
because the interest rates fluctuate with market interest rates or the fixed rates are based on
estimated current rates offered to the Company for debt with similar terms and maturities. The
Company has determined that the fair value of its 7% Notes is unascertainable due to the lack of
public trading market and the inability to currently obtain financing with similar terms in the
current economic environment. The Notes are included in the balance sheet as of September 30, 2011
at $75,058 which is net of unamortized discount of $1,052. The Notes bear interest at 7% per annum,
payable in cash, and will mature in April 2028.
Put Warrants: The carrying amounts are equal to fair value based upon the Black-Scholes option
pricing method.
Other assets and liabilities of the Company that are not defined as financial instruments are
not included in the above disclosures, such as property and equipment. Also, non-financial
instruments typically not recognized in financial statements nevertheless may have value but are
not included in the above disclosures. These include, among other items, the trained work force,
customer goodwill and similar items.
Effective January 1, 2008, the Company adopted new provisions of ASC Topic 820. ASC Topic 820
clarifies that fair value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants.
Under ASC Topic 820, fair value measurements are not adjusted for transaction costs. ASC Topic 820
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurement inputs) and the lowest
priority to unobservable inputs (Level 3 measurement inputs). The three levels of the fair value
hierarchy under ASC Topic 820 are described below:
Basis of Fair Value Measurement:
| Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets. | |
| Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, quoted prices for similar assets, or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset. | |
| Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
The following table presents the Companys liabilities that are measured and recognized at
fair value on a recurring basis classified under the appropriate level of the fair value hierarchy
as of :
September 30, 2011 | ||||||||||||||||
Liabilities | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Put warrants |
| | $ | 741 | $ | 741 |
December 31, 2010 | ||||||||||||||||
Liabilities | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Put warrants |
| | $ | 3,785 | $ | 3,785 |
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Following is a description of valuation methodologies used for liabilities recorded at fair
value:
Put Warrants: The put warrants are valued using the Black-Scholes option pricing method. The
weighted average value per outstanding warrant at September 30, 2011 is computed to be $0.52 using
a discount rate of 0.30% and an average volatility factor of 71.0%. The weighted average value per
outstanding warrant at December 31, 2010 is computed to be $2.67 using a discount rate of 1.52% and
an average volatility factor of 93.9%.
A reconciliation of the beginning and ending balances for liabilities measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) during the period is as
follows:
Fair Value Measurements | ||||||||
Using Significant Unobservable Inputs | ||||||||
(Level 3) | ||||||||
Three Months | Three Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2011 | 2010 | |||||||
Put Warrants | Put Warrants | |||||||
Beginning balance |
$ | 3,221 | $ | 2,174 | ||||
Total unrealized gain included in earnings |
(2,480 | ) | (107 | ) | ||||
Ending balance |
$ | 741 | $ | 2,067 | ||||
The amount of gain for the period included
in earnings attributable to the change in
unrealized losses relating to liabilities
still held at the reporting date |
$ | 2,480 | $ | 107 | ||||
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2011 | 2010 | |||||||
Put Warrants | Put Warrants | |||||||
Beginning balance |
$ | 3,785 | $ | 3,289 | ||||
Total unrealized gain included in earnings |
(3,044 | ) | (1,222 | ) | ||||
Ending balance |
$ | 741 | $ | 2,067 | ||||
The amount of gain for the period included
in earnings attributable to the change in
unrealized losses relating to liabilities
still held at the reporting date |
$ | 3,044 | $ | 1,222 | ||||
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This Form 10-Q includes certain statements that may be deemed to be forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements
in this Form 10-Q which address activities, events or developments that Metalico, Inc. (herein,
Metalico, the Company, we, us, our or other similar terms) expects or anticipates will or
may occur in the future, including such things as future acquisitions (including the amount and
nature thereof), business strategy, expansion and growth of our business and operations, general
economic and market conditions and other such matters are forward-looking statements. Although we
believe the expectations expressed in such forward-looking statements are based on reasonable
assumptions within the bounds of our knowledge of our business, a number of factors could cause
actual results to differ materially from those expressed in any forward-looking statements. These
and other risks, uncertainties and other factors are discussed under Risk Factors appearing in
our Annual Report on Form 10-K for the year ended December 31, 2010 (Annual Report), as the same
may be amended from time to time.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included under Item 1 of this Report. In
addition, reference should be made to the audited consolidated financial statements and notes
thereto and related Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our 2010 Annual Report. Amounts reported in the following discussions are
not reported in thousands unless otherwise specified.
General
We operate in three distinct business segments: (a) ferrous and non-ferrous scrap metal
recycling (Scrap Metal Recycling), (b) platinum group and minor metals recycling (PGM and Minor
Metals Recycling), and (c) lead metal product fabricating (Lead Fabricating). Our operating
facilities include twenty scrap metal recycling facilities, including a combined aluminum
de-oxidizing plant, six PGM and Minor Metal Recycling facilities and four lead product
manufacturing and fabricating plants. The Company markets a majority of its products on a national
basis but maintains several international customers.
Effective January 1, 2011, we have identified PGM and Minor Metals Recycling as a new segment
previously grouped in the Scrap Metal Recycling segment. Management feels the separation provides
clarity on the Companys traditional scrap metal recycling operations and the operations of its
specialized PGM and higher value Minor Metals recycling. Where applicable, all previous year
information reported below has been adjusted to reflect comparative data.
Overview of Quarterly Results
The following items represent a summary of financial information for the three months ended
September 30, 2011 compared with the three months ended September 30, 2010
| Sales increased to $168.7 million, compared to $137.0 million. | ||
| Operating income decreased to $6.5 million, compared to operating income of $9.6 million. | ||
| Net income of $5.1 million, compared to a net income of $4.5 million. | ||
| Net income of $0.11 per diluted share, compared to a net income of $0.10 per diluted share. |
The following items represent a summary of financial information for the nine months ended
September 30, 2011 compared with the nine months ended September 30, 2010
| Sales increased to $529.2 million, compared to $415.6 million. | ||
| Operating income increased to $34.9 million, compared to operating income of $29.9 million. | ||
| Net income of $20.5 million, compared to a net income of $12.4 million. | ||
| Net income of $0.43 per diluted share, compared to a net income of $0.27 per diluted share. |
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Critical Accounting Policies and Use of Estimates
Our discussion and analysis of our financial condition and results of operations are based
upon our condensed consolidated financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of our financial
statements requires the use of estimates and judgments that affect the reported amounts and related
disclosures of commitments and contingencies. We rely on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances to make judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ materially from these estimates. There were no changes to the policies as
described in our Annual Report on Form 10-K except for the change in presentation of segment data.
