Attached files
file | filename |
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EX-31.1 - EX-31.1 - METALICO INC | d800379dex311.htm |
EX-31.2 - EX-31.2 - METALICO INC | d800379dex312.htm |
EX-32.1 - EX-32.1 - METALICO INC | d800379dex321.htm |
EX-32.2 - EX-32.2 - METALICO INC | d800379dex322.htm |
EXCEL - IDEA: XBRL DOCUMENT - METALICO INC | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
or
¨ | 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 x NO ¨
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 x NO ¨
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 | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ¨ NO x
Number of shares of Common stock, par value $.001, outstanding as of November 7, 2014: 58,322,983
Table of Contents
Form 10-Q Quarterly Report
Table of Contents
PART I | ||||
Item 1. |
Page 3 | |||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Page 20 | ||
Item 3. |
Page 32 | |||
Item 4. |
Page 33 | |||
PART II | ||||
Item 1. |
Page 33 | |||
Item 1A. |
Page 33 | |||
Item 3. |
Page 34 | |||
Item 6. |
Page 34 |
2
Table of Contents
Item 1. | Financial Statements |
METALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2014 and December 31, 2013
2014 | 2013 | |||||||
(Unaudited) | (Note 1) | |||||||
($ thousands) | ||||||||
ASSETS | ||||||||
Current Assets |
||||||||
Cash |
$ | 7,524 | $ | 7,056 | ||||
Trade receivables, less allowance for doubtful accounts 2014 - $479; 2013 - $524 |
58,635 | 53,417 | ||||||
Inventories |
50,736 | 69,683 | ||||||
Prepaid expenses and other current assets |
4,844 | 5,660 | ||||||
Assets of discontinued operations |
36,025 | | ||||||
Income taxes receivable |
417 | 2,050 | ||||||
Deferred income taxes |
1,855 | 2,607 | ||||||
|
|
|
|
|||||
Total current assets |
160,036 | 140,473 | ||||||
Property and equipment, net |
81,515 | 98,748 | ||||||
Goodwill |
17,075 | 22,443 | ||||||
Other intangibles, net |
28,212 | 31,450 | ||||||
Other assets, net |
7,630 | 7,899 | ||||||
|
|
|
|
|||||
Total assets |
$ | 294,468 | $ | 301,013 | ||||
|
|
|
|
|||||
LIABILITIES AND EQUITY | ||||||||
Current Liabilities |
||||||||
Current maturities of other long-term debt |
$ | 6,392 | $ | 6,327 | ||||
Accounts payable |
21,076 | 17,956 | ||||||
Accrued expenses and other current liabilities |
4,284 | 3,845 | ||||||
Liabilities of discontinued operations |
2,793 | | ||||||
|
|
|
|
|||||
Total current liabilities |
34,545 | 28,128 | ||||||
|
|
|
|
|||||
Long-Term Liabilities |
||||||||
Senior unsecured convertible notes payable |
24,262 | 23,172 | ||||||
Other long-term debt, less current maturities |
95,100 | 97,919 | ||||||
Deferred income taxes |
2,195 | 2,295 | ||||||
Accrued expenses and other long-term liabilities |
856 | 1,267 | ||||||
|
|
|
|
|||||
Total long-term liabilities |
122,413 | 124,653 | ||||||
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|
|
|
|||||
Total liabilities |
156,958 | 152,781 | ||||||
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|
|||||
Commitments and Contingencies (Note 13) |
||||||||
Equity |
||||||||
Common stock |
48 | 48 | ||||||
Additional paid-in capital |
185,743 | 185,520 | ||||||
Accumulated deficit |
(48,539 | ) | (38,017 | ) | ||||
Accumulated other comprehensive loss |
(372 | ) | (372 | ) | ||||
|
|
|
|
|||||
Total Metalico, Inc. and Subsidiaries equity |
136,880 | 147,179 | ||||||
Noncontrolling interest |
630 | 1,053 | ||||||
|
|
|
|
|||||
Total equity |
137,510 | 148,232 | ||||||
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|
|||||
Total liabilities and equity |
$ | 294,468 | $ | 301,013 | ||||
|
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|
|
See notes to condensed consolidated financial statements.
3
Table of Contents
METALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2014 and 2013
Three months ended | Nine months ended | |||||||||||||||
September 30, 2014 |
September 30, 2013 |
September 30, 2014 |
September 30, 2013 |
|||||||||||||
(Unaudited) | ||||||||||||||||
($ thousands, except share and per share data) | ||||||||||||||||
Revenue |
$ | 128,586 | $ | 117,748 | $ | 372,990 | $ | 348,264 | ||||||||
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|
|
|
|
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|
|||||||||
Costs and expenses |
||||||||||||||||
Operating expenses |
118,089 | 108,152 | 345,387 | 323,747 | ||||||||||||
Selling, general, and administrative expenses |
4,477 | 4,953 | 14,885 | 15,958 | ||||||||||||
Impairment charges |
| 38,737 | | 38,737 | ||||||||||||
Gain on acquisition |
| (105 | ) | | (105 | ) | ||||||||||
Depreciation and amortization |
3,873 | 4,182 | 11,705 | 12,303 | ||||||||||||
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|
|||||||||
126,439 | 155,919 | 371,977 | 390,640 | |||||||||||||
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|
|||||||||
Operating income (loss) |
2,147 | (38,171 | ) | 1,013 | (42,376 | ) | ||||||||||
|
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|
|
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|
|||||||||
Financial and other income (expense) |
||||||||||||||||
Interest expense |
(2,980 | ) | (2,287 | ) | (7,665 | ) | (6,727 | ) | ||||||||
Gain on debt extinguishment |
| 324 | | 324 | ||||||||||||
Financial instruments fair value adjustments |
| | | 3 | ||||||||||||
Other |
22 | 352 | 52 | 361 | ||||||||||||
|
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|
|
|
|
|
|
|||||||||
(2,958 | ) | (1,611 | ) | (7,613 | ) | (6,039 | ) | |||||||||
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|
|
|
|||||||||
Loss from continuing operations before income taxes |
(811 | ) | (39,782 | ) | (6,600 | ) | (48,415 | ) | ||||||||
Provision (benefit) for federal and state income taxes |
1,302 | (12,752 | ) | 580 | (14,520 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from continuing operations |
(2,113 | ) | (27,030 | ) | (7,180 | ) | (33,895 | ) | ||||||||
(Loss) income from discontinued operations net of income taxes (Note 3) |
(4,898 | ) | (669 | ) | (3,765 | ) | 2,235 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated net loss |
(7,011 | ) | (27,699 | ) | (10,945 | ) | (31,660 | ) | ||||||||
Net loss attributable to noncontrolling interest |
108 | 48 | 423 | 98 | ||||||||||||
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|
|
|
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|
|||||||||
Net loss attributable to Metalico, Inc. |
$ | (6,903 | ) | $ | (27,651 | ) | $ | (10,522 | ) | $ | (31,562 | ) | ||||
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|
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|
|||||||||
(Loss) income per common share: |
||||||||||||||||
Basic and diluted |
||||||||||||||||
Loss from continuing operations |
$ | (0.04 | ) | $ | (0.56 | ) | $ | (0.14 | ) | $ | (0.71 | ) | ||||
(Loss) income from discontinued operations |
(0.10 | ) | (0.02 | ) | (0.08 | ) | 0.05 | |||||||||
|
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|
|||||||||
Net loss |
$ | (0.14 | ) | $ | (0.58 | ) | $ | (0.22 | ) | $ | (0.66 | ) | ||||
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|
|||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic and diluted |
48,219,340 | 48,035,117 | 48,199,728 | 47,909,811 | ||||||||||||
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4
Table of Contents
METALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three and Nine Months Ended September 30, 2014 and 2013
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2014 |
September 30, 2013 |
September 30, 2014 |
September 30, 2013 |
|||||||||||||
(Unaudited) | ||||||||||||||||
($ thousands) | ||||||||||||||||
Consolidated net loss |
$ | (7,011 | ) | $ | (27,699 | ) | $ | (10,945 | ) | $ | (31,660 | ) | ||||
Other comprehensive (loss) income, net of tax |
| | | | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Comprehensive loss |
$ | (7,011 | ) | $ | (27,699 | ) | $ | (10,945 | ) | $ | (31,660 | ) | ||||
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
Table of Contents
METALICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2014 and 2013
2014 | 2013 | |||||||
(Unaudited) | ||||||||
($ thousands) | ||||||||
Cash Flows from Operating Activities |
||||||||
Consolidated net loss |
$ | (10,945 | ) | $ | (31,660 | ) | ||
Loss (income) from discontinued operations |
3,765 | (2,235 | ) | |||||
Adjustments to reconcile consolidated net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
12,808 | 13,088 | ||||||
Deferred income tax expense (benefit) |
528 | (9,267 | ) | |||||
Provision for doubtful accounts receivable |
26 | 82 | ||||||
Provision for loss on vendor advances |
| 34 | ||||||
Financial instruments fair value adjustments |
| (3 | ) | |||||
Net (gain) loss on sale of property and equipment |
(264 | ) | 109 | |||||
Gain on debt extinguishment |
| (324 | ) | |||||
Gain on acquisition |
| (105 | ) | |||||
Impairment charges |
| 38,737 | ||||||
Interest paid in kind |
1,076 | | ||||||
Equity in loss of unconsolidated investee |
| 78 | ||||||
Compensation expense on restricted stock and stock options |
232 | 788 | ||||||
Change in assets and liabilities, net of acquisitions: |
||||||||
Trade receivables |
(7,907 | ) | 2,267 | |||||
Inventories |
4,410 | 4,371 | ||||||
Income taxes receivable, prepaid expenses and other |
2,165 | (3,083 | ) | |||||
Accounts payable, accrued expenses, income taxes payable and other liabilities |
5,914 | 1,278 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities continuing operations |
11,808 | 14,155 | ||||||
Net cash (used in) provided by operating activities discontinued operations |
(1,109 | ) | 3,565 | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
10,699 | 17,720 | ||||||
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|
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Cash Flows from Investing Activities |
||||||||
Proceeds from sale of property and equipment |
341 | 158 | ||||||
Purchases of property and equipment |
(6,247 | ) | (7,518 | ) | ||||
Cash paid for business acquisitions, less cash acquired |
| (1,958 | ) | |||||
(Increase) decrease in other assets |
112 | (78 | ) | |||||
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|
|||||
Net cash used in investing activities continuing operations |
(5,794 | ) | (9,396 | ) | ||||
Net cash used in investing activities discontinued operations |
(1,017 | ) | (721 | ) | ||||
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|
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Net cash used in investing activities |
(6,811 | ) | (10,117 | ) | ||||
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|
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Cash Flows from Financing Activities |
||||||||
Net borrowings (payments) under revolving lines-of-credit |
2,404 | (577 | ) | |||||
Proceeds from other borrowings |
1,509 | 2,139 | ||||||
Principal payments on other borrowings |
(6,669 | ) | (9,306 | ) | ||||
Debt issuance costs paid |
(664 | ) | (725 | ) | ||||
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Net cash used in financing activities continuing operations |
(3,420 | ) | (8,469 | ) | ||||
Net cash used in financing activities discontinued operations |
| | ||||||
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Net cash used in financing activities |
(3,420 | ) | (8,469 | ) | ||||
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Net increase (decrease) in cash |
468 | (866 | ) | |||||
Cash: |
||||||||
Beginning of period |
7,056 | 5,418 | ||||||
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|
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End of period |
$ | 7,524 | $ | 4,552 | ||||
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See notes to condensed consolidated financial statements.
