UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
[x] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March
31, 2008
OR
|
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition period from
_________ to_________
Commission
file number 001-12127
EMPIRE
RESOURCES, INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware
|
22-3136782
|
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
Identification
No.)
|
|
One
Parker Plaza
|
|
Fort
Lee, NJ
|
07024
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(201)
944-2200
(Registrant’s
Telephone Number, Including Area Code)
Indicate by check 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.
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See definition of "large accelerated
filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Larger
Accelerated Filer [ ]
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Accelerated
Filer [ ]
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|
|
Non-Accelerated
Filer [ ]
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Smaller
reporting company [X]
|
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
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Common
Stock, par value $0.01 per share
|
|
9,826,184
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|
(Class)
|
|
(Outstanding
on May 9, 2008)
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EMPIRE
RESOURCES, INC.
FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 2008
Introduction
We have
prepared the condensed consolidated interim financial statements included
herein, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America have been omitted
pursuant to such rules and regulations. In the opinion of our management, such
financial statements reflect all adjustments necessary for a fair presentation
of the results for the interim periods presented and to make such financial
statements not misleading. All adjustments necessary for a fair presentation of
interim period results are of a normal recurring nature unless otherwise noted.
Our results of operations for the three months ended March 31, 2008 are not
necessarily indicative of the results to be expected for the full
year. We urge you to read these interim financial statements in
conjunction with the consolidated financial statements and the notes thereto
included in our Annual Report filed on Form 10-K for the year ended December 31,
2007.
In
thousands, except share and per share amounts
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(unaudited)
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|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,071
|
|
|
$
|
2,228
|
|
|
Restricted
cash
|
|
|
3,116
|
|
|
|
0
|
|
|
Trade
accounts receivable (less allowance for doubtful accounts of
$191
and $191)
|
|
|
80,522
|
|
|
|
63,188
|
|
|
Inventories
|
|
|
90,655
|
|
|
|
105,129
|
|
|
Other
current assets, including derivatives
|
|
|
8,307
|
|
|
|
9,078
|
|
|
Total
current assets
|
|
|
185,671
|
|
|
|
179,623
|
|
|
Property
and equipment, net
|
|
|
7,664
|
|
|
|
7,751
|
|
|
Deferred
financing costs, net of accumulated amortization of $117 and
$106
|
|
|
411
|
|
|
|
357
|
|
|
Total
Assets
|
|
$
|
193,746
|
|
|
$
|
187,731
|
|
|
|
|
|
|
|
|
|
|
|
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LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
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Current
liabilities:
|
|
|
|
|
|
|
|
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Notes
payable - banks
|
|
$
|
108,930
|
|
|
$
|
107,867
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|
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Current
maturities of long-term debt
|
|
|
127
|
|
|
|
125
|
|
|
Trade
accounts payable
|
|
|
30,264
|
|
|
|
35,495
|
|
|
Accrued
expenses and derivative liabilities
|
|
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20,615
|
|
|
|
9,940
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|
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Dividends
payable
|
|
|
491
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|
|
|
491
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Total
current liabilities
|
|
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160,427
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|
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153,918
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Long-term
debt, net of current maturities
|
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2,014
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|
|
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2,056
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|
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Commitments
and contingencies
|
|
|
|
|
|
|
|
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Stockholders'
equity:
|
|
|
|
|
|
|
|
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Common
stock $.01 par value, 20,000,000 shares authorized and
11,749,651
shares issued at March 31, 2008 and December 31, 2007
|
|
|
117
|
|
|
|
117
|
|
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Additional
paid-in capital
|
|
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11,709
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|
|
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11,709
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Retained
earnings
|
|
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24,111
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|
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23,490
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|
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Accumulated
other comprehensive loss
|
|
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(2,393
|
)
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|
|
(1,320
|
)
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Treasury
stock (1,923,467 shares)
|
|
|
(2,239
|
)
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|
|
(2,239
|
)