We believe the following critical accounting policies, among others, affect the more
significant judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition
Revenue from product sales is recognized based on free on board (FOB) terms which generally
is when title transfers and the risks and rewards of ownership have passed to customers. Brokerage
sales are recognized upon receipt of materials by the customer and reported net of costs in product
sales. Historically, there have been very few sales returns and adjustments in excess of reserves
for such instances that would impact the ultimate collection of revenues, therefore, no material
provisions have been made when a sale is recognized. The loss of any significant customer could
adversely affect our results of operations or financial condition.
Accounts Receivable and Allowance for Uncollectible Accounts Receivable
Accounts receivable consist primarily of amounts due from customers from product sales. The
allowance for uncollectible accounts receivable totaled $845,000 and $1.0 million as of September
30, 2011 and December 31, 2010, respectively. Our determination of the allowance for uncollectible
accounts receivable includes a number of factors, including the age of the accounts, past
experience with the accounts, changes in collection patterns and general industry conditions.
While we believe our allowance for uncollectible accounts is adequate, changes in economic
conditions or continued weakness in the steel, metals, or construction industry could require us to
increase our reserve for uncollectible accounts and adversely impact our future earnings.
Derivatives and Hedging
We are exposed to certain risks relating to our ongoing business operations. The primary risks
managed by using derivative instruments are commodity price risk and interest rate risk. We use
forward sales contracts with PGM substrate processors to protect against volatile commodity prices.
This process ensures a fixed selling price for the material we purchase and process. We secure
selling prices with PGM processors, in ounces of Platinum, Palladium and Rhodium, in incremental
lots for material which we expect to purchase within an average 2 to 3 day time period. However,
these forward sales contracts with PGM substrate processors are not subject to any hedge
designation as they are considered within the normal sales exemption provided by ASC Topic 815.
We have in the past entered into interest rate swaps to manage interest rate risk associated
with our variable-rate borrowings. In connection with the new Credit Agreement entered into on
March 2, 2010, with JP Morgan Chase
Bank, N.A., we were required to terminate its $20.0 million interest rate swap contract. As a
result, the
we paid $760,000 to terminate the interest rate swap contract. With the termination of the interest
rate swap contract, no other interest rate protection agreements are outstanding.
Goodwill
The carrying amount of goodwill is tested annually as of December 31 and whenever events or
circumstances indicate that impairment may have occurred. Judgment is used in assessing whether
goodwill should be tested more frequently for impairment than annually. Factors such as unexpected
adverse economic conditions, competition and other external events may require more frequent
assessments.
In September 2011, the FASB issued updated guidance that modifies the manner in which the
two-step impairment test of goodwill is applied. Under the updated guidance, Accounting Standards
Update (ASU) No. 2011-08, an entity
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may assess qualitative factors (such as changes in management, key personnel, strategy, key
technology, or customers) that may impact a reporting units fair value and lead to the
determination that it is more likely than not that the fair value of a reporting unit is less than
its carrying value, including goodwill. If an entity determines that it is more likely than not,
it must perform an impairment test.
The goodwill impairment test follows a two-step process. In the first step, the fair value of
a reporting unit is compared to its carrying value. If the carrying value of a reporting unit
exceeds its fair value, the second step of the impairment test is performed for purposes of
measuring the impairment. In the second step, the fair value of the reporting unit is allocated to
all of the assets and liabilities of the reporting unit to determine an implied goodwill value.
This allocation is similar to a purchase price allocation. If the carrying amount of the reporting
units goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized
in an amount equal to that excess.
In determining the carrying value of each reporting unit, management allocates net deferred
taxes and certain corporate maintained liabilities specifically allocable to each reporting unit to
the net operating assets of each reporting unit. The carrying amount is further reduced by any
impairment charges made to other indefinite lived intangibles of a reporting unit.
Since market prices of our reporting units are not readily available, we make various
estimates and assumptions in determining the estimated fair values of the reporting units. The
evaluation of impairment involves comparing the current fair value of each reporting unit to its
carrying value, including goodwill. We use a five-year discounted cash flow model (DCF Model) and a
market approach to estimate the current fair value of our reporting units when testing for
impairment. A number of significant assumptions and estimates are involved in the application of
the DCF Model to forecast operating cash flows, including sales volumes, profit margins, tax rates,
capital spending, discount rate, and working capital changes. Forecasts of operating and selling,
general and administrative expenses are generally based on historical relationships of previous
years. Each of these estimates is subject to significant management judgment; however, we believe
each to be reasonable based on currently available information regarding current and expected
operations. Changes in these estimates or the economic environment in which we operate can have a
significant impact on the determination of cash flows and fair value and could potentially result
in future material impairments.
When applying the DCF Model, the cash flows expected to be generated are discounted to their
present value equivalent using a rate of return that reflects the relative risk of the investment,
as well as the time value of money. This return is an overall rate based upon the individual rates
of return for invested capital (equity and interest-bearing debt). The return, known as the
weighted average cost of capital (WACC), is calculated by weighting the required returns on
interest-bearing debt and common equity in proportion to their estimated percentages in an expected
capital structure. For our 2010 analysis, we arrived at a discount rate of 17.2%. The inputs used
in calculating the WACC include (i) average of capital structure ratios used in previous Metalico
acquisition valuations, (ii) an estimate of combined federal and state tax rates (iii) the cost of
Baa rated debt based on Moodys Seasoned Corporate Bond Yields of 6.10% as of December 1, 2010, and
(iv) a 22.0% required return on equity determined under the Modified Capital Asset Pricing (CAPM)
model.
If the carrying amount of a reporting unit that contains goodwill exceeds fair value, a
possible impairment would be indicated. If a possible impairment is indicated, the implied fair
value of goodwill would be estimated by comparing the fair value of the net assets of the reporting
unit, excluding goodwill, to the total fair value of the unit. If the carrying amount of goodwill
exceeds its implied fair value, an impairment charge would be recorded.
We have identified seven reporting units, which account for approximately 94% of revenue for
the nine months ended September 30, 2011 with recorded goodwill. A list of our reporting units and
their respective amount of goodwill recorded in each reporting unit as of September 30, 2011, is as
follows ($ in thousands):
Reporting Unit | Goodwill Recorded | |||
Lead Fabricating |
$ | 5,369 | ||
New York State Scrap Recycling |
24,243 | |||
Pennsylvania Scrap Recycling |
3,674 | |||
Ohio Scrap Recycling |
15,075 | |||
Minor Metals Recycling |
3,859 | |||
Texas PGM Recycling |
9,988 | |||
New Jersey PGM Recycling |
10,804 | |||
Total |
$ | 73,012 | ||
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Throughout 2009 and into 2010, the financial markets and industries in which we operate
improved from the conditions that existed at December 31, 2008. Additionally, we have experienced
an increase in the price of our common stock and total market capitalization value. At December 31,
2010 and 2009, our market capitalization exceeded total stockholders equity by approximately
$106.5 million and $78.2 million, respectively. Significant improvements in economic conditions in
industries in which we purchase and sell material have resulted in forecasts which, when used in
our DCF model, support the carrying value of our goodwill in all of our reporting units. As a
result, no impairment was recorded for the years ended December 31, 2010 and 2009.