6
Table of Contents
METALICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ thousands, except per share data)
(Unaudited)
Note 1 General
Business
Metalico, Inc. and subsidiaries (the Company) operates thirty-one scrap metal recycling facilities (Scrap Metal Recycling), including an aluminum de-oxidizing plant co-located with a scrap metal recycling facility, in a single reportable segment. As of September 30, 2014, due to its anticipated sale, the Company has reclassified its lead metal product fabricating (Lead Fabricating) operations, a previously separate reportable segment, as discontinued operations (see Note 3). The Company markets a majority of its products domestically but maintains several international customers.
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). The consolidated financial statements include the accounts of Metalico, Inc., a Delaware corporation, its wholly-owned subsidiaries, subsidiaries in which it has a controlling interest, consolidated entities in which it has made equity investments, or has other interests through which it has majority-voting control or it exercises the right to direct the activities that most significantly impact the entitys performance. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Companys equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries and other consolidated entities have been eliminated in consolidation. Certain information related to the Companys organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with U.S. 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.
As indicated above and further described in Note 3, in the condensed consolidated balance sheet as of September 30, 2014, the Company has reclassified as discontinued operations, the assets and liabilities of its former Lead Fabricating segment which are expected to be sold having met the criteria for such classification. The operating results of the former Lead Fabricating segment have also been reclassified into discontinued operations in the condensed consolidated statements of operations and cash flows. Prior period amounts were conformed to the current period presentation.
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, 2013, 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, 2013 has been derived from the audited balance sheet as of that date included in the Form 10-K.
Liquidity and Risk
On November 21, 2013, the Company entered into a six-year senior credit facility (as further described below in Note 9, the Financing Agreement) with revolving and term loan components to replace its former revolving credit facility, repurchase a significant portion of the Companys outstanding 7% Convertible Notes (the Notes) and provide liquidity to retire any Notes subject to an optional repurchase right effective on June 30, 2014. The Company did not meet the maximum leverage ratio covenant prescribed by the Financing Agreement for the quarterly periods ending March 31, and June 30, 2014 and the lenders party to the Financing Agreement restricted availability under the term portion of the agreement to redeem the Notes. On June 30, 2014, the Company received redemption notices from the Note holders, was unable to draw funds under the Financing Agreement meant to redeem the Notes and was consequently in default on the Notes. As described in Note 9, on October 21, 2014, the Company cured its defaults through the completion of a debt restructuring which included an amendment to the Financing Agreement, an equity conversion of certain Notes and an exchange of new ten-year convertible notes and stock rights for the balance of its previously outstanding Notes. No assurance can be given that the Company will maintain compliance in forthcoming quarters or that the lenders will waive future noncompliance.
7
Table of Contents
The Company expects to fund current working capital needs, interest payments and capital expenditures through the next twelve months with cash on hand and cash generated from operations, supplemented by borrowings available under the current senior credit agreement and potentially available elsewhere, such as vendor financing or other equipment lines of credit.
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern, which requires management of a company to evaluate whether there is substantial doubt about the companys ability to continue as a going concern. This ASU is effective for the annual reporting period ending after December 15, 2016, and for interim and annual reporting periods thereafter, with early adoption permitted. The Company is currently assessing the impact that this standard will have on its condensed consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU becomes effective for the Company at the beginning of its 2017 fiscal year; early adoption is not permitted. The Company is currently assessing the impact that this standard will have on its condensed consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the criteria for determining which disposals can be presented as a discontinued operation and modifies existing disclosure requirements. Under the revised standard, a discontinued operation must represent a strategic shift that has or will have a major effect on an entitys operations and financial results. This ASU is effective for reporting periods beginning after December 15, 2014 with early adoption permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issue. The Company has not elected early adoption and is currently evaluating the new guidance to determine the future impact it may have to its consolidated financial statements.
Note 2 Business Acquisitions
Business acquisition (scrap metal recycling segment): On December 23, 2013, the Company, through its Goodman Services, Inc. subsidiary, acquired substantially all of the operating assets of Furlows North East Auto, Inc. an automotive salvage and parts provider in North East, Pennsylvania, in the Greater Erie vicinity. Closing on the real property was completed on March 3, 2014. The Company plans to grow the facilitys salvage car buying capabilities and continue its pick-and-pull auto parts business while taking advantage of additional access to scrap metal to feed its shredder in suburban Buffalo, New York. The purchase price was paid using cash provided under the Companys current credit agreement and notes payable to the sellers. The allocation of the purchase price did not result in any goodwill. Unaudited pro forma results are not presented as they are not material to the Companys overall consolidated financial statements.
Business acquisition (scrap metal recycling segment): On July 23, 2013, the Company, through its Goodman Services, Inc. subsidiary, acquired substantially all of the assets, including real property, of Segel and Son, Inc. a family-owned scrap iron and metal recycling business with facilities in Warren, Pennsylvania and Olean, New York. The acquisition provides a source of feedstock material for the Companys shredder facility located nearby in suburban Buffalo. The purchase price was paid using cash provided under the Companys previous credit agreement. The allocation of the purchase price resulted in a bargain purchase gain of $105 (net of $67 in deferred income taxes) and no goodwill was recorded. The Company also issued common stock valued at $25 to a former Segel officer as an inducement to enter into a one-year employment agreement. Unaudited pro forma results are not presented as they are not material to the Companys overall consolidated financial statements.
8
Table of Contents
Business acquisition (scrap metal recycling segment): On February 4, 2013, the Company, through its Metalico Pittsburgh, Inc. subsidiary, acquired certain accounts, equipment and a lease of certain real property from Three Rivers Scrap Metal, Inc. to operate a scrap metal recycling facility in the Greater Pittsburgh area in north suburban Conway, Beaver County, Pennsylvania. The acquisition provides a source of feedstock material for the Companys shredder facility located nearby on Neville Island in Pittsburgh. The purchase price was paid using cash provided under the Companys previous Credit Agreement. The financial statements include a purchase price allocation which did not result in the recording of goodwill. Unaudited pro forma results are not presented as they are not material to the Companys overall consolidated financial statements.
Note 3 Assets Held-for-Sale and Discontinued Operations
The Company is in advanced negotiations to sell substantially all of the assets of its Lead Fabricating operating segment for approximately $29,350 in cash, with the price subject to adjustment for the level of working capital at the date of sale. Anticipated proceeds are expected to be approximately $32,000. The Lead Fabricating operations comprise the entirety of the Companys Lead Fabricating reportable segment. The transaction is subject to the purchasers due diligence process, as well as other customary closing conditions. It is anticipated that the transaction will close by December 31, 2014. The assets and liabilities related to Lead Fabricating business are segregated in the September 30, 2014 Condensed Consolidated Balance Sheets in the period in which the business is classified as held for sale.
The following table summarizes the components of the Companys Lead Fabricating operations assets and liabilities on the Condensed Consolidated Balance Sheet as of September 30, 2014:
September 30, 2014 |
||||
Assets: |
||||
Trade receivables |
$ | 7,743 | ||
Inventories |
14,214 | |||
Prepaid expenses and other current assets |
831 | |||
Property and equipment, net |
13,047 | |||
Other assets, net |
190 | |||
|
|
|||
Total assets held for sale |
$ | 36,025 | ||
|
|
|||
Liabilities: |
||||
Accounts payable |
$ | 1,635 | ||
Accrued expenses and other liabilities |
1,158 | |||
|
|
|||
Total liabilities held for sale |
$ | 2,793 | ||
|
|
The Company reports the results of operations of a business as discontinued operations if the business is classified as held for sale, the operations and cash flows of the business have been or will be eliminated from ongoing operations as a result of a disposal transaction and the Company will not have any significant continuing involvement in the operations of the business after the disposal transaction. The results of discontinued operations are reported in Discontinued Operations in the Condensed Consolidated Statements of Operations for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation.
9
Table of Contents
The results of operations for the Lead Fabricating businesses presented as discontinued operations in the Condensed Consolidated Statements of Operations are as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, 2014 |
September 30, 2013 |
September 30, 2014 |
September 30, 2013 |
|||||||||||||
Revenue |
$ | 17,991 | $ | 18,035 | $ | 51,085 | $ | 55,111 | ||||||||
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Costs and expenses |
||||||||||||||||
Operating expenses |
15,589 | 15,461 | 44,034 | 46,922 | ||||||||||||
Selling, general, and administrative expenses |
1,004 | 961 | 3,003 | 2,896 | ||||||||||||
Accrued loss on sale |
6,640 | | 6,640 | | ||||||||||||
Depreciation and amortization |
386 | 408 | 1,180 | 1,231 | ||||||||||||
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23,619 | 16,830 | 54,857 | 51,049 | |||||||||||||
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|||||||||
(Loss) income from discontinued operations |
(5,628 | ) | 1,205 | (3,772 | ) | 4,062 | ||||||||||
Financial and other income (expense) |
| 42 | 2 | (76 | ) | |||||||||||
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|
|||||||||
(Loss) income from discontinued operations, before income tax expense |
(5,628 | ) | 1,247 | (3,770 | ) | 3,986 | ||||||||||
(Benefit from) provision for income taxes |
(730 | ) | 1,916 | (5 | ) | 1,751 | ||||||||||
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|
|
|
|
|
|
|
|||||||||
Loss from discontinued operations |
$ | (4,898 | ) | $ | (669 | ) | $ | (3,765 | ) | $ | 2,235 | |||||
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|
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Note 4 Major Customer
Revenues for the three and nine months ended September 30, 2014 and 2013, include revenue from net sales to a particular continuing operations customer (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, 2014 and December 31, 2013.