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Total
stockholders' equity
|
|
|
31,305
|
|
|
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31,757
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|
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Total
Liabilities and Stockholders' equity
|
|
$
|
193,746
|
|
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$
|
187,731
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements
|
|
|
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In
thousands, except per share amounts
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|
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Three
Months Ended March 31,
|
|
|
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2008
|
|
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2007
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|
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Net
sales
|
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$
|
119,029
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$
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139,841
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|
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Cost
of goods sold
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|
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112,819
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|
|
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131,423
|
|
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Gross
profit
|
|
|
6,210
|
|
|
|
8,418
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|
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Selling,
general and administrative expenses
|
|
|
2,776
|
|
|
|
2,516
|
|
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Operating
income
|
|
|
3,434
|
|
|
|
5,902
|
|
|
Interest
expense
|
|
|
1,659
|
|
|
|
2,026
|
|
|
Income
before income taxes
|
|
|
1,775
|
|
|
|
3,876
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|
|
Income
taxes
|
|
|
663
|
|
|
|
1,465
|
|
|
Net
income
|
|
$
|
1,112
|
|
|
$
|
2,411
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|
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Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,826
|
|
|
|
9,790
|
|
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Diluted
|
|
|
9,972
|
|
|
|
10,052
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|
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Earnings
per share:
|
|
|
|
|
|
|
|
|
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Basic
|
|
$
|
0.11
|
|
|
$
|
0.25
|
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements
|
|
|
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In
thousands
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
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Cash
flows from operating activities:
|
|
|
|
|
|
|
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Net
income
|
|
$
|
1,112
|
|
|
$
|
2,411
|
|
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Adjustments
to reconcile net income to net cash provided by
(used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
109
|
|
|
|
128
|
|
|
Deferred
income taxes
|
|
|
42
|
|
|
|
36
|
|
|
Other
|
|
|
(437
|
)
|
|
|
|
|
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Changes
in:
|
|
|
|
|
|
|
|
|
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Restricted
cash
|
|
|
(3,116
|
)
|
|
|
277
|
|
|
Trade
accounts receivable
|
|
|
(16,651
|
)
|
|
|
(24,098
|
)
|
|
Inventories
|
|
|
15,659
|
|
|
|
14,180
|
|
|
Other
current assets
|
|
|
1,460
|
|
|
|
(94
|
)
|
|
Trade
accounts payable
|
|
|
(5,239
|
)
|
|
|
4,650
|
|
|
Accrued
expenses
|
|
|
8,452
|
|
|
|
(4,772
|
)
|
|
Net
cash provided by (used in) operating activities
|
|
|
1,391
|
|
|
|
(7,282
|
)
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
Investment
in marketable securities
|
|
|
|
|
|
|
(16
|
)
|
|
Purchases
of property and equipment
|
|
|
(10
|
)
|
|
|
(105
|
)
|
|
Net
cash used in investing activities
|
|
|
(10
|
)
|
|
|
(121
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable – banks
|
|
|
|
|
|
|
9,450
|
|
|
Repayments
- mortgage payable
|
|
|
(40
|
)
|
|
|
(29
|
)
|
|
Dividends
paid
|
|
|
(491
|
)
|
|
|
(2,055
|
)
|
|
Deferred
financing costs
|
|
|
(65
|
)
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(596
|
)
|
|
|
7,366
|
|
|
Net
increase (decrease) in cash
|
|
|
785
|
|
|
|
(37
|
)
|
|
Effect
of exchange rate on cash
|
|
|
58
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
2,228
|
|
|
|
1,243
|
|
|
Cash
at end of period
|
|
$
|
3,071
|
|
|
$
|
1,206
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,620
|
|
|
$
|
1,901
|
|
|
Income
taxes
|
|
$
|
(65
|
)
|
|
$
|
310
|
|
|
Non
Cash Financing Activities:
|
|
|
|
|
|
|
|
|
|
Dividend
declared but not yet paid
|
|
$
|
491
|
|
|
$
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements
|
|
|
|
|
|
Empire
Resources, Inc.
1.
The Company
The
condensed consolidated financial statements include the accounts of Empire
Resources, Inc. and its wholly-owned subsidiaries, Empire Resources Pacific
Ltd., which acts as a sales agent in Australia, 6900 Quad Avenue LLC (the
company which owns our warehouse facility in Baltimore), Imbali Metals BVBA (our
European subsidiary), and Empire Resources Extrusions LLC (our extrusion
business).
All
significant inter-company transactions and accounts have been eliminated on
consolidation. We purchase, sell and extrude semi-finished aluminum
products.
2.
Use of Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from these
estimates.
One major
customer accounted for approximately 11% of our consolidated net sales for the
three month period ended March 31, 2008 and 12% for the same period ended March
31, 2007.
We purchase aluminum from a limited
number of suppliers located throughout the world. One supplier, Hulamin Ltd.,
accounted for 55% of total purchases during the three month period ended March
31, 2008 as compared to 51% during the three month period ended March 31, 2007.