At September 30, 2011, the net equity reported by Metalico exceeded its market capitalization
value by $9.6 million. Metalico management believes the spread between our market capitalization
particularly without a control premium and our consolidated carrying value does not serve as a
direct indicator that our recorded goodwill is impaired. We considered the decrease in our market
capitalization from August 1 through September 30, 2011 and also observed improved stock price and
modest recovery in commodity prices since quarter-end. We believe that the decrease is
substantially related to a general decline in the stock market and general heightened concern over
broad industry performance over this period and is not related to specific conditions that are or
might impact the operations of any of our reporting units. Accordingly, we do not currently
believe that these declines represent indicators of long-lived asset impairments.
Intangible Assets and Other Long-lived Assets
We test all finite-lived intangible assets (amortizable) and other long-lived assets, such as
fixed assets, for impairment only if circumstances indicate that possible impairment exists. To the
extent actual useful lives are less than our previously estimated lives, we will increase our
amortization expense on a prospective basis. We estimate useful lives of our intangible assets by
reference to both contractual arrangements such as non-compete covenants and current, projected,
undiscounted cash flows for supplier and customer lists. At September 30, 2011, no indicators of
impairment were identified and no adjustments were made to the estimated lives of finite-lived
assets.
We test indefinite-lived intangibles such as trademarks and trade names for impairment at
least annually by comparing the carrying value of the intangible to its fair value. Fair value of
the intangible asset is calculated using the projected discounted cash flows produced from the
intangible. If the carrying value exceeds the projected discounted cash flows attributed to the
intangible asset, the carrying value is no longer considered recoverable and the Company will
record impairment. At September 30, 2011, no indicators of impairment were identified and no
adjustments were made to the estimated lives of indefinite-lived assets.
Stock-based Compensation
Stock-based compensation cost is estimated at the grant date based on the awards fair value
as calculated by the Black-Scholes option-pricing model and is recognized as expense ratably on a
straight-line basis over the option vesting period for those options expected to vest. The
Black-Scholes option-pricing model requires various judgmental assumptions including expected
volatility and expected option life. These factors are determined at the date of each individual or
group grant. Significant changes in any of these assumptions could materially affect the fair value
of stock-based awards granted in the future.
Income taxes
Our provision for income taxes reflects income taxes paid or payable (or received or
receivable) for the current year plus the change in deferred income taxes during the period.
Deferred income taxes represent the future tax consequences
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expected to occur when the reported
amounts of assets and liabilities are recovered or paid, and result from differences
between the financial and tax bases of our assets and liabilities and are adjusted for changes
in tax rates and tax laws when enacted. Valuation allowances are recorded to reduce deferred income
tax assets when it is more likely than not that a tax benefit will not be realized and uncertain
tax benefit liabilities are recognized for tax positions taken in returns that are subject to some
uncertainty. Such valuation allowances and liabilities are subject to managements estimates about
future performance of the Company and strength of its tax positions.
RESULTS OF OPERATIONS
The Company is divided into three reporting segments: Scrap Metal Recycling, which includes
three general product categories, ferrous, non-ferrous and other scrap services; PGM and Minor
Metals Recycling which includes two general product recycling categories, Platinum Group Metals
(PGMs) and Minor Metals including the Refractory Metals Molybdenum, Tungsten, Tantalum and
Niobium; and Lead Fabricating.
The following table sets forth information regarding revenue in each segment
Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||||||||||||||||||||||||||||||||||||
($s, and weights in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net | Net | Net | Net | |||||||||||||||||||||||||||||||||||||||||||||
Weight | Sales | % | Weight | Sales | % | Weight | Sales | % | Weight | Sales | % | |||||||||||||||||||||||||||||||||||||
Scrap Metal Recycling |
||||||||||||||||||||||||||||||||||||||||||||||||
Ferrous metals (tons) |
135.8 | $ | 60,501 | 35.9 | 119.7 | $ | 42,484 | 31.0 | 427.7 | $ | 188,700 | 35.7 | 350.0 | $ | 126,870 | 30.5 | ||||||||||||||||||||||||||||||||
Non-ferrous metals (lbs.) |
32,764 | 35,160 | 20.8 | 36,176 | 35,651 | 26.0 | 109,651 | 120,094 | 22.7 | 107,434 | 99,888 | 24.1 | ||||||||||||||||||||||||||||||||||||
Other |
| 1,633 | 1.0 | | 998 | 0.8 | | 4,457 | 0.8 | | 2,476 | 0.6 | ||||||||||||||||||||||||||||||||||||
Total Scrap Metal Recycling |
97,294 | 57.7 | 79,133 | 57.8 | 313,251 | 59.2 | 229,234 | 55.2 | ||||||||||||||||||||||||||||||||||||||||
PGM and Minor Metals Recycling |
||||||||||||||||||||||||||||||||||||||||||||||||
Platinum Group Metals (troy oz.) |
29.2 | 38,088 | 22.6 | 31.4 | 33,016 | 24.1 | 92.8 | 120,938 | 22.9 | 108.0 | 115,549 | 27.8 | ||||||||||||||||||||||||||||||||||||
Minor Metals (lbs.) |
494 | 12,641 | 7.5 | 459 | 8,147 | 5.9 | 1,434 | 36,422 | 6.8 | 1,317 | 21,757 | 5.2 | ||||||||||||||||||||||||||||||||||||
Total PGM and Minor Metals Recycling |
50,729 | 30.1 | 41,163 | 30.0 | 157,360 | 29.7 | 137,306 | 33.0 | ||||||||||||||||||||||||||||||||||||||||
Lead Fabricating (lbs.) |
12,661 | 20,705 | 12.2 | 12,524 | 16,660 | 12.2 | 36,212 | 58,576 | 11.1 | 35,121 | 49,070 | 11.8 | ||||||||||||||||||||||||||||||||||||
Total Revenue |
$ | 168,728 | 100.0 | $ | 136,956 | 100.0 | $ | 529,187 | 100.0 | $ | 415,610 | 100.0 | ||||||||||||||||||||||||||||||||||||
The following table sets forth information regarding our average selling prices for the
past seven quarters. The fluctuation in pricing is due to many factors including domestic and
export demand and our product mix.