Net sales to Customer as a percentage of Total Revenues |
Trade Receivable Balance as of | |||||||||||||||||||||||
Three Months Ended September 30, 2014 |
Three Months Ended September 30, 2013 |
Nine Months Ended September 30, 2014 |
Nine Months Ended September 30, 2013 |
September 30, 2014 |
December 31, 2013 |
|||||||||||||||||||
Customer A |
10.6 | % | 5.8 | % | 8.2 | % | 5.7 | % | $ | 8,830 | $ | 5,065 |
Note 5 Inventories
Inventories as of September 30, 2014 and December 31, 2013 were as follows:
September 30, 2014 |
December 31, 2013 |
|||||||
Raw materials |
$ | 2,770 | $ | 5,085 | ||||
Work-in-process |
615 | 6,479 | ||||||
Finished goods |
977 | 7,192 | ||||||
Ferrous scrap metal |
24,667 | 27,277 | ||||||
Non-ferrous scrap metal |
21,707 | 23,650 | ||||||
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|
|
|||||
$ | 50,736 | $ | 69,683 | |||||
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Table of Contents
Note 6 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. At June 30, 2014, the actual year-to-date operating results of the Companys Bradford, PA reporting unit differed significantly enough from forecast to determine that impairment to the carrying value of its goodwill was possible. The Company performed an interim goodwill impairment test for its Bradford, PA Scrap Metal Recycling reporting unit as of that date. Using revised forecasts in a discounted cash flow model, the impairment test indicated the fair value of the reporting units goodwill exceeded its carrying value and no impairment charges were required. The Company continues to closely monitor the operating results of this and the other remaining reporting units with recorded goodwill to determine if an interim impairment analysis is required. Due to the anticipated sale of the Companys Lead Fabricating reporting unit, a loss of $5,368 was recorded at September 30, 2014 for the carrying value of the goodwill of Lead Fabricating as the carrying value exceeds the anticipated selling price. Changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2014 were as follows:
Scrap Metal Recycling |
Lead Fabricating (Discontinued) |
Corporate and Other |
Consolidated | |||||||||||||
December 31, 2013 |
$ | 17,075 | $ | 5,368 | $ | | $ | 22,443 | ||||||||
Acquired during the period |
| | | | ||||||||||||
Anticipated loss on sale |
| (5,368 | ) | | (5,368 | ) | ||||||||||
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|
|
|
|
|||||||||
September 30, 2014 |
$ | 17,075 | $ | | $ | | $ | 17,075 | ||||||||
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|
Adverse changes in general economic and market conditions and future volatility in the equity markets could have further impact on the Companys valuation of its reporting units and may require the Company to assess the carrying value of its remaining goodwill and other intangibles prior to normal annual testing dates.
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, 2014, no adjustments were made to the estimated lives of unimpaired finite-lived assets. Other intangible assets as of September 30, 2014 and December 31, 2013 consisted of the following:
Gross Carrying Amount |
Accumulated Amortization |
Impairment Charges |
Anticipated Loss on Sale |
Net Carrying Amount |
||||||||||||||||
September 30, 2014 |
||||||||||||||||||||
Covenants not-to-compete |
$ | 6,514 | $ | (2,621 | ) | $ | | $ | | $ | 3,893 | |||||||||
Trademarks and tradenames |
4,875 | | | (875 | ) | 4,000 | ||||||||||||||
Supplier relationships |
35,024 | (14,705 | ) | | | 20,319 | ||||||||||||||
Know-how |
397 | | | (397 | ) | | ||||||||||||||
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|
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|
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|
|
|||||||||||
$ | 46,810 | $ | (17,326 | ) | $ | | $ | (1,272 | ) | $ | 28,212 | |||||||||
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|
|
|
|||||||||||
December 31, 2013 |
||||||||||||||||||||
Covenants not-to-compete |
$ | 6,514 | $ | (2,188 | ) | $ | | $ | | $ | 4,326 | |||||||||
Trademarks and trade names |
5,975 | | (1,100 | ) | | 4,875 | ||||||||||||||
Supplier relationships |
40,330 | (13,171 | ) | (5,307 | ) | | 21,852 | |||||||||||||
Know-how |
397 | | | | 397 | |||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||
$ | 53,216 | $ | (15,359 | ) | $ | (6,407 | ) | $ | | $ | 31,450 | |||||||||
|
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|
|
|
|
|
|
|
|
The changes in the net carrying amount of amortizable intangible assets by classifications for the nine months ended September 30, 2014 were as follows:
Covenants Not-to- Compete |
Supplier Relationships |
|||||||
Balance, December 31, 2013 |
$ | 4,326 | $ | 21,852 | ||||
Acquisitions/additions |
| | ||||||
Amortization |
(433 | ) | (1,533 | ) | ||||
|
|
|
|
|||||
Balance, September 30, 2014 |
$ | 3,893 | $ | 20,319 | ||||
|
|
|
|
Amortization expense on finite-lived intangible assets for the three and nine months ended September 30, 2014 was $655 and $1,966, respectively. Amortization expense on finite-lived intangible assets for the three and nine months ended September 30, 2013 was $802 and $2,405, respectively.
As described in Note 3, due to the anticipated sale of the Companys Lead Fabricating reporting unit, the Company recorded a loss of $1,272 which included $875 in trademarks and $397 of know-how as the carrying value exceeds the anticipated selling price.
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Estimated aggregate amortization expense on amortized intangible assets for each of the periods listed below is as follows:
Years Ending December 31: |
Amount | |||
Remainder of 2014 |
$ | 655 | ||
2015 |
2,834 | |||
2016 |
2,828 | |||
2017 |
2,441 | |||
2018 |
1,885 | |||
Thereafter |
13,569 | |||
|
|
|||
$ | 24,212 | |||
|
|
Note 7 Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of September 30, 2014 and December 31, 2013 consisted of the following:
September 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
Current | Long- Term |
Total | Current | Long- Term |
Total | |||||||||||||||||||
Environmental monitoring costs |
$ | 61 | $ | 761 | $ | 822 | $ | 109 | $ | 761 | $ | 870 | ||||||||||||
Payroll and employee benefits |
1,846 | | 1,846 | 940 | 387 | 1,327 | ||||||||||||||||||
Interest and bank fees |
388 | | 388 | 431 | | 431 | ||||||||||||||||||
Customer obligations |
| | | 458 | | 458 | ||||||||||||||||||
Other |
1,989 | 95 | 2,084 | 1,907 | 119 | 2,026 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 4,284 | $ | 856 | $ | 5,140 | $ | 3,845 | $ | 1,267 | $ | 5,112 | |||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
Note 8 Stock Options and Stock-Based Compensation
Stock-based compensation expense was $53 and $203 for the three months ended September 30, 2014 and 2013, respectively, and $232 and $788 for the nine months ended September 30, 2014 and 2013, 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, 2013 was estimated on the date of the grant using a Black-Scholes option-pricing model that uses the assumptions noted in the following table. No options were granted during the nine months ended September 30, 2014.
Black-Scholes Valuation Assumptions (1) | Nine Months Ended September 30, 2013 |
|||
Weighted average expected life (in years) (2) |
5.0 | |||
Weighted average expected volatility (3) |
81.08 | % | ||
Weighted average risk free interest rates (4) |
1.32 | % | ||
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, 2014 were as follows:
Number of Stock Options |
Weighted Average Exercise Price |
|||||||
Options outstanding, beginning of period |
1,051,288 | $ | 4.00 | |||||
Options granted |
| | ||||||
Options exercised |
| | ||||||
Options forfeited or expired |
(411,121 | ) | $ | 3.87 | ||||
|
|
|||||||
Options outstanding, end of period |
640,167 | $ | 4.09 | |||||
|
|
|||||||
Options exercisable, end of period |
638,820 | $ | 4.09 | |||||
|
|
|
|
12
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The weighted average remaining contractual term and the aggregate intrinsic value of both options outstanding and options exercisable as of September 30, 2014 was 0.9 years and $0, respectively.
The weighted average fair value for the stock options granted during the nine months ended September 30, 2013 was $0.96. The weighted average remaining contractual term and the aggregate intrinsic value of both options outstanding and options exercisable as of September 30, 2013 was 1.5 years and $0, respectively.
There were no stock options exercised during the nine months ended September 30, 2014 and 2013.
As of September 30, 2014, total unrecognized stock-based compensation expense related to stock options was $1, which is expected to be recognized over a weighted average period of 1.5 years.
Deferred Stock
Deferred stock awards granted vest and are issued ratably over a three-year period from the date of grant. Changes in the Companys deferred stock awards for the nine months ended September 30, 2014 were as follows:
Number of Stock Awards |
Weighted-Average Grant Date Fair Value |
|||||||
Outstanding at beginning of period |
303,736 | $ | 2.44 | |||||
Stock awards granted |
10,000 | $ | 1.84 | |||||
Stock awards cancelled\forfeited |
(6,900 | ) | $ | 1.55 | ||||
Stock awards vested and issued |
(86,581 | ) | $ | 4.63 | ||||
|
|
|||||||
Outstanding at end of period |
220,255 | $ | 1.58 | |||||
|
|
|
|
As of September 30, 2014, total unrecognized stock-based compensation expense related to stock awards was $205, which is expected to be recognized over a weighted average period of 1.3 years.
Note 9 Long-Term Debt
On November 21, 2013, the Company entered into a Financing Agreement (the Financing Agreement) with a syndicate of lenders led by TPG Specialty Lending, Inc. (TPG), as agent. The six-year agreement consists of senior secured credit facilities in the aggregate amount of $125,000, including a $65,000 revolving line of credit and two term loan facilities totaling $60,000. The revolving line of credit provides for revolving loans that, in the aggregate, are not to exceed the lesser of $65,000 and a Borrowing Base amount based on specified percentages of eligible accounts receivable and inventory. Revolving loans bear interest at the Base Rate (a rate determined by reference to the prime rate but in any event not less than 3.00%) plus 2.00% or, at the Companys election, a LIBOR-based rate (the current LIBOR rate but in any event not less than 1.00%) plus 3.00% (an aggregate effective rate of 4.16% at September 30, 2014). The term loans bear interest at the Base Rate plus 7.50% or, at the Companys election, the LIBOR-based rate plus 8.50% (an aggregate effective rate of 9.50% at September 30, 2014) and related deferred financing costs are being amortized over the term of the Financing Agreement. The proceeds of the Financing Agreement were used to retire the Companys revolving credit agreement with JPMorgan Chase Bank, NA, Inc., as agent and other lenders party thereto, and to repurchase $36,741 of the Companys 7% Convertible Notes ( the Notes).
At June 30, 2014, the Company was not in compliance with the maximum leverage ratio covenant prescribed by the Financing Agreement. The Companys failure to redeem its Notes on June 30, 2014 was also an event of a default under the terms of the Financing Agreement.
On October 21, 2014, the Company entered into a Second Amendment (Second Amendment) to the Financing Agreement. The Second Amendment increases interest rate margins to 2.75% for Base rate revolving loans and 3.75% for LIBOR-based revolving loans; 8.50% for Base rate term loans and 9.50% for LIBOR-based term loans. The Second Amendment also resets the Maximum Leverage Ratio for the quarterly periods through December 31, 2016 with further reset provisions subject to certain specified asset sales and excluded the balance of the Notes from the debt component of
13
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the leverage ratio calculation. In addition to a cash amendment fee of $578, the senior lenders also received an additional fee of $3,500 that is payable either in cash at the maturity of the outstanding term loans under the Financing Agreement and/or, at the holders option, but without duplication, in shares of the Companys common stock pursuant to a warrant issued at closing with a cashless exercise feature. The Second Amendment also waives the previously existing defaults under the Financing Agreement and resets the Maximum Leverage Ratio for the September 30, 2014 through December 31, 2016 quarterly periods, lifts a non-payment blockage to junior lenders and provides consent to amend the Notes.
The Company remains subject to certain financial covenants, including maximum leverage, maximum capital expenditures and minimum availability, 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. Obligations under the Financing Agreement are secured by substantially all of the Companys assets. Outstanding balances under the revolving line of credit and term loans were $50,621 and $33,191, respectively, as of September 30, 2014. At September 30, 2014, availability under the revolving portion of the Financing Agreement was $11,535. The Company believes it will be able to meet the future maximum leverage ratio covenants modified under the Second Amendment and thus all of the outstanding balances under the Financing Agreement have been classified as long-term liabilities.