Our supply agreement with Hulamin Ltd. expires on August 9, 2008 and may be
extended or amended by mutual agreement. Three other suppliers
accounted for 23% of total purchases during the first quarter of 2008 as
compared to 32% during the first quarter of 2007. The loss of any one
of our largest suppliers or a material default by any such supplier in its
obligations to us would have a material adverse effect on our business.
4. Stock
Options
We account for stock options using
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123R”). SFAS 123R requires recognition of stock-based
compensation expense for an award of equity instruments, including stock
options, over the vesting period based on the fair value of the award at the
grant date. We do not have any outstanding unvested employee stock
options, and during the three month period ended March 31, 2008, we did not
grant any stock options or any other stock-based awards.
5.
Inventories
Inventories,
which consist primarily of purchased semi-finished aluminum products, are stated
at the lower of cost or market. Cost is determined by the
specific-identification method. Inventory is mostly purchased for specific
customer orders. The carrying amount of inventory which is hedged by
futures contracts designated as fair value hedges is adjusted to fair
value.
6.
Notes Payable—Banks
We
operate under a credit agreement with JPMorgan Chase Bank, N.A. as lenders’
agent, and Rabobank International, New York branch, Citicorp USA, Inc., Brown
Brothers Harriman & Co., and Fortis Capital Corp.
Our
credit agreement provides for a $175 million revolving line of credit, including
a commitment to issue letters of credit and a swing-line loan
sub-facility. The credit agreement provides that amounts under the
facility may be borrowed, repaid and re-borrowed, subject to a borrowing base
test, until the maturity date of June 30, 2011. As of March 31, 2008
and December 31, 2007, the credit utilized under this agreement amounted to
respectively, $135,312,000 and $112,735,000 (including $42,062,000 and
$19,485,000 of outstanding letters of credit).
Amounts
borrowed under our credit agreement bear interest at LIBOR, Eurodollar, money
market or base rates, at our option, plus an applicable margin. The
applicable margin is determined by our leverage ratios. Borrowings
under the credit agreement are collateralized by security interests in
substantially all of our assets. The credit agreement contains financial and
other covenants including, but not limited to, covenants requiring maintenance
of minimum tangible net worth and compliance with leverage ratios, as well as an
ownership minimum and limitations on other indebtedness, liens, and investments
and on dispositions of assets.
In
connection with the revolving line of credit, we are a party to interest rate
swaps with a total notional amount of $70 million terminating in
2010. These swaps are designated as cash flow hedges of the variable
interest on that portion of the credit agreement up to the notional
amount. We will pay a weighted average fixed rate of 5.14% plus a
spread to the bank, and in return the bank pays us floating LIBOR rate plus a
spread. This floating rate resets monthly.
In
addition, we are a party to a mortgage and related interest rate swap that we
entered into in 2004 in connection with the purchase of our Baltimore
warehouse. The mortgage loan, which had an outstanding balance of
$2.14 million at March 31, 2008 and $2.18 million at December 31, 2007, requires
monthly payments of approximately $21,600, including interest at LIBOR + 1.75%,
and matures in December 2014. Under the interest rate swap, which has
been designated as a cash flow hedge and remains effective through the maturity
of the mortgage loan, we pay a monthly fixed interest rate of 6.37% to the
counterparty bank on a notional principal equal to the outstanding principal
balance of the mortgage. In return, the bank pays us a floating rate,
namely, LIBOR, which resets monthly, plus 1.75% on the same notional principal
amount.
In
addition, Imbali Metals BVBA, our wholly owned Belgian subsidiary ("Imbali"), is
party to a secured credit facility with Fortis Bank SA/NV, New York Branch,
under which Imbali has a EUR 10 million commitment available for loans and
documentary letters of credit. The credit facility expires June 30,
2008, however management expects to extend the facility prior to its
expiration. This credit facility, which is unconditionally guaranteed
by Empire Resources, Inc., provides that amounts may be borrowed, repaid and
re-borrowed, subject to a borrowing base test. The loans under the facility bear
interest at a rate equal to 1.75% per annum in excess of EURIBOR. The
facility may be renewed subject to the agreement of both parties. As
of March 31, 2008 and December 31, 2007 the credit utilized under this agreement
amounted to EUR 9.9 million (US $15,680,000 and US$14,617,000).
7.