Average | ||||||||||||||||||||
Average | Average | PGM Price | Average | Average | ||||||||||||||||
Ferrous | Non-Ferrous | per troy oz. | Minor Metal | Lead | ||||||||||||||||
For the quarter ended: | Price per ton | Price per lb. | (1) | Price per lb. (2) | Price per lb. | |||||||||||||||
September 30, 2011 |
$ | 445 | $ | 1.07 | $ | 1,216 | $ | 25.59 | $ | 1.64 | ||||||||||
June 30, 2011 |
$ | 433 | $ | 1.08 | $ | 1,202 | $ | 28.10 | $ | 1.64 | ||||||||||
March 31, 2011 |
$ | 445 | $ | 1.13 | $ | 1,229 | $ | 22.90 | $ | 1.57 | ||||||||||
December 31, 2010 |
$ | 368 | $ | 0.95 | $ | 1,117 | $ | 18.29 | $ | 1.51 | ||||||||||
September 30, 2010 |
$ | 355 | $ | 0.99 | $ | 986 | $ | 17.73 | $ | 1.33 | ||||||||||
June 30, 2010 |
$ | 383 | $ | 0.91 | $ | 1,122 | $ | 17.36 | $ | 1.42 | ||||||||||
March 31, 2010 |
$ | 353 | $ | 0.89 | $ | 966 | $ | 14.44 | $ | 1.46 |
(1) | Average PGM prices are comprised of combined troy ounces of Platinum, Palladium and Rhodium. | |
(2) | Average Minor Metal prices are comprised of combined weights of Tungsten, Tantalum, Molybdenum and other related metals. |
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Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
Consolidated net sales increased by $31.7 million, or 23.1%, to $168.7 million for the three
months ended September 30, 2011 compared to consolidated net sales of $137.0 million for the three
months ended September 30, 2010. Acquisitions added $6.3 million to consolidated net sales for the
quarter ended September 30, 2011. Excluding acquisitions, sales increased by $25.4 million. The
Company reported increases in average metal selling prices in all segments of operations
representing $30.5 million offset by lower selling volumes amounting to $5.1 million.
Scrap Metal Recycling
Ferrous Sales
Ferrous sales increased by $18.0 million, or 42.4%, to $60.5 million for the three months
ended September 30, 2011, compared to $42.5 million for the three months ended September 30, 2010.
Acquisitions added $4.1 million to ferrous sales for the second quarter of 2011. Excluding
acquisitions, ferrous sales increased by $13.9 million attributable to higher volume sold of 10,700
tons, or 9.0%, amounting to $3.8 million and higher average selling prices totaling $10.1 million.
The average selling price for ferrous products was approximately $445 per ton for the three months
ended September 30, 2011 compared to $355 per ton for the three months ended September 30, 2010, an
increase of approximately 25.4%.
Non-Ferrous Sales
Non-ferrous sales decreased by $492,000, or 1.4%, to $35.2 million for the three months ended
September 30, 2011, compared to $35.7 million for the three months ended September 30, 2010.
Acquisitions added $1.7 million to non-ferrous sales for the second quarter of 2011. Excluding
acquisitions, non-ferrous sales decreased by $2.2 due to lower sales volumes amounting to $4.0
million, but were offset by higher average selling prices totaling $1.8 million. The average
selling price for non-ferrous products was approximately $1.07 per pound for the three months ended
September 30, 2011 compared to $0.99 per pound for the three months ended September 30, 2010, an
increase of approximately 8.1%.
PGM and Minor Metal Recycling
Platinum Group Metals
Platinum Group Metal (PGM) recycling sales increased $5.1 million, or 15.5%, to $38.1
million for the three months ended September 30, 2011, compared to $33.0 million for the three
months ended September 30, 2010. The increase in sales was due to higher selling prices amounting
to $9.3 million but was offset by lower volumes sold totaling $4.2 million. For the three months
ended September 30, 2011, the Company sold 29,200 combined troy ounces of platinum group metals
compared to 31,400 combined troy ounces for the three months ended September 30, 2010, a decrease
of 2,200 ounces or 7.0%. The average combined selling price for PGM metal was approximately
$1,216 per troy ounce for the three months ended September 30, 2011 compared to $986 per troy ounce
for the three months ended September 30, 2010, an increase of 23.3%.
Minor Metals
Sales of Minor Metals, which primarily include metals such as Molybdenum, Tungsten and
Tantalum, increased $4.5 million, or 55.6%, to $12.6 million for the three months ended September
30, 2011, compared to $8.1 million for the three months ended September 30, 2010. The increase in
sales was due to higher selling prices amounting to $3.9 million and higher volumes sold totaling
$613,000. The average combined selling price for minor metals was approximately $25.59 per pound
for the three months ended September 30, 2011 compared to $17.73 per pound for the three months
ended September 30, 2010, an increase of 44.3%.
Lead Fabricating
Lead Fabricating sales increased by $4.0 million, or 24.0%, to $20.7 million for the three
months ended September 30, 2011 compared to $16.7 million for the three months ended September 30,
2010. The increase in sales was due to higher average selling prices amounting to $3.9 million and
by higher volume sold totaling $179,000. The average selling price of our lead fabricated products
was approximately $1.64 per pound for the three months ended September 30, 2011, compared to $1.33
per pound for the three months ended September 30, 2010. Sales volume increased to 12.7
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million pounds for the three months ended September 30, 2011 from 12.5 million pounds for the
three months ended September 30, 2010, an increase of 1.6%.
Operating Expenses
Operating expenses increased by $33.0 million, or 27.9%, to $151.2 million for the three
months ended September 30, 2011 compared to $118.2 million for the three months ended September 30,
2010. Acquisitions added $5.3 million to operating expense for the quarter ended September 30,
2011. Excluding acquisitions, operating expenses increased by $27.7 million. The increase in
operating expense was due to a $25.5 million increase in the cost of purchased metals due to higher
commodity prices and a $2.2 million increase in other operating expenses. These operating expense
increases include wages and benefits of $868,000, freight charges of $563,000, equipment and
vehicle repairs and maintenance expenses of $522,000, energy and utility expenses of $149,000 and
production and fabricating supplies of $109,000.
Selling, General, and Administrative
Selling, general, and administrative expenses increased $928,000, or 14.7%, to $7.2 million,
or 4.3% of sales, for the three months ended September 30, 2011, compared to $6.3 million, or 4.6%
of sales, for the three months ended September 30, 2010. Acquisitions added $302,000 to selling,
general and administrative expenses for the quarter ended September 30, 2011. Excluding
acquisitions, selling, general and administrative expenses increased by $626,000. The increases
include $549,000 in consulting and professional fees, $148,000 for wages and benefits, $72,000 in
advertising and promotional expenses. These increases were offset by $78,000 a reduction in
insurance costs in and other expenses of $65,000.
Depreciation and Amortization
Depreciation and amortization increased to $3.8 million, or 2.3% of sales, for the three
months ended September 30, 2011 compared to $3.5 million, or 2.5% of sales for the three months
ended September 30, 2010. The increase as a percentage of sales was primarily attributable to
higher sales. Acquisitions added $410,000 to depreciation and amortization expense. Excluding
acquisitions, depreciation and amortization expense decreased by $30,000.
Operating Income
Operating income for three months ended September 30, 2011 decreased by $3.1 million to $6.5
million for three months ended September 30, 2011 from $9.6 million for the three months ended
September 30, 2010 and was a net result of the factors discussed above.