Listed below are the material debt covenants as prescribed by the Second Amendment to the Financing Agreement.
Maximum Leverage Ratio ratio of total debt (excluding balances due under the New Series Convertible Notes) to trailing four-quarter EBITDA at September 30, 2014 must not exceed covenant:
Covenant |
6.00 to 1.00 | |
Actual |
4.78 to 1.00 |
Maximum Leverage Ratios under the Financing Agreement for the next four quarterly periods are as follows:
For the quarterly period ending: |
Covenant Ratio | |
December 31, 2014 |
6.00 to 1.0 | |
March 31, 2015 |
6.00 to 1.0 | |
June 30, 2015 |
6.00 to 1.0 | |
September 30, 2015 |
6.00 to 1.0 |
Maximum Consolidated Capital Expenditures capital expenditures for the nine months ended September 30, 2014 must not exceed covenant
Covenant |
$ | 9,000 | ||
Actual |
$ | 7,073 |
On December 12, 2011, the Company entered into an Equipment Finance Agreement (the Equipment Finance Agreement) with First Niagara Leasing, Inc. (First Niagara) providing up to $10,418. The Company used $6,585 to repay a term loan provided under the Companys previous credit agreement with JPMorgan Chase Bank, NA, Inc., as agent, and other lenders party thereto. The loan is secured by the Buffalo, New York shredder and related equipment. Upon entering the Financing Agreement with the TPG lending group, the Company and First Niagara entered into an amendment adopting the covenants prescribed by the Financing Agreement, which includes the covenants prescribed by the Second Amendment. All cross defaults due to the defaults under the Financing Agreement have been waived by First Niagara. A previous loan modification shortened the First Niagara maturity to coincide with the maturity of the Financing Agreement in November 2019 and accordingly increased the required monthly payments from $110 to $141. The interest rate under the loan remains unchanged at 4.77% per annum. As of September 30, 2014 and December 31, 2013, the outstanding balance under the loan was $7,735 and $8,708, respectively.
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 $100,000 of Senior Unsecured Convertible Notes (the Notes) convertible at all times into shares of the Companys common stock (Note Shares). The original conversion price of the Notes was $14.00 per share. The Notes bore interest at 7% per annum, payable in cash, and matured in April 2028. The Notes also contained an optional repurchase right requiring the Company to redeem the Notes at par which was exercised by the
14
Table of Contents
Note holders on June 30, 2014. Due to the Companys inability to meet the maximum leverage ratio covenant under the Financing Agreement at March 31, 2014, availability under the term portion of the Financing Agreement to redeem the Notes was restricted by the lenders party to the Financing Agreement and on June 30, 2014, the Company was unable to redeem the Notes. As of September 30, 2014 and December 31, 2013, the outstanding balance plus accrued unpaid interest on the Notes of $1,076 was $24,262 and $23,172, respectively (net of $282 and $297, respectively, in unamortized discount related to the original fair value of warrants issued with the Notes).
On October 20, 2014, the Note holders converted $10,000 of the debt to Metalico common stock under the terms of the Notes at a rate of $0.9904 per share. Pursuant to individual Exchange Agreements dated October 21, 2014, the holders exchanged the remaining principal balance plus accrued unpaid interest, a total of $14,727, for three sets of New Series Convertible Notes (described below) and a right to receive additional common shares in the event the trading price of the Companys stock falls below certain values, determined at December 17, 2014, the fortieth trading day after the date of the Exchange Agreement.
New Series Convertible Notes
The remaining $14,727 Note balance not converted on October 20, 2014, was exchanged into New Series Convertible Notes. The aggregate principal amounts of each of the Series A New Series Convertible Notes and the Series C New Series Convertible Notes is $4,490 and the aggregate principal amount of the Series B New Series Convertible Notes is $5,748. The New Series Convertible Notes mature on July 1, 2024 and bear interest, payable in kind, at a rate of 13.5% per annum. The interest rate was applicable retroactively to balances under the original Notes as of July 1, 2014 and resulted in $804 of paid in kind interest expense in the quarter ended September 30, 2014. Portions of the new notes may be paid from proceeds of the Companys previously announced planned divestiture of non-core assets.
Series A New Series Convertible Notes may be converted into shares of Metalico common stock at any time after issuance at a rate of $1.30 per share. The Company may not redeem any portion of the Series A Notes prior to July 1, 2017, and after that may redeem all or a portion of the balance subject to a premium payable in additional shares of stock. Series B and Series C New Series Convertible Notes will be assigned their conversion rates based on a Note VWAP calculation triggered as of the determination dates of December 31, 2014 and April 30, 2015, respectively. Note VWAP is the weighted average price of Metalico common stock for a thirty-day trading period including the fifteen trading days prior to, and the fifteen trading days commencing on, the applicable determination date. As of the end of the applicable Note VWAP measuring period, each new series will have a conversion rate of 110% of its respective Note VWAP and will be convertible to Metalico common stock as of such date. All or a portion of the Series C and Series B New Convertible Notes may be redeemed by the Company, in that order, from portions of the proceeds of the Companys previously announced planned divestiture of non-core assets in certain stated and permitted amounts. Redemptions of Series B and Series C New Convertible Notes from proceeds of such asset sales before their respective determination dates may be made at par without premium or penalty, and after such dates subject to the same premium as the Series A Notes.
Aggregate annual maturities, excluding discounts, required on all debt outstanding as of September 30, 2014, are as follows:
Twelve months ending September 30,: |
Amount | |||
2015 |
$ | 6,392 | ||
2016 |
6,031 | |||
2017 |
5,155 | |||
2018 |
4,468 | |||
2019 |
3,938 | |||
Thereafter |
100,052 | |||
|
|
|||
$ | 126,036 | |||
|
|
15
Table of Contents
Note 10 Stockholders Equity
A reconciliation of the activity in Stockholders Equity accounts for the nine months ended September 30, 2014 is as follows:
Common Stock |
Additional Paid-in Capital |
(Accumulated Deficit) |
Accumulated Other Comprehensive Loss |
Noncontrolling Interest |
Total Equity |
|||||||||||||||||||
Balance December 31, 2013 |
$ | 48 | $ | 185,520 | $ | (38,017 | ) | $ | (372 | ) | $ | 1,053 | $ | 148,232 | ||||||||||
Net loss |
| | (10,522 | ) | | (423 | ) | (10,945 | ) | |||||||||||||||
Issuance of 79,336 shares of common stock on deferred stock vesting, net of tax withholding repurchase |
| (9 | ) | | | | (9 | ) | ||||||||||||||||
Stock-based compensation expense |
| 232 | | | | 232 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance September 30, 2014 |
$ | 48 | $ | 185,743 | $ | (48,539 | ) | $ | (372 | ) | $ | 630 | $ | 137,510 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss:
There were no additions to or reclassifications out of accumulated other comprehensive loss attributable to the Company for the three and nine months ended September 30, 2014 and 2013. The components of accumulated other comprehensive loss, net of tax benefit of $256, are as follows:
September 30, 2014 |
December 31, 2013 |
|||||||
Unrecognized actuarial losses of defined benefit pension plan |
$ | (372 | ) | $ | (372 | ) | ||
|
|
|
|
Note 11 Statements of Cash Flows Information
The following describes the Companys noncash investing and financing activities:
Nine Months Ended September 30, 2014 |
Nine Months Ended September 30, 2013 |
|||||||
Issuance of common stock as compensation |
$ | | $ | 25 | ||||
Issuance of common stock for business acquisitions |
$ | | $ | 500 |
The Company paid $5,780 and $5,863 in cash for interest expense in the nine months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014, the Company made cash income tax payments of $182 and received cash refunds of $1,939. For the nine months ended September 30, 2013, the Company made cash income tax payments of $156 and received cash refunds of $22.
Note 12 Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) is computed by dividing net income (loss) 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, 2014 and 2013.
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Loss from continuing operations attributable to Metalico, Inc. |
$ | (2,005 | ) | $ | (26,982 | ) | $ | (6,757 | ) | $ | (33,797 | ) | ||||
(Loss) income from discontinued operations |
(4,898 | ) | (669 | ) | (3,765 | ) | 2,235 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss attributable to Metalico, Inc. |
$ | (6,903 | ) | $ | (27,651 | ) | $ | (10,522 | ) | $ | (31,562 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares - Basic and Diluted |
48,219,340 | 48,035,117 | 48,199,728 | 47,909,811 | ||||||||||||
|
|
|
|
|
|
|
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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 and nine months ended September 30, 2014, 640,167 outstanding options, 220,255 outstanding deferred shares and 1,676,358 shares issuable upon conversion of Notes as of September 30, 2014 were excluded from the computation of diluted EPS because their effect would have been anti-dilutive. For the three and nine months ended September 30, 2013, 1,419,231 outstanding warrants, 1,056,288 outstanding options, 417,486 deferred shares and 4,514,990 shares issuable upon conversion of Notes as of September 30, 2013 were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive.
Note 13 Commitments and Contingencies
Environmental Remediation Matters
The Company formerly conducted secondary lead smelting and refining operations in Tennessee. Those operations ceased in 2003. The Company also sold substantially all of the lead smelting assets of its Gulf Coast Recycling (GCR) subsidiary, in Tampa, Florida in 2006.
As of September 30, 2014 and December 31, 2013, estimated remaining environmental monitoring costs reported as a component of accrued expenses were $822 and $870, respectively. No further remediation is anticipated. Of the $822 accrued as of September 30, 2014, $61 is reported as a current liability and the remaining $761 is estimated to be paid as follows: $70 from 2015 through 2017, $75 from 2018 through 2019 and $616 thereafter. These costs primarily include the post-closure monitoring and maintenance of the landfills at the former lead facilities in College Grove, Tennessee and Tampa, Florida. While changing environmental regulations might alter the accrued costs, management does not currently anticipate a material adverse effect on estimated accrued costs. The Company and its subsidiaries are at this time in material compliance with all of their obligations under all pending consent orders in College Grove, Tennessee and the greater Tampa area.
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.
The Company does not believe compliance with environmental regulations will have a material impact on earnings or its competitive position.
Employee Matters
As of September 30, 2014, approximately 3% of the Companys continuing workforce was covered by a collective bargaining agreement. Twenty-two employees located at the scrap processing facility in Akron, Ohio were represented by the Chicago and Midwest Regional Joint Board. On June 26, 2014, the members of the Joint Board ratified a new 3 year contract that expires on June 25, 2017.
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 14 Income Taxes
The Company files income tax returns in the federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to federal or state income tax examinations by tax authorities for years
17
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before 2009. 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 Company has a recorded a valuation allowance of approximately $2,856 as of September 30, 2014 to reduce deferred income tax assets, primarily net operating loss carryforwards, to the amount that is more likely than not to be realized in future periods. In evaluating the Companys ability to recover its deferred income tax assets the Company considers all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. Excluding the impact of the valuation allowance, the Companys effective income tax rate including discontinued operations for the three months ended September 30, 2014 and 2013 was 35% and 28%, respectively. The Companys effective income tax rate for the nine months ended September 30, 2014 and 2013 was 22% and 29%, respectively.