Financial and Other Income/(Expense)
Interest expense was $2.2 million, or 1.3% of sales, for the three months ended September 30,
2011 compared to $2.2 million or 1.6% of sales, for the three months ended September 30, 2010.
Interest expense was affected by lower interest rates on a significant portion of our outstanding
debt but was offset by the effect of higher average outstanding debt balances resulting in little
change to recorded interest expense. As described in Note 8 of the accompanying financial
statements, on March 2, 2010, we entered into a new senior secured credit facility (Credit
Agreement) with a syndicate of lenders led by JPMorgan Chase Bank, N.A. (JPMChase) that includes
revolving and term features. In doing so, we terminated our senior revolving credit facility with
Wells Fargo Foothill, Inc. and retired outstanding term notes to benefit from lower interest rates.
Other income for the three months ended September 30, 2011, includes income of $2.5 million to
adjust the Put Warrant liability to its fair value as compared to income of $107,000 for the
quarter ended September 30, 2010. The warrants were issued in connection with common stock offering
in April 2008 and the $100 million 7% convertible note offering in May 2008.
Income Taxes
For the three months ended September 30, 2011, the Company recognized income tax expense of
$1.9 million, resulting in an effective tax rate of 27%. For the three months ended September 30,
2010, the Company recognized an income tax expense of $3.2 million, resulting in an effective tax
rate of 41%. Our interim period income tax provisions (benefits) are recognized based upon our
projected effective income tax rates for the fiscal year in its entirety and,
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therefore, requires management of the Company to make estimates of future income, expense and
differences between financial accounting and income tax requirements in the jurisdictions in which
the Company is taxed. Our effective rate may differ from the blended expected statutory income tax
rate of 39% due to permanent differences between income for tax purposes and income for book
purposes. These permanent differences include fair value adjustments to financial instruments,
stock based compensation, amortization of certain intangibles and certain non-deductible expenses.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
Consolidated net sales increased by $113.6 million, or 27.3%, to $529.2 million for the nine
months ended September 30, 2011 compared to consolidated net sales of $415.6 million for the nine
months ended September 30, 2010. Acquisitions added $17.1 million to consolidated net sales for
the nine months ended September 30, 2011. Excluding acquisitions, sales increased by $96.5 million.
The Company reported increases in average metal selling prices in all segments of operations
representing $97.2 million. The increase in selling prices was offset by lower selling volumes
amounting to $726,000.
Scrap Metal Recycling
Ferrous Sales
Ferrous sales increased by $61.8 million, or 48.7%, to $188.7 million for the nine months
ended September 30, 2011, compared to $126.9 million for the nine months ended September 30, 2010.
Acquisitions added $10.2 million to ferrous sales. Excluding acquisitions, the increase in ferrous
sales was attributable to higher volume sold of 52,700 tons, or 15.1%, amounting to $18.9 million
and higher average selling prices totaling $32.7 million. The average selling price for ferrous
products was approximately $441 per ton for the nine months ended September 30, 2011 compared to
$362 per ton for the nine months ended September 30, 2010, an increase of approximately 21.8%.
Non-Ferrous Sales
Non-ferrous sales increased by $20.2 million, or 20.2%, to $120.1 million for the nine months
ended September 30, 2011, compared to $99.9 million for the nine months ended September 30, 2010.
Acquisitions added $4.9 million to non-ferrous sales for the second quarter of 2011. Excluding
acquisitions, the increase in non-ferrous sales was due to higher average selling prices totaling
$17.0 million offset by lower sales volumes amounting to $1.7 million and. The average selling
price for non-ferrous products was approximately $1.10 per pound for the nine months ended
September 30, 2011 compared to $0.93 per pound for the nine months ended September 30, 2010, an
increase of approximately 18.3%.
PGM and Minor Metal Recycling
Platinum Group Metals
Platinum Group Metal (PGM) recycling sales increased $5.4 million, or 0.5%, to $120.9
million for the nine months ended September 30, 2011, compared to $115.5 million for the nine
months ended September 30, 2010. The increase in sales was due to higher selling prices amounting
to $26.9 million but was offset by lower volumes sold totaling $21.5 million. For the nine months
ended September 30, 2011, the Company sold 92,800 combined troy ounces of platinum group metals
compared to 108,000 combined troy ounces for the nine months ended September 30, 2010, a decrease
of 15,200 ounces or 14.1%. The average combined selling price for PGM metal was approximately
$1,217 per troy ounce for the nine months ended September 30, 2011 compared to $1,013 per troy
ounce for the nine months ended September 30, 2010, an increase of 20.1%.
Minor Metals
Sales of Minor Metals, which primarily include metals such as Molybdenum, Tungsten and
Tantalum, increased $14.6 million, or 67.0%, to $36.4 million for the nine months ended September
30, 2011, compared to $21.8 million for the nine months ended September 30, 2010. The increase in
sales was due to higher selling prices amounting to $12.7 million and higher volumes sold totaling
$1.9 million. The average combined selling price for minor metals was approximately $25.39 per
pound for the nine months ended September 30, 2011 compared to $16.52 per pound for the nine months
ended September 30, 2010, an increase of 53.7%.
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Lead Fabricating
Lead Fabricating sales increased by $9.5 million, or 19.3%, to $58.6 million for the nine
months ended September 30, 2011 compared to $49.1 million for the nine months ended September 30,
2010. The increase in sales was due to higher average selling prices amounting to $7.9 million and
by higher volume sold totaling $1.6 million. The average selling price of our fabricated lead
products was approximately $1.62 per pound for the nine months ended September 30, 2011, compared
to $1.40 per pound for the nine months ended September 30, 2010. Sales volume increased to 36.2
million pounds for the nine months ended September 30, 2011 from 35.1 million pounds for the nine
months ended September 30, 2010, an increase of 3.1%.
Operating Expenses
Operating expenses increased by $105.1 million, or 29.5%, to $461.3 million for the nine
months ended September 30, 2011 compared to $356.2 million for the nine months ended September 30,
2010. Acquisitions added $14.5 million to operating expense for the nine months ended September 30,
2011. Excluding acquisitions, operating expenses increased by $90.6 million. The increase in
operating expense was due to an $83.0 million increase in the cost of purchased metals due to
higher commodity prices and a $7.6 million increase in other operating expenses. These operating
expense increases include wages and benefits of $3.0 million, freight charges of $2.0 million,
energy and utility expenses of $952,000, vehicle repairs and maintenance expenses of $892,000,
production and fabricating supplies of $571,000 and increases in other miscellaneous operating
expenses of $161,000.
Selling, General, and Administrative
Selling, general, and administrative expenses increased $2.3 million, or 11.6%, to $22.2
million, or 4.2% of sales, for nine months ended September 30, 2011, compared to $19.9 million, or
4.8% of sales, for nine months ended September 30, 2010 Acquisitions added $735,000 to selling,
general and administrative expenses for the nine months ended September 30, 2011. Excluding
acquisitions, selling, general and administrative expenses increased by $1.5 million. The increases
include $809,000 in consulting and professional fees, $526,000 for wages and benefits, $201,000 in
insurance costs, $181,000 in advertising and promotional expenses and $113,000 in travel expenses.
These increases were offset by reductions in and other expenses of $315,000.
Depreciation and Amortization
Depreciation and amortization increased to $10.8 million, or 2.0% of sales, for the nine
months ended September 30, 2011 compared to $10.1 million, or 2.4% of sales for the nine months
ended September 30, 2010. The decrease as a percentage of sales was primarily attributable to
higher sales. Acquisitions added $1.1 million to depreciation and amortization expense. Excluding
acquisitions, depreciation and amortization expense decreased by $372,000.
Operating Income
Operating income for the nine months ended September 30, 2011 increased by $5.0 million to
$34.9 million for the nine months ended September 30, 2011 from $29.9 million for the nine months
ended September 30, 2010 and was a result of the factors discussed above.
Financial and Other Income/(Expense)
Interest expense was $7.1 million, or 1.3% of sales, for the nine months ended September 30,
2011 compared to $7.5 million or 1.8% of sales, for the nine months ended September 30, 2010. The
$427,000 decrease in interest expense was attributable to lower interest rates on a significant
portion of our outstanding debt. As described in Note 8 of the accompanying financial statements,
on March 2, 2010, we entered into a new senior secured credit facility (Credit Agreement) with a
syndicate of lenders led by JPMorgan Chase Bank, N.A. (JPMChase) that includes revolving and term
features. In doing so, we terminated our senior revolving credit facility with Wells Fargo
Foothill, Inc. and retired outstanding term notes to benefit from lower interest rates.
Other expense for the nine months ended September 30, 2010, included $3.0 million in charges
related to the refinancing of our senior credit facilities. The items comprising this amount
included $2.1 million in unamortized deferred financing costs expensed as a result of the
termination of our loan and financing agreements with Wells Fargo Foothill and Ableco. We also
incurred $341,000 in credit facility termination fees and a charge of $598,000 from the
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reclassification of other comprehensive loss related to the interest rate swap that we
terminated upon entering into the Credit Agreement with JPMChase. No similar expense was incurred
in the nine months ended September 30, 2011.
Other income for the nine months ended September 30, 2011, includes income of $3.0 million to
adjust the Put Warrant liability to its fair value as compared to income of $1.2 million for the
nine months ended September 30, 2010. The warrants were issued in connection with common stock
offering in April 2008 and the $100 million 7% convertible note offering in May 2008.
Income Taxes
For the nine months ended September 30, 2011, the Company recognized income tax expense of
$10.6 million, resulting in an effective tax rate of 34%. For the nine months ended September 30,
2010, the Company recognized an income tax expense of $8.2 million, resulting in an effective tax
rate of 40%. Our interim period income tax provisions (benefits) are recognized based upon our
projected effective income tax rates for the fiscal year in its entirety and, therefore, requires
management of the Company to make estimates of future income, expense and differences between
financial accounting and income tax requirements in the jurisdictions in which the Company is
taxed. Our effective rate may differ from the blended expected statutory income tax rate of 39% due
to permanent differences between income for tax purposes and income for book purposes. These
permanent differences include fair value adjustments to financial instruments, stock based
compensation, amortization of certain intangibles and certain non-deductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
During the nine months ended September 30, 2011, we generated $23.2 million of cash from
operating activities compared to $5.1 million of operating cash used during the nine months ended
September 30, 2010. For the nine months ended September 30, 2011, the Companys net income of
$20.5 million and non-cash net expense of depreciation and amortization of $11.7 million was offset
by a $9.0 million change in working capital components. The changes in working capital components
include an increase in accounts receivable of $8.8 million due to higher sales and a $6.0 million
increase in inventory. These items were offset by a $4.9 million increase to accounts payable,
accrued expenses, income taxes payable and other liabilities and an $876,000 decrease in prepaid
expenses and other current assets. For the nine months ended September 30, 2010, the Companys net
income of $12.4 million and non-cash items of depreciation and amortization of $10.9 million and
other non-cash items of $2.3 million was offset by a $30.8 million change in working capital
components. The changes in working capital components include an increase in accounts receivable of
$28.5 million and an increase in inventory of $8.6 million. These items were offset by a $1.7
million increase to accounts payable, accrued expenses, income taxes payable and other liabilities
and a $4.6 million decrease in income tax receivables, prepaid expenses and other current assets.
The increase in prepaid expenses includes a $900,000 increase in unsecured vendor advances. Vendor
advances as of September 30, 2010 totaled $1.8 million net of a $333,000 reserve for losses.
We used $20.2 million in net cash for investing activities for the nine months ended September
30, 2011 compared to using net cash of $4.1 million in the nine months ended September 30, 2010.
During nine months ended September 30, 2011, we purchased $18.7 million in equipment and capital
improvements which primarily included $3.0 million for the purchase of the land and building and
$6.0 million in improvements to date in Western, New York that will be used to house our new
shredding operation. We also used $1.8 million in cash to fund a portion of our acquisition of
Goodman Services, Inc. and $312,000 in increases to other long-term assets. These items were offset
by $564,000 in proceeds from the disposal of capital equipment. During the nine months ended
September 30, 2010, we purchased $4.3 million in equipment and capital improvements and incurred
changes in other assets of $384,000 which was offset by $617,000 in proceeds from the sale of
capital equipment.
During the nine months ended September 30, 2011, we used $543,000 of net cash from financing
activities compared to $8.6 million of net cash generated during the nine months ended September
30, 2010. For the nine months ended September 30, 2011, total new borrowings were $9.4 million. We
also received $522,000 in proceeds from the exercise of employee stock options. These borrowings
and proceeds were offset by debt repayments of $8.9 million and net repayments under our revolving
credit facility of $1.4 million. We also paid $196,000 in debt issuance costs related to credit
facility amendment with JPMChase. For the nine months ended September 30, 2010, total new
borrowings were $9.1 million and net borrowings under our revolving credit facility amounted to
$4.1 million. These borrowings were
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offset by debt repayments of $3.4 million and the payment of $1.3 million in debt issue costs
related to agreement entered into with JPMChase. We also received $74,000 in proceeds from the
exercise of stock options.
Financing and Capitalization
On March 2, 2010, we entered into a Credit Agreement (the Credit Agreement) with a
syndicate of lenders led by JPMorgan Chase Bank, N.A and including RBS Business Capital and Capital
One Leverage Finance Corp. The three-year facility consisted of senior secured credit facilities in
the aggregate amount of $65.0 million, including a $57.0 million revolving line of credit (the
Revolver) and an $8.0 million machinery and equipment term loan facility (Initial Term Loan).