On March 31, 2014, the State of New York enacted significant changes to its Corporate Franchise Tax provisions for taxable years beginning on or after January 1, 2015. As part of the New York tax law reform, companies meeting the definition of a qualified New York manufacturer will effectively have a 0% tax rate for corporate income tax. Prior to enactment, the Company had maintained deferred state tax assets consisting primarily of tax credits and loss carryforwards in New York which now have no future economic benefit. As a result, $1,495 in net deferred tax assets were charged to income tax expense during the nine months ended September 30, 2014. The Companys effective rate may also differ from the blended expected statutory income tax rate of 35% due to permanent differences between income for tax purposes and income for book purposes. These permanent differences include stock-based compensation and certain other non-deductible expenses.
Note 15 Fair Value Disclosure
Accounting Standards Codification (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 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, 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 value of notes payable and long-term debt reported in the accompanying condensed consolidated balance sheets approximates fair value as substantially all of this debt bears interest based on prevailing market rates currently available.
Put Warrants: The carrying amounts are equal to fair value based upon the Black-Scholes method calculation.
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.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
Basis of Fair Value Measurement:
| Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets. |
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| 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). |
Following is a description of valuation methodologies used for liabilities recorded at fair value:
Put Warrants: Due to the amount by which the exercise price of the put warrants exceeded the current market price of the Companys common stock, the fair value of the Put Warrant liability at December 31, 2013 was $0. An increase or decrease in the market price of the Companys common stock had a corresponding effect on the fair value of this liability. These warrants expired on July 17, 2014.
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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, 2013 (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 2013 Annual Report. Amounts reported in the following discussions are not reported in thousands unless otherwise specified.
General
As of September 30, 2014, we operate thirty-one scrap metal recycling facilities located in Buffalo, Rochester, Niagara Falls, Lackawanna, Olean, Syracuse and Jamestown, New York; Akron, Youngstown and Warren, Ohio: Elizabeth, New Jersey; Buda, Texas; Gulfport, Mississippi; Pittsburgh, Brownsville, Sharon, Conway, West Chester, Lancaster, Warren and Bradford, Pennsylvania; and Colliers, West Virginia; an aluminum de-ox plant co-located with our scrap yard in Syracuse, New York. The Company markets a majority of its products on a national basis but maintains several international customers.
At September 30, 2014, due to its anticipated sale, our Lead Fabricating reportable segment has been reclassified into discontinued operations having met the criteria for such classification. The assets and liabilities of our former Lead Fabricating operations have been reclassified on our September 30, 2014 balance sheet and included in discontinued operations in our Statements of Operations for all periods presented. Our former Lead Fabricating operating segment was comprised of four lead product manufacturing and fabricating plants located in Birmingham, Alabama; Healdsburg and Ontario, California; and Granite City, Illinois.
Overview of Quarterly Results
The following items represent a summary of financial information for the three months ended September 30, 2014 compared with the three months ended September 30, 2013:
| Revenue from continuing operations increased to $128.6 million, compared to $117.7 million. |
| Operating income from continuing operations increased to $2.1 million, compared to an operating loss of $38.2 million. |
| Net loss from continuing operations of $2.1 million, improved from a loss of $27.0 million. |
| Net loss per diluted share of $0.14, compared to a net loss of $0.58 per diluted share. |
The following items represent a summary of financial information for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013:
| Revenue from continuing operations increased to $373.0 million, compared to $348.3 million. |
| Operating income from continuing operations increased to $1.0 million, compared to operating loss of $42.4 million. |
| Net loss from continuing operations was $7.2 million, compared to a loss of $33.9 million. |
| Net loss per diluted share was $0.22, compared to a net loss of $0.66 per diluted share. |
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Market Conditions and Outlook
The scrap recycling industry is highly cyclical and commodity metal prices are volatile and fluctuate widely. Such volatility can be due to numerous factors beyond our control, including but not limited to general domestic and global economic conditions, including metal market conditions, competition, the financial condition of our major suppliers and consumers and international demand for domestically produced scrap.
Although we seek to turn over our inventory of raw or processed scrap metals as rapidly as markets dictate, we are exposed to commodity price risk during the period that we have title to products that are held in inventory for processing and/or resale. Our estimates of future earnings could prove to be unreliable because of the unpredictability and potential magnitude of commodity price swings and the related effect on scrap volume purchases and shipments.
The volatile nature of metal commodity prices makes it difficult for us to predict future revenue trends as shifting international and domestic demand can significantly impact the prices of our products, supply and demand for our products and affect anticipated future results. However, looking ahead we expect continued moderate economic improvement in the manufacturing and industrial sectors.
Export demand for ferrous scrap, particularly off the east coast of the U.S. to Turkey continues to weaken, a trend that began in the second quarter. Ferrous selling prices for the export market into October and November have fallen due to the weak export demand and stronger U.S. dollar and have increased the availability of ferrous scrap tonnage to U.S. domestic markets and causing pricing instability. U.S. domestic steel production remains strong with a capacity utilization rate hovering around 76%. U.S Gross Domestic Product (GDP) expanded at a 3.5% seasonally adjusted annual rate in the third quarter of 2014 exceeding economists forecast of 3.1%. These scrap market demand and pricing dynamics are expected to remain at least through year-end. Significant competition for scrap supply remains constant and is expected to continue in the months ahead.
Pricing for non-ferrous metals have also softened from recent highs due to expectations of slower growth rates in the Chinese and European economies. Auto manufacturers plans to increase the use of aluminum in vehicle production have buoyed selling prices for aluminum and are expected to provide price support in coming months. Lowered economic growth forecasts have had more effect on copper pricing. After rising back above $3.20 per pound in July 2014, spot copper prices have dipped slightly below $3.00 per pound but appear to have support around that level.
Critical Accounting Policies and Use of Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with 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.
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 as goods are shipped, which generally is when title transfers and the risks and rewards of ownership have passed to customers, based on free on board (FOB) terms. 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 of amounts due from customers from product sales. The allowance for uncollectible accounts receivable totaled $479,000 at September 30, 2014 and $524,000 at December 31, 2013. 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.
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While we believe our allowance for uncollectible accounts is adequate, changes in economic conditions or 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. 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.
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.
We assess qualitative factors to determine whether it is more likely than not that the fair value of any of our reporting units is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill 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.
Management believes a significant factor behind the Companys weak first quarter operating results were temporary resulting from unusually severe weather conditions producing lower than anticipated selling volumes due to reduced scrap production and disruptions in inbound and outbound material flows due to transportation delays. Through the six months ended June 30, 2014, the actual year-to-date operating results of our Bradford, PA reporting unit differed significantly enough from forecast to determine that impairment to the carrying value of its goodwill was possible and we performed an interim goodwill impairment test for our Bradford, PA Scrap Metal Recycling reporting unit at June 30, 2014. Based on managements assessment of future operating results for our Bradford, PA reporting unit, we determined the fair value of this reporting unit, calculated using discounted cash flow analyses as more fully described below, exceeded its carrying value and did not result in an impairment charge. We continue to closely monitor the operating results of the reporting units with recorded goodwill to determine if an interim impairment analysis is required. The Company performs its required annual impairment test at December 31 each year.
At September 30, 2014, three of our reporting units have recorded goodwill. Due to the anticipated sale of our Lead Fabricating reporting unit, we have recorded a loss of $5,368 for the carrying value of the goodwill of Lead Fabricating as the carrying value of the reporting unit exceeds the anticipated selling price. The accrued loss has been recorded in discontinued operations for the three and nine months ended September 30, 2014. A list of these reporting units and the amount of goodwill remaining in each as of September 30, 2014, is as follows ($ in thousands):
Reporting Unit |
Goodwill Recorded |
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New York State Scrap Recycling |
$ | 10,966 | ||
Bradford, PA Scrap Recycling |
3,943 | |||
New Jersey PGM Recycling |
2,166 | |||
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Total |
$ | 17,075 | ||
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In determining the carrying value of each reporting unit, where appropriate, 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 impairment charges, if any, made to other long-lived assets of a reporting unit.
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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. We use a discounted cash flow (DCF) model of a five-year forecast with terminal values to estimate the current fair value of our reporting units when testing for impairment. The terminal value captures the value of a reporting unit beyond the projection period in a DCF analysis representing growth in perpetuity, and is the present value of all subsequent cash flows.
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 rates, and working capital changes. Forecasts of operating and selling, general and administrative expenses are generally based on historical relationships of previous years. We use an enterprise value approach to determine the carrying and fair values of our reporting units. 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 June 30, 2014 interim analysis, we reduced the expected cash flow of our Bradford, PA Scrap Metal reporting unit by 17% over a five-year forecast period. Using the build-up method under the Modified Capital Asset Pricing (CAPM) model, we arrived at a discount rate of 12.96%. The inputs used in calculating the WACC as of June 30, 2014 include a) an after tax cost of Baa-rated debt based on Moodys Seasoned Corporate Bond Yields of 4.8%, b) a 19.5% required return on equity and c) a weighting of the prior components equal to 40% for debt and 60% for equity based on an average of capital structure ratios of market participants in our industry. The 19.5% required return on equity is based on the following inputs: (a) a 3.08% risk free return rate of a 20 year U.S. Treasury note as of June 30, 2014, (b) a beta-adjusted equity risk premium of 8.94% based on guideline U.S. public company common stocks, (c) a small company risk premium of 5.99% and (d) a Metalico-specific risk premium of 1.50%. The step 1 impairment analysis resulted in a fair value of $102,000, or 0.9%, in excess of its carrying value and no impairment charges were required.
At December 31, 2013, the Company performed its annual impairment testing. Based on our DCF analysis as of that date, we determined the computed fair value of our reporting units exceeded their respective carrying values and no impairment charges were required. Falling demand from export markets or other factors could reduce scrap selling prices. Tight available scrap supplies competitive buying pressures and their potential for lower profit margins could impact future operating results and lower cash flows. Should these conditions accelerate, goodwill impairment charges to our scrap metal reporting units may be required prior to or upon our 2014 annual year end testing.
Intangible Assets and Other Long-lived Assets
The Company tests finite-lived intangible assets (amortizable) and other long-lived assets, such as property and equipment, 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. Through September 30, 2014, no indicators of impairment were identified and no adjustments were made to the estimated lives of finite-lived assets.
As a result of the anticipated sale of our Lead Fabricating operations and its reclassification into discontinued operations, we recorded a loss of $875 to trademarks and tradenames and $397 of knowhow in the three months ended September 30, 2014 as the carrying value of the reporting unit exceeds the anticipated selling price.
The Company tests indefinite-lived intangibles such as trademarks and trade names for impairment 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. Through September 30, 2014, no indicators of impairment were identified and no adjustments were made to the estimated lives of finite-lived assets.
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Stock-based Compensation
We recognize expense for equity-based compensation ratably over the requisite service period based on the grant date fair value of the related award. The fair value of deferred stock grants is determined using the average of the high and low trading price for our common stock on the day of grant. For stock option grants, we calculate the fair value of the award on the date of grant using the Black-Scholes method. Determining the fair value of stock options at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility in our stock price, annual forfeiture rates, and exercise behavior. Any assumptions used may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
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 taxes during the year. Deferred taxes represent the future tax consequences 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 tax assets when it is more likely than not that a tax benefit will not be realized.
RESULTS OF OPERATIONS
The Companys Scrap Metal Recycling business includes three general product categories: ferrous, non-ferrous (including the PGM and Minor Metals Recycling operations which had previously been separately reported) and other scrap services.
The following table sets forth information regarding revenues of each of our product categories.
Revenues | ||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2014 |
Three Months Ended September 30, 2013 |
Nine Months Ended September 30, 2014 |
Nine Months Ended September 30, 2013 |
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($s, and weights in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Weight | Net Sales |
% | Weight | Net Sales |
% | Weight | Net Sales |
% | Weight | Net Sales |
% | |||||||||||||||||||||||||||||||||||||
Scrap Metal Recycling |
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Ferrous metals (tons) |
160.4 | $ | 61,469 | 47.8 | 152.2 | $ | 55,670 | 47.3 | 455.7 | $ | 178,147 | 47.8 | 431.5 | $ | 159,661 | 45.8 | ||||||||||||||||||||||||||||||||
Non-ferrous metals (lbs.) |
55,402 | 65,906 | 51.3 | 45,436 | 60,951 | 51.8 | 155,655 | 191,629 | 51.3 | 134,934 | 185,702 | 53.4 | ||||||||||||||||||||||||||||||||||||
Other |
| 1,211 | 0.9 | | 1,127 | 0.9 | | 3,214 | 0.9 | | 2,901 | 0.8 | ||||||||||||||||||||||||||||||||||||
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Total Revenue |
$ | 128,586 | 100.0 | $ | 117,748 | 100.0 | $ | 372,990 | 100.0 | $ | 348,264 | 100.0 | ||||||||||||||||||||||||||||||||||||
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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 non-ferrous pricing below excludes the affect of PGM and Minor Metals.
For the quarter ended: |
Average Ferrous Price per ton |
Average Non-Ferrous Price per lb. |
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September 30, 2014 |
$ | 383 | $ | 0.89 | ||||
June 30, 2014 |
$ | 388 | $ | 0.88 | ||||
March 31, 2014 |
$ | 402 | $ | 0.93 | ||||
December 31, 2013 |
$ | 375 | $ | 0.88 | ||||
September 30, 2013 |
$ | 366 | $ | 0.95 | ||||
June 30, 2013 |
$ | 368 | $ | 0.92 | ||||
March 31, 2013 |
$ | 377 | $ | 0.98 |
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Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013
Revenues
Consolidated net sales increased by $10.9 million, or 9.3%, to $128.6 million for the three months ended September 30, 2014 compared to consolidated net sales of $117.7 million for the three months ended September 30, 2013. Acquisitions added $53,000 to consolidated net sales for the three months ended September 30, 2014 and were included in other scrap services. Excluding acquisitions, the Company reported increases in selling volumes amounting to $16.3 million and mixed average metal selling prices resulting in lower sales of $5.5 million.
Due to the many different ferrous and non-ferrous commodities that we buy, process and sell as well the various grades of material within those commodities and the mix of material sold through each of our locations, sales and margin totals can vary.
Ferrous Sales
Ferrous sales increased by $5.8 million, or 10.4%, to $61.5 million for the three months ended September 30, 2014, compared to $55.7 million for the three months ended September 30, 2013. The increase in ferrous sales was attributable to higher average selling prices amounting to $2.8 million and higher volumes sold amounting to $3.0 million. The average selling price for ferrous products was $383 per ton for the three months ended September 30, 2014 compared to $366 per ton for the three months ended September 30, 2013.
Non-Ferrous Sales
Non-ferrous sales increased by $4.9 million, or 8.0%, to $65.9 million for the three months ended September 30, 2014, compared to $61.0 million for the three months ended September 30, 2013. The increase in non-ferrous sales was due to higher volumes sold totaling $13.3 million but was offset by lower average selling prices amounting to $8.4 million. The most significant volume increases came from Zorba, a non-ferrous by-product of the auto shredding process, and aluminum De-ox. The average selling price for non-ferrous products, excluding the effect of PGM and Minor Metals, was $0.89 per pound for the three months ended September 30, 2014 compared to $0.95 per pound for the three months ended September 30, 2013.
Operating Expenses
Operating expenses increased by $9.9 million, or 9.1%, to $118.1 million for the three months ended September 30, 2014 compared to $108.2 million for the three months ended September 30, 2013. The affect of acquisitions was immaterial for the quarter ended September 30, 2014. The increase in operating expense was primarily due to an increase in the cost of material sold totaling $9.3 million consisting of higher volume of material purchased totaling $12.6 million and increase in freight charges totaling $586,000. These increases were offset by lower per unit costs in the current period amounting to $3.9 million. Scrap metal margins, including in and outbound freight charges fell by 0.4 percentage points from the previous year period. Other operating expenses also increased by $631,000. Changes in the components of other operating expense include an increase in wages and benefits of $475,000 due to increased staff and overtime, increased energy costs of $257,000 due to increased production, particularly natural gas for aluminum De-ox production and electricity for shredder production and a $148,000 increase in production and warehouse supplies due to higher volumes processed. These increases were offset by a reduction in repairs and maintenance of $125,000 and other miscellaneous operating expenses totaling $124,000.
Selling, General, and Administrative
Selling, general, and administrative expenses decreased $476,000, or 9.6%, to $4.5 million, or 3.5% of sales, for the three months ended September 30, 2014, compared to $5.0 million, or 4.2% of sales, for the three months ended September 30, 2013. The affect of acquisitions was immaterial for the quarter ended September 30, 2014. The decrease was comprised of lower wage and benefit costs of $144,000 due to the replacement and attrition of higher paid managerial staff, a decrease in insurance costs of $176,000 due in part to a reduction in premiums and change in policy periods, a $40,000 decrease in professional fees due primarily to legal costs related to a customer bankruptcy incurred in the previous year and a decrease in other miscellaneous expenses of $116,000.
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Depreciation and Amortization
Depreciation and amortization decreased by $309,000 to $3.9 million, or 3.0% of sales, for the three months ended September 30, 2014 compared to $4.2 million, or 3.6% of sales for the three months ended September 30, 2013. The reduction reflects lower levels of depreciable property and equipment in the three months ended September 30, 2014.
Impairment charges
We recognized total goodwill and intangible impairment charges of $38.7 million for the three months ended September 30, 2013. Based on the comparison of our actual year to date operating results through September 30, 2013, to the forecasted results used in our annual impairment test at December 31, 2012, and the degree to which our results differed from the forecast for most of our reporting units due to a competitive sourcing environment and lower selling prices, we performed an interim goodwill impairment test at September 30, 2013. Using revised forecasts, we determined that the fair value of several of our reporting units did not exceed their respective carrying values as of September 30, 2013 and therefore recorded a $32.3 million goodwill impairment charge. We also recorded a $5.3 million impairment charge to a supplier list and a $1.1 million impairment charge related to the remaining carrying value of the trade name used at our Texas scrap recycling facility.
Financial and Other Income (Expense)
Interest expense increased by $693,000 to $3.0 million for the three months ended September 30, 2014 compared to $2.3 million for the three months ended September 30, 2013, due primarily to higher interest rates on outstanding term debt and convertible notes due to default under the applicable debt agreements.
Other income for the three months ended September 30, 2013, includes a gain of $324,000 net of $68,000 in unamortized debt discount and $224,000 in unamortized deferred financing costs, on the repurchase of $5.6 million of the Companys convertible notes.
Other income for the three months ended September 30, 2013, also includes a gain of $348,000 related to the dissolution of our 50% joint venture in Ithaca, New York.
Income Taxes
For the three months ended September 30, 2014, the Company recognized income tax expense of $1.3 million, resulting in a negative effective tax rate of 161%. For the three months ended September 30, 2013, the Company recognized income tax benefit of $12.8 million, resulting in an effective tax rate of 32%. 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.
At September 30, 2014, we recorded a valuation allowance of approximately $2.9 million to reduce deferred income tax assets, primarily net operating loss carryforwards, to the amount that is more likely than not to be realized in future periods. In evaluating our ability to recover our deferred income tax assets we consider all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. Also, the computation methodology used to determine the classification of tax expense between continuing and discontinued operations in the current period has produced unusual effective tax rates for the current year period. Due to the breakout of the discontinued operations, the previous quarter reported a higher effective tax rate for continuing operations due to the amount of permanent differences and discrete items relative to pre-tax book income which affected the current year periods tax expense recorded.
Excluding the impact of the valuation allowance, our effective income tax rate, including discontinued operations for the three months ended September 30, 2014 and 2013, was 35% and 28%, respectively. Our effective rate may differ from the blended expected statutory income tax rate of 35% due to permanent differences between income for tax purposes and income for book purposes. These permanent differences include stock-based compensation and certain other non-deductible expenses.
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Discontinued Operations
Discontinued operations include the operations of our former Lead Fabricating segment which have been reclassified due to its anticipated sale. Lead Fabricating sales for the three months ended September 30, 2014 of $18.0 million were unchanged compared to $18.0 million for the three months ended September 30, 2013. Volumes declined by 275,000 pounds over the same period last year. The average selling price of lead fabricated products was $1.78 per pound for the three months ended September 30, 2014, compared to $1.74 per pound for the three months ended September 30, 2013. We also recorded a loss of $6.6 million on the goodwill and intangible assets of our Lead Fabricating operations based on the carrying value of the net assets to be sold in excess of the expected sale price. The transaction is expected to be completed by December 31, 2014. Loss from discontinued operations was $4.9 million, net of income tax benefit of $728,000, for the three months ended September 30, 2014 compared to a loss of $670,000, net of income tax expense of $1.9 million for the three months ended September 30, 2013.
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Revenues
Consolidated net sales increased by $24.7 million, or 7.1%, to $373.0 million for the nine months ended September 30, 2014 compared to consolidated net sales of $348.3 million for the nine months ended September 30, 2013. Acquisitions added $633,000 to consolidated net sales for the nine months ended September 30, 2014 and were included in other scrap services. Excluding acquisitions, sales increased by $24.1 million. The Company reported increases in selling volumes amounting to $38.1 million which was offset by a decrease in average metal selling prices representing $14.0 million.
Ferrous Sales
Ferrous sales increased by $18.4 million, or 11.5%, to $178.1 million for the nine months ended September 30, 2014, compared to $159.7 million for the nine months ended September 30, 2013. The increase was attributable to higher volume sold of 24,000 tons, or 5.6%, amounting to $8.9 million and higher average selling prices totaling $9.5 million. The average selling price for ferrous products was approximately $391 per ton for the nine months ended September 30, 2014 compared to $370 per ton for the nine months ended September 30, 2013, an increase of 5.7%.
Non-Ferrous Sales
Non-ferrous sales increased by $5.9 million, or 3.2%, to $191.6 million for the nine months ended September 30, 2014, compared to $185.7 million for the nine months ended September 30, 2013. The increase in non-ferrous sales was due to higher sales volumes amounting to $29.1 million but was offset by lower average selling prices totaling $23.2 million. The average selling price for non-ferrous products, excluding the effect of PGM and Minor Metals was $0.90 per pound for the nine months ended September 30, 2014 compared to $0.95 per pound for the nine months ended September 30, 2013, a decrease of 5.3%.