The Revolver provides for revolving loans which, in the aggregate, were not to exceed the lesser of
$57.0 million or a Borrowing Base amount based on specified percentages of eligible accounts
receivable and inventory and bears interest at the Base Rate (a rate determined by reference to
the prime rate) plus 1.25% or, at our election, the current LIBOR rate plus 3.5%. The Initial Term
Loan accrued interest at the Base Rate plus 2% or, at our election, the current LIBOR rate plus
4.25%. Under the Credit Agreement, we are subject to certain operating covenants and are restricted
from, among other things, paying cash dividends, repurchasing its common stock over certain stated
thresholds, and entering into certain transactions without the prior consent of the lenders. In
addition, the Credit Agreement contains certain financial covenants, including minimum fixed charge
coverage ratios, and maximum capital expenditures covenants. Obligations under the Credit Agreement
are secured by substantially all of the Companys assets other than real property, which is subject
to a negative pledge. The proceeds of the Credit Agreement are used for present and future
acquisitions, working capital, and general corporate purposes.
Upon the effectiveness of the Credit Agreement described in the preceding paragraph, we
terminated the Amended and Restated Loan and Security Agreement with Wells Fargo Foothill, Inc.
dated July 3, 2007, as amended (the Loan Agreement) and repaid outstanding indebtedness under the
Loan Agreement in the aggregate principal amount of approximately $13.5 million. We also terminated
the Financing Agreement with Ableco Finance LLC dated July 3, 2007, as amended (the Financing
Agreement) and repaid outstanding indebtedness under the Financing Agreement in the aggregate
principal amount of approximately $30.6 million. Outstanding balances under the Loan Agreement and
the Financing Agreement were paid with borrowings under the Credit Agreement and available cash.
On January 27, 2011, we entered into a Second Amendment (the Amendment) to the Credit
Agreement. The Amendment provided for an increase in the maximum amount available under the Credit
Agreement to $85.0 million, including $70.0 million under the Revolver (up from $57.0 million) and
an additional term loan (Term Loan 1) to be available in multiple draws in the aggregate amount
of $9.0 million earmarked for capital expenditures, primarily the shredder project in suburban
Buffalo, New York. The original term loan funded at the closing of the Credit Agreement continues
to amortize. The Amendment increases the advance rate for inventory under the Revolvers borrowing
base formula. LIBOR-based interest rates have been reduced to the current LIBOR rate plus 3.25% (an
effective rate of 3.76% as of September 30, 2011) for revolving loans and the current LIBOR rate
plus 3.75% (an effective rate of 4.16% as of September 30, 2011) for term loans. Term Loan 1 bears
interest at the Base Rate plus 2.0% or LIBOR Rate plus 3.75% (an effective rate of 4.15% as of
September 30, 2011). The Amendment also adjusted the definition of Fixed Charges and several
covenants, allowing for increases in permitted indebtedness, capital expenditures, and permitted
acquisition baskets and extends the Credit Agreements maturity date from March 1, 2013 to January
23, 2014. The remaining material terms of the Credit Agreement remain unchanged by the Amendment.
As of September 30, 2011, the Revolver had $33.9 million available for borrowing and $2.2 million
outstanding letters of credit. The outstanding balance under the Credit Agreement at September 30,
2011 and December 31, 2010 was $42.8 million and $41.3 million, respectively.
On April 23, 2008, we entered into a Securities Purchase Agreement with accredited
investors (Note Holders) which provided for the sale of $100.0 million of Senior Unsecured
Convertible Notes (the Notes) convertible into shares of our common stock (Note Shares). The
initial and current conversion price of the Notes is $14.00 per share. The Notes bear interest at
7% per annum, payable in cash, and will mature in April 2028. In addition, the Notes contain (i) an
optional repurchase right exercisable by the Note Holders on the sixth, eighth and twelfth
anniversaries of the date of issuance of the Notes, whereby each Note Holder will have the right to
require the Company to redeem the Notes at par and (ii) an optional redemption right exercisable by
the Company beginning on May 1, 2011, the third anniversary of the date of issuance of the Notes,
and ending on the day immediately prior to the sixth anniversary of the date of issuance of the
Notes, whereby the Company shall have the option but not the obligation to redeem the Notes at a
redemption price equal to 150% of the principal amount of the Notes to be redeemed plus any accrued
and unpaid interest thereon, limited to 30% of the aggregate principal amount of the Notes as of
the issuance date, and from and after the sixth anniversary of the date of issuance of the Notes,
the Company shall have the option to redeem any or all of the Notes at a
redemption price equal to 100% of the principal amount of the Notes to be redeemed plus any
accrued and unpaid interest thereon.
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As of September 30, 2011, the outstanding balance on the Notes was $75.0 million (net of
$1.1 million in unamortized discount related to the original fair value warrants issued with the
Notes).
The Notes also contain (i) certain repurchase requirements upon a change of control, (ii)
make-whole provisions upon a change of control, (iii) weighted average anti-dilution protection,
subject to certain exceptions, (iv) an interest make-whole provision in the event that the Note
Purchasers are forced to convert their Notes between the third and sixth anniversaries of the date
of issuance of the Notes whereby the Note Purchasers would receive the present value (using a 3.5%
discount rate) of the interest they would have earned had their Notes so converted been outstanding
from such forced conversion date through the sixth anniversary of the date of issuance of the
Notes, and (v) a debt incurrence covenant which limits our ability to incur debt under certain
circumstances.
Future Capital Requirements
As of September 30, 2011, we had $5.9 million in cash, availability under the Credit
Agreement of $33.9 million and total working capital of $118.6 million. As of September 30, 2011,
our current liabilities totaled $44.5 million. We expect to fund our current working capital needs,
interest payments, term debt payments and capital expenditures over the next twelve months with
cash on hand and cash generated from operations, supplemented by borrowings available under the
Credit Agreement and potentially available elsewhere, such as vendor financing, manufacturer
financing, operating leases and other equipment lines of credit that are offered to us from time to
time. We may also access equity and debt markets for possible acquisitions, working capital and to
restructure current debt.
Historically, the Company has entered into negotiations with its lenders when it was
reasonably concerned about potential breaches and prior to the occurrences of covenant defaults. A
breach of any of the covenants contained in lending agreements could result in default under such
agreements. In the event of a default, a lender could refuse to make additional advances under the
revolving portion of a credit facility, could require the Company to repay some or all of its
outstanding debt prior to maturity, and/or could declare all amounts borrowed by the Company,
together with accrued interest, to be due and payable. In the event that this occurs, the Company
may be unable to repay all such accelerated indebtedness, which could have a material adverse
impact on its financial position and operating performance.
If necessary, the Company could use its existing cash balances or attempt to access
equity and debt markets or to obtain new financing arrangements with new lenders or investors as
alternative funding sources to restructure current debt. Any issuance of new equity could dilute
current shareholders. Any new debt financing could be on terms less favorable than those of our
existing financing and could subject us to new and additional covenants. Decisions by lenders and
investors to enter into such transactions with the Company would depend upon a number of factors,
such as the Companys historical and projected financial performance, compliance with the terms of
its current or future credit agreements, industry and market trends, internal policies of
prospective lenders and investors, and the availability of capital. No assurance can be had that
the Company would be successful in obtaining funds from alternative sources.