Operating Expenses
Operating expenses increased by $21.7 million, or 6.7%, to $345.4 million for the nine months ended September 30, 2014 compared to $323.7 million for the nine months ended September 30, 2013. The affect of acquisitions was immaterial for the nine months ended September 30, 2014. The increase in operating expenses were primarily due to an increase in the cost of material sold totaling $20.7 million and an increase in other operating expenses totaling $1.0 million. The increase in the cost of material sold was due primarily to a higher volume of material acquired totaling $29.1 million, an increase in freight costs of $890,000 and a reduction in capitalized overhead costs of $614,000 due to lower inventories. These increases were offset by lower per unit costs in the current period amounting to $9.9 million. Scrap metal margin percentage increased 0.1 point from the previous year period. The $1.0 million increase in other operating expense include an increased energy costs of $759,000 due to combination of factors including increases in electric utility and natural gas rates, usage due to exceptionally cold weather in the first quarter of 2014, increased production, particularly natural gas for aluminum De-ox production. Wages and benefits increased by $695,000 due to increased staff and overtime and production and warehouse supplies expensed increased by $103,000 due to higher volumes processed. These items were offset by reductions in rent and occupancy costs of $133,000 due to the dissolution of the Ithaca joint venture in March 2013 and a reduction in property taxes in Buda, Texas; $235,000 reduction in repairs and maintenance costs due to expense incurred in the previous year period for repairs to the De-ox smelter in Syracuse, New York and a net decrease in other miscellaneous operating expenses of $139,000.
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Selling, General, and Administrative
Selling, general, and administrative expenses decreased $1.1 million, or 6.9%, to $14.9 million, or 4.0% of sales, for the nine months ended September 30, 2014, compared to $16.0 million, or 4.6% of sales, for the nine months ended September 30, 2013. The affect of acquisitions was immaterial for the nine months ended September 30, 2014. The decrease was comprised of lower wage and benefit costs of $805,000 due to the replacement and attrition of higher paid managerial staff, a $197,000 decrease in professional fees due primarily to legal costs related to a customer bankruptcy incurred in the previous year and other miscellaneous expenses of $70,000.
Depreciation and Amortization
Depreciation and amortization decreased by $598,000 to $11.7 million, or 3.1% of sales, for the nine months ended September 30, 2014 compared to $12.3 million, or 3.5% of Scrap Metal Recycling sales for the nine months ended September 30, 2013. The reduction reflects lower levels of depreciable property and equipment in the nine months ended September 30, 2014, offsetting depreciation expense.
Impairment charges
We recognized total goodwill and intangible impairment charges of $38.7 million for the nine months ended September 30, 2013. Based on the comparison of our actual year to date operating results through September 30, 2013, to the forecasted results used in our annual impairment test at December 31, 2012, and the degree to which our results differed from the forecast for most of our reporting units due to a competitive sourcing environment and lower selling prices, we performed an interim goodwill impairment test at September 30, 2013. Using revised forecasts, we determined that the fair value of several of our reporting units did not exceed their respective carrying values as of September 30, 2013 and therefore recorded a $32.3 million goodwill impairment charge. We also recorded a $5.3 million impairment charge to a supplier list and a $1.1 million impairment charge related to the remaining carrying value of the trade name used at our Texas scrap recycling facility.
Financial and Other Income (Expense)
Interest expense was $7.7 million, or 2.1% of sales, for the nine months ended September 30, 2014 compared to $6.7 million, or 1.9% of sales, for the nine months ended September 30, 2013. The $938,000 increase in interest expense was due to higher interest rates on outstanding term debt and convertible notes due to higher interest rates on outstanding term debt and convertible notes due to default under the applicable debt agreements and the amortization of deferred financing costs incurred with the Financing Agreement entered into in November 2013.
Other income for the nine months ended September 30, 2013, includes a gain of $324,000 net of $68,000 in unamortized debt discount and $224,000 in unamortized deferred financing costs on the repurchase of $5.6 million of our notes.
Other income for the nine months ended September 30, 2013, also includes a gain of $348,000 related to the dissolution of the Companys 50% joint venture in Ithaca, New York.
Income Taxes
For the nine months ended September 30, 2014, the Company recognized an income tax expense of $580,000, resulting in a negative effective tax rate of 9%. For the nine months ended September 30, 2013, the Company recognized an income tax benefit of $14.5 million, resulting in an effective tax rate of 30%. 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.
At September 30, 2014, we recorded a valuation allowance of approximately $2.9 million to reduce deferred income tax assets, primarily net operating loss carryforwards, to the amount that is more likely than not to be realized in future periods. In evaluating our ability to recover our deferred income tax assets we consider all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis.
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On March 31, 2014, the State of New York enacted significant changes to its Corporate Franchise Tax provisions for taxable years beginning on or after January 1, 2015. As part of the New York tax law reform, companies meeting the definition of a qualified New York manufacturer will effectively have a 0% tax rate for corporate income tax. Prior to enactment, the Company had maintained deferred state tax assets consisting primarily of tax credits and loss carryforwards in New York which now have no future economic benefit. As a result, $1,495 in net deferred tax assets were charged to income tax expense for the nine months ended September 30, 2014.
Excluding the impact of the valuation allowance, our effective income tax rate, including discontinued operations for the nine months ended September 30, 2014 and 2013, was 22% and 29%, respectively. Our effective rate may also differ from the blended expected statutory income tax rate of 35% due to permanent differences between income for tax purposes and income for book purposes. These permanent differences include stock-based compensation and certain non-deductible expenses.
Discontinued Operations
Discontinued operations include the operations of our former Lead Fabricating segment which have been reclassified due to its anticipated sale. Lead Fabricating sales decreased by $4.0 million or 7.3%, to $51.1 million for the nine months ended September 30, 2014 compared to Lead Fabricating sales of $55.1 million for the nine months ended September 30, 2013. Volumes fell by 3.3 million pounds compared to the same period last year. The average selling price of lead fabricated products was $1.75 per pound for the nine months ended September 30, 2014, compared to $1.69 per pound for the nine months ended September 30, 2013. We also recorded a loss of $6.6 million on the goodwill and intangible assets of our Lead Fabricating operations based on the carrying value of the net assets to be sold in excess of the expected sale price. The transaction is expected to be completed by December 31, 2014. Loss from discontinued operations was $3.8 million, net of income tax benefit of $5,000, for the nine months ended September 30, 2014 compared to income of $2.2 million, net of income tax expense of $1.8 million for the nine months ended September 30, 2013.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
For the nine months ended September 30, 2014, we generated $10.7 million of cash from operating activities compared to $17.7 million of operating cash generated for the nine months ended September 30, 2013. Continuing operations contributed $11.8 million and discontinued operations used $1.1 million of the total cash flows from operating activities for the nine months ended September 30, 2014. For the nine months ended September 30, 2014, the Companys net loss of $10.9 million less a loss from discontinued operations of $3.8 million were offset by depreciation and amortization expense of $12.8 million, other non-cash charges of $1.6 million and a $4.6 million change in working capital components. The changes in working capital components include an increase in accounts receivable of $7.9 million due to increased sales. This increase was offset by a $4.4 million decrease to inventories also due to the increase in sales, a $5.9 million increase to accounts payable, accrued expenses and other liabilities and a $2.2 million decrease to prepaid expenses and other current assets due primarily to timing. For the nine months ended September 30, 2013, the Companys net loss of $31.7 million plus income from discontinued operations of $2.2 million were offset by depreciation and amortization expense of $13.1 million, other net noncash items of $30.1 million and a $4.8 million change in working capital components. The changes in working capital components include an decrease in accounts receivable of $2.3 million and a $4.4 million decrease in inventory due to a reduction in the quantity on hand and carrying value of our scrap metal inventory and a $1.3 million increase to accounts payable, accrued expenses and other current liabilities due primarily to the timing of certain payroll and employee benefit accruals. These increases were offset by a $3.1 million increase in prepaid expenses and income taxes receivable due primarily to expected income tax refunds. Continuing operations contributed $14.2 million and discontinued operations contributed $3.5 million of the total cash flows from operating activities for the nine months ended September 30, 2013.
We used $6.8 million in net cash for investing activities for the nine months ended September 30, 2014 compared to using net cash of $10.1 million in the nine months ended September 30, 2013. Continuing operations used $5.8 million and discontinued operations used $1.0 million of the total cash flows from investing activities for the nine months ended September 30, 2014. Continuing operations used $9.4 million and discontinued operations used $721,000
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of the total cash flows from investing activities for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, we purchased $6.2 million in equipment and received $341,000 in proceeds on the disposal of property. For the nine months ended September 30, 2013, we purchased $7.5 million in equipment and capital improvements and paid $2.0 million, in cash, to acquire two businesses. We also received $158,000 in proceeds from the disposal of equipment.
We used $3.4 million of net cash from financing activities for the nine months ended September 30, 2014, compared to $8.5 million of net cash used for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, we increased borrowings on our revolving credit facility by $2.4 million to finance the increase in accounts receivable and borrowed $1.5 million to purchase new equipment. These borrowings proceeds were offset by other debt repayments of $6.7 million and the payment of $664,000 in debt issuance costs. For the nine months ended September 30, 2013, total new borrowings were $2.1 million. These borrowings proceeds were offset by other debt repayments of $9.3 million, the payment of $725,000 in debt issuance costs related to credit facility amendment with JPMChase and $577,000 in net repayments of our revolving credit facility. All cash used in financing activities for the nine months ended September 30, 2014 and 2013 were for continuing operations.
Financing and Capitalization
Senior Credit Facilities:
On November 21, 2013, we entered into a Financing Agreement (the Financing Agreement) with a syndicate of lenders led by TPG Specialty Lending, Inc. (TPG), as agent. The six-year agreement consists of senior secured credit facilities in the aggregate amount of $125.0 million, including a $65.0 million revolving line of credit and two term loan facilities totaling $60.0 million. The revolving line of credit provides for revolving loans that, in the aggregate, are not to exceed the lesser of $65.0 million or a Borrowing Base amount based on specified percentages of eligible accounts receivable and inventory and bear interest at the Base Rate (a rate determined by reference to the prime rate but in any event not less than 3.00%) plus 2.00% or, at our election, a LIBOR-based rate (the current LIBOR rate but in any event not less than 1.00%) plus 3.00% (an aggregate effective rate of 4.13% at June 30, 2014). The term loans bear interest at the Base Rate plus 7.50% or, at our election, the LIBOR-based rate plus 8.50% (an aggregate effective rate of 9.50% at June 30, 2014). We are subject to certain financial covenants, including maximum leverage, maximum capital expenditures and minimum availability, and are restricted from, among other things, paying cash dividends, repurchasing our common stock over certain stated thresholds, and entering into certain transactions without the prior consent of the lenders. Obligations under the Financing Agreement are secured by substantially all of our assets. The proceeds of the Financing Agreement were used to retire our revolving credit agreement with JPMorgan Chase Bank, N.A., and to repurchase $36.7 million in outstanding Notes.
Under the terms of the Notes, the holders were entitled to deliver notices of redemption on or before June 30, 2014, requiring the Company to redeem the Notes, at par, plus any accrued but unpaid interest through the date of redemption. At March 31, 2014 and June 30, 2014, we were not in compliance with the Maximum Leverage Ratio covenant under the Financing Agreement. The March 31 noncompliance was waived by the senior lenders but availability under the term portion of the Financing Agreement was restricted by the senior lenders and upon request for redemption, we were unable to redeem the Notes. On June 30, 2014, we received redemption notices from the Note holders and were unable to draw funds under the Financing Agreement meant to redeem the Notes and consequently we were in default on the Notes.
On October 21, 2014, we entered into a Second Amendment to the Financing Agreement. The Second Amendment increases interest rate margins to 2.75% for Base rate revolving loans and 3.75% for LIBOR-based revolving loans; 8.50% for Base rate term loans and 9.50% for LIBOR-based term loans. The Second Amendment also resets the Maximum Leverage Ratio for the quarterly periods through December 31, 2016 with further reset provisions subject to certain specified asset sales and excluded the balance of the Notes from the debt component of the leverage ratio calculation. In addition to a cash amendment fee of $578,000, the senior lenders also received an additional fee of $3.5 million that is payable either in cash at the maturity of the outstanding term loans under the Financing Agreement and/or, at the holders option, but without duplication, in shares of the Companys common stock pursuant to a warrant issued at closing with a cashless exercise feature. The Second Amendment also waives the existing defaults under the Financing Agreement, lifts a non-payment blockage to junior lenders and provides consent to amend the Notes.
Senior Unsecured Convertible Notes Payable:
On April 23, 2008, we entered into a Securities Purchase Agreement with accredited investors (Note Holders) which provided for the sale of $100 million of Senior Unsecured Convertible Notes (the Notes) convertible into shares
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of our common stock (Note Shares). The conversion price of the Notes was $14.00 per share. The Notes bore interest at 7% per annum, payable in cash, and matured in April 2028. In addition, the Notes contained an optional repurchase right exercisable by the Note Holders on June 30, 2014, whereby each Note Holder had the right to require the Company to redeem its Note at par. On June 30, 2014, we received redemption notices from the Note holders and were unable to draw funds under the Financing Agreement intended to redeem the Notes. Consequently we were in default on the Notes.
As of September 30, 2014, the outstanding balance plus accrued unpaid interest of $1.1 million on the Notes was $24.3 million (net of $282,000 in unamortized discount related to the original fair value of warrants issued with the Notes). On October 20, 2014, the Note holders converted $10.0 million of the debt to Metalico common stock under the terms of the Notes at a negotiated rate of $0.9904 per share. Pursuant to individual Exchange Agreements dated October 21, 2014, the holders exchanged the remaining principal balance plus accrued unpaid interest, a total of $14.7 million, for three sets of New Series Convertible Notes (described below) and a right to receive additional common shares in the event the trading price of the Companys stock falls below certain values, determined at the fortieth trading day after the date of the Exchange Agreement.
New Series Convertible Notes
The remaining $14.7 million Note balance not converted on October 20, 2014, was exchanged into New Series Convertible Notes. The aggregate principal amounts of each of the Series A New Series Convertible Notes and the Series C New Series Convertible Notes is $4.5 million and the aggregate principal amount of the Series B New Series Convertible Notes is $5.7 million. The New Series Convertible Notes mature on July 1, 2024 and bear interest, payable in kind, at a rate of 13.5% per annum. The interest rate was applicable retroactively to balances under the original Notes as of July 1, 2014 and resulted in $804,000 of paid in kind interest expense in the quarter ended September 30, 2014. Portions of the new notes may be paid from proceeds of the Companys previously announced planned divestiture of non-core assets.
Series A New Series Convertible Notes may be converted into shares of Metalico common stock at any time after issuance at a rate of $1.30 per share. We may not redeem any portion of the Series A Notes prior to July 1, 2017, and after that may redeem all or a portion of the balance subject to a premium payable in additional shares of stock. Series B and Series C New Series Convertible Notes will be assigned their conversion rates based on a Note VWAP calculation triggered as of the determination dates of December 31, 2014 and April 30, 2015, respectively. Note VWAP is the weighted average price of Metalico common stock for a thirty-day trading period including the fifteen trading days prior to, and the fifteen trading days commencing on, the applicable determination date. As of the end of the applicable Note VWAP measuring period, each new series will have a conversion rate of 110% of its respective Note VWAP and will be convertible to Metalico common stock as of such date. All or a portion of the Series C and Series B New Convertible Notes may be redeemed by the Company, in that order, from portions of the proceeds of the Companys previously announced planned divestiture of non-core assets in certain stated and permitted amounts. Redemptions of Series B and Series C New Convertible Notes from proceeds of such asset sales before their respective determination dates may be made at par without premium or penalty, and after such dates subject to the same premium as the Series A Notes.
Other Secured Debt
On December 12, 2011, we entered into an Equipment Finance Agreement (the Equipment Finance Agreement) with First Niagara Leasing, Inc. (First Niagara) providing up to $10.4 million. We used $6.6 million to repay a term loan provided under our previous credit agreement with JPMorgan Chase Bank, NA, Inc., as agent, and other lenders party thereto. The loan is secured by the Buffalo, New York shredder and related equipment. Upon entering the Financing Agreement with the TPG lending group, the Company and First Niagara entered into an amendment adopting the covenants prescribed by the Second Amendment of the Financing Agreement. All cross defaults due to the default under the Financing Agreement have been waived by First Niagara. A previous loan modification shortened the First Niagara maturity to coincide with the maturity of the Financing Agreement in November 2019 and accordingly increased the required monthly payments from $110,000 to $141,000. The interest rate under the loan remains unchanged at 4.77% per annum. As of September 30, 2014 and December 31, 2013, the outstanding balance under the loan was $7.7 million and $8.7 million, respectively.
Future Capital Requirements
As of September 30, 2014, we had $7.5 million in cash and availability under the revolver portion of the Financing Agreement of $11.5 million. As of September 30, 2014, our current liabilities totaled $34.5 million. Having cured the defaults under our debt agreements, we were able to reclassify a significant portion of our debt to long-term. We expect
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to fund our current working capital needs, interest payments and capital expenditures with cash on hand and cash generated from operations, supplemented by borrowings available under the Financing 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. The Second Amendment to the Financing Agreement modified the quarterly maximum leverage ratio covenant through December 31, 2016, to a level which we reasonably expect to achieve. However, material adverse macroeconomic conditions or deteriorating conditions in the commodity markets in which we operate could have a material impact to our operating results and affect our ability to meet our debt covenants. No assurance can be given that we will be able to meet our modified debt covenants or that our lenders will waive any event of noncompliance.
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.
Contingencies
We are involved in certain 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, 2014, $83.8 million of our outstanding debt consisted of variable rate borrowings pursuant to the Financing Agreement entered into on November 21, 2013. Borrowings under the Financing Agreement 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 at September 30, 2014 were to equal the average borrowings under our Financing Agreement during a fiscal year, a hypothetical 1% increase or decrease in interest rates would increase or decrease interest expense on our variable borrowings by approximately $838,000 per year on our variable rate debt with a corresponding change in cash flows. We have no open interest rate protection agreements as of June 30, 2014.
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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 for 2013 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 on the carrying value of our inventories. We have no open commodity price protection agreements as of September 30, 2014.
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.
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, 2014 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.
(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, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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. 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 2013.
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, 2013 filed with the Securities and Exchange Commission on March 17, 2014 except for the following.
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Our common stock price has fluctuated widely over the past twelve months, and the trading price of our common stock is likely to continue to be volatile, which could result in substantial losses to investors and litigation.
At the time of this filing, the trading price of shares of the Companys common stock has been significantly lower than the trading price of the Companys common stock over the past twelve months. Further, there has been a significant increase in the volume of common stock traded during the months of October and November of this year. It is possible that such price and volume fluctuations will continue to occur, regardless of our operating performance. These factors may have an adverse impact on the trading value and liquidity of our common stock, and may result in substantial losses to investors.
The uncertainty as to how many shares of common stock will be issued in connection with the Series B new convertible notes, Series C new convertible notes and the issuance of additional common shares may cause further dilution of current stockholders equity, and additionally may cause the trading price of our common stock to decrease.
As previously disclosed by the Company, on October 21, 2014, pursuant to the terms of certain Exchange Agreements, we agreed to exchange an aggregate of approximately $14.7 million of outstanding principal and accrued and unpaid interest under our 7% Senior Convertible Notes due 2028 into (i) new convertible notes in the aggregate principal amount of approximately $14.7 million and (ii) a right to receive a number of additional shares of our common stock in accordance with, and subject to, the terms set forth in the Exchange Agreements. The new convertible notes consist of the Series A new convertible notes, the Series B new convertible notes and the Series C new convertible notes.
The conversion rate for debt held under the Series B notes and Series C notes is contingent upon the average price of our common stock during the fifteen (15) consecutive trading days before December 31, 2014 or April 30, 2015, respectively, and the fifteen (15) consecutive trading days commencing on and including December 31, 2014 or April 30, 2015, respectively. As such, the Company is unable to determine the precise number of shares that may be issued in connection with such conversions, which has the potential to create significant downward pressure on the trading price of our common stock. Further, as the conversion price decreases, the number of shares to be issued will increase, and thus the issuance of such shares may result in the dilution of current stockholders equity. Such issuances may adversely affect stockholders ability to sell their shares of our common stock at or above the price they paid for shares of our common stock, if at all.
The number of additional common shares to be issued under the Exchange Agreements is contingent upon the average price of our common stock during the forty (40) consecutive trading days beginning on, and including, the trading day immediately following October 21, 2014. As such, the Company cannot definitively determine the number of additional common shares that will be issued, which has the potential to create significant downward pressure on the trading price of our common stock. The issuance of additional common shares and any resulting dilution or decrease in trading price may result in substantial losses to investors.
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Item 3. Defaults Upon Senior Securities
On or before June 30, 2014, the Company received redemption notices from all holders of its 7% Convertible Notes representing the aggregate principal of $23.5 million. The redemption notices required the Company to redeem the Notes, at par, plus any accrued but unpaid interest through the date of redemption. Availability provided under the Financing Agreement to redeem the Notes was restricted by the senior lenders due to the Companys noncompliance with the Maximum Leverage Ratio covenant as of March 31, 2014 as prescribed by the Financing Agreement. The Companys inability to redeem the Notes was a default under the terms of the Notes and its failure to redeem the Notes was a default under the terms of the Financing Agreement.
On October 21, 2014, the Company cured its default under the Financing Agreement by entering into an amendment which waives the existing default, modifies future debt covenants, lifts a non-payment blockage to junior lenders and provides consent to amend the Convertible Notes. The Company cured its default with Convertible Note holders with a restructuring that provided for conversion of $10.0 million of Notes into the Companys common stock at a negotiated price and the issuance of New Series Convertible Notes for the remaining $14.7 million balance. Other cross defaults with junior lenders have also been waived upon adoption of the Second Amendment to the Financing Agreement.
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 | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
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Table of Contents
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 14, 2014 | By: | /s/ CARLOS E. AGÜERO | ||||
Carlos E. Agüero | ||||||
Chairman, President and Chief Executive Officer | ||||||
Date: November 14, 2014 | By: | /s/ KEVIN WHALEN | ||||
Kevin Whalen | ||||||
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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