Off-Balance Sheet Arrangements
Other than operating leases, we do not have any significant off-balance sheet
arrangements that are likely to have a current or future effect on our financial condition, result
of operations or cash flows.
Business Acquisition and Capital Expenditures
On February 18, 2011, we purchased a 44-acre parcel of land, including a
177,500-square-foot building, in suburban Buffalo to house an indoor scrap metal shredder. The
installation will include a new state-of-the-art downstream separation system to maximize the
recovery of valuable non-ferrous products. The Company expects to make a capital investment of more
than $10.0 million for the acquisition of the property, plant and support equipment and related
improvements for the shredder project. The Company is using the proceeds from the Credit Agreement
and available cash to fund the project. The facility is expected to be operational by the end of
2011.
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On January 31, 2011, we acquired 100% of the outstanding capital stock of Goodman
Services, Inc., a Bradford, Pennsylvania-based full service recycling company with additional
facilities in Jamestown, New York and Canton, Ohio. The acquisition is consistent with our
expansion strategy of penetrating geographically contiguous markets and benefiting from
intercompany and operating synergies that are available through consolidation. Goodman Services,
Inc.s locations complement our existing facilities in the Great Lakes corridor. Bradford is 80
miles from our Buffalo operations and will become a feed source for the suburban Buffalo shredder.
Jamestown is 75 miles from our Buffalo yards. Canton, Ohio is in close proximity to our operations
in Akron, Ohio.
Contingencies
We are involved in certain other legal proceedings and litigation arising in the ordinary
course of business. In the opinion of management, the outcome of such other proceedings and
litigation will not materially affect the Companys consolidated financial position, results of
operations, or cash flows.
The Company does not carry, and does not expect to carry for the foreseeable future,
significant insurance coverage for environmental liability because the Company believes that the
cost for such insurance is not economical. However, we continue to monitor products offered by
various insurers that may prove to be practical. Accordingly, if the Company were to incur
liability for environmental damage in excess of accrued environmental remediation liabilities, its
consolidated financial position, results of operations, and cash flows could be materially
adversely affected. The Company and its subsidiaries are at this time in material compliance with
all of their pending remediation obligations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial risk resulting from fluctuations in interest rates and commodity
prices. We seek to minimize these risks through regular operating and financing activities.
However, from time to time, we may use derivative financial instruments when management feels such
hedging activities are beneficial to reducing risk of fluctuating interest rates and commodity
prices.
Interest rate risk
We are exposed to interest rate risk on our floating rate borrowings. As of September 30,
2011, $42.8 million of our outstanding debt consisted of variable rate borrowings under our senior
secured credit facility with JPMChase Bank and other lenders. Borrowings under the credit facility
bear interest at either the prime rate of interest plus a margin or LIBOR plus a margin. Increases
in either the prime rate or LIBOR may increase interest expense. Assuming our variable borrowings
were to equal the average borrowings under our senior secured credit facility during a fiscal year,
a hypothetical increase or decrease in interest rates by 1% would increase or decrease interest
expense on our variable borrowings by approximately $428,000 per year with a corresponding change
in cash flows. We have no open interest rate protection agreements as of September 30, 2011.
Commodity price risk
We are exposed to risks associated with fluctuations in the market price for both ferrous,
non-ferrous, PGM and lead metals which are at times volatile. See the discussion under the section
entitled Risk Factors The metals recycling industry is highly cyclical and export markets can
be volatile in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.
We attempt to mitigate this risk by seeking to turn our inventories quickly instead of holding
inventories in speculation of higher commodity prices. We use forward sales contracts with PGM
substrate processors to hedge against the extremely volatile PGM metal prices. The Company
estimates that if selling prices decreased by 10% in any of the business units in which we operate,
it would not have a material effect to the carrying value of our inventories. We have no open
commodity price protection agreements as of September 30, 2011.
Foreign currency risk
International sales account for an immaterial amount of our consolidated net revenues and all
of our international sales are denominated in U.S. dollars. We also purchase a small percentage of
our raw materials from international vendors and these purchases are also denominated in U.S.
dollars. Consequently, we do not enter into any foreign currency swaps to mitigate our exposure to
fluctuations in the currency rates.
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Common stock market price risk
We are exposed to risks associated with the market price of our own common stock. The
liability associated with the Put Warrants uses the value of our common stock as an input variable
to determine the fair value of this liability. Increases or decreases in the market price of our
common stock have a corresponding effect on the fair of this liability. For example, if the price
of our common stock was $1.00 higher as of September 30, 2011, the put warrant liability and
expense for financial instruments fair value adjustments would have increased by $488,000.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of September 30, 2011 to provide reasonable assurance that information
required to be disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms. Our disclosure controls and procedures include controls and
procedures designed to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
On January 31, 2011, the Company acquired all of the outstanding common stock of Goodman
Services, Inc. We have started to document and analyze the systems of disclosure controls and
procedures and internal control over financial reporting of this acquired company and integrate it
within our broader framework of controls. As we integrate the historical internal controls over
financial reporting of the acquisition into our own internal controls over financial reporting,
certain temporary changes may be made to our internal controls over financial reporting until such
time as this integration is complete. Although we have not presently identified any material
weaknesses in our disclosure controls and procedures or internal control over financial reporting
as a result of this acquisition, there can be no assurance that a material weakness will not be
identified in the course of this review.
(b) Changes in internal controls over financial reporting.
There was no change in the Companys internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our quarter ended September 30, 2011 that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in various litigation matters involving ordinary and
routine claims incidental to our business. A significant portion of these matters result from
environmental compliance issues and workers compensation-related claims applicable to our
operations. We are involved in litigation and environmental proceedings as described in Note 12 of
the accompanying financial statements. A description of matters in which we are currently involved
is set forth at Item 3 of our Annual Report on Form 10-K for 2010.
Item 1A. Risk Factors
There were no material changes in any risk factors previously disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission
on March 14, 2011.
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Item 6. Exhibits
The following exhibits are filed herewith:
31.1
|
Certification of Chief Executive Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended | |
31.2
|
Certification of Chief Financial Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended | |
32.1
|
Certification of Chief Executive Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code | |
32.2
|
Certification of Chief Financial Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code |
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
METALICO, INC. (Registrant) |
||||
Date: November 3, 2011 | By: | /s/ CARLOS E. AGÜERO | ||
Carlos E. Agüero | ||||
Chairman, President and Chief Executive Officer |
||||
Date: November 3, 2011 | By: | /s/ ERIC W. FINLAYSON | ||
Eric W. Finlayson | ||||
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
||||
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