Earnings Per Share (In thousands, except per share amounts)
|
|
|
Three
months ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Weighted
average shares outstanding-basic
|
|
|
9,826
|
|
|
|
9,790
|
|
|
Dilutive
effect of stock options
|
|
|
146
|
|
|
|
262
|
|
|
Weighted
average shares outstanding-diluted
|
|
|
9,972
|
|
|
|
10,052
|
|
|
Basic
Earnings per Share
|
|
$
|
0.11
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share
|
|
$
|
0.11
|
|
|
$
|
0.24
|
|
Basic
earnings per share are based upon weighted average number of common shares
outstanding during each period. Diluted earnings per share are based upon the
weighted average number of common shares outstanding during each period, plus
dilutive potential common shares from assumed exercise of the outstanding stock
options using the treasury stock method.
8.
Dividends
On March
18, 2008 our Board of Directors declared cash dividends aggregating $0.05 per
share or $491,300 to stockholders of record at the close of business
on March 31, 2008, which was paid on April 14, 2008. The Board of
Directors intends to review its dividend policy on a quarterly basis, and a
determination by the Board of Directors will be made subject to profitability,
free cash flow and other requirements of the business.
9.
Commitments and Contingencies
We have
outstanding letters of credit to certain of our suppliers, which at March 31,
2008 amounted to approximately $42,062,000.
A. W.
Financial Services, S.A., a French company ("AWF"), filed a complaint against
us, as well as against the transfer agent for our shares, American Stock
Transfer & Trust Company ("AST"), and AST's agent or sub-contractor,
Affiliated Computer Services, Inc. ("ACS"), on September 28, 2007, in the U.S.
District Court, Southern District of New York, claiming that 30,426 shares of
the Company's common stock owned by AWF, as well as related dividends, were
improperly delivered to the State of Delaware as unclaimed (escheated)
property. AWF alleges that the escheatment resulted from, among other
things, the negligence of each defendant and a breach of fiduciary duty by
us. In addition, AWF alleges that through the escheatment we and the
other defendants converted its property. AWF claims that it has
suffered damages of not less than $870,000, reflecting in general the difference
between the value of the shares when liquidated by the State of Delaware (or its
agent, ACS) and when AWF claims to have first inquired about selling the shares
in the spring of 2006, plus dividends that it would have received in that
period, plus interest, plus an amount reflecting the loss in value of the dollar
against the euro. AWF is also seeking specific performance, namely
that we deliver to it a stock certificate in its name representing 30,426 shares
of the Company's common stock. Since the initial complaint, AST has
filed cross-claims against us and ACS seeking indemnity for any losses resulting
to it from AWF's claims. We first received actual notice of this lawsuit on
March 5, 2008. On March 18, 2008, we filed an answer to the complaint
denying its material allegations and asserting affirmative
defenses. On April 4, 2008, AWF filed an amended
complaint. Counsel for AST has agreed that as a result, its
cross-claim is currently moot. On May 2, 2008, we filed a motion to
dismiss the amended complaint for failure to state a claim. The
briefing of that motion is ongoing. We believe that we have
meritorious defenses to the complaint and the cross-claim and intend to defend
against these claims vigorously.
10.
Derivative Financial Instruments and Risk Management
Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” issued by the Financial Accounting Standards Board requires us to
recognize all derivatives in the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through earnings. If the
derivative is a hedge, depending upon the nature of the hedge, changes in the
fair value of the derivative are either offset against the change in fair value
of the hedged assets, liabilities or firm commitments through earnings (fair
value hedge), or recognized in other comprehensive income until the hedged item
is recognized in earnings (cash flow hedge). The ineffective portion of a
derivative’s change in fair value, if any, is immediately recognized in
earnings. When a hedged item in a fair value hedge is sold, the adjustment in
the carrying amount of the hedged item is recognized in earnings.
As of
March 31, 2008 there were deposits of $3,116,000 with brokers for margin in
connection with derivative contracts at March 31, 2008. At December
31, 2007, there were no such deposits with brokers. Such deposits are classified
as restricted cash on the accompanying balance sheet.
At March
31, 2008 and December 31, 2007, net unrealized losses on our open foreign
exchange forward contracts amounted to approximately $1,495,000 and $890,000
respectively. Net unrealized losses on aluminum futures contracts at March 31,
2008 were approximately $6,403,000 and net unrealized gains on aluminum futures
contracts at December 31, 2007 amounted to approximately
$2,865,000.
These
amounts, which represent the fair value of the open derivative contracts, were
offset through earnings by like amounts for the changes in the fair value of
inventories and commitments and the dollar equivalent of foreign currency
denominated accounts receivable which were hedged. On March 31, 2008,
open derivative contracts are reflected in the accompanying balance sheet in
derivative liabilities ($7,898,000). On December 31, 2007, such
amounts are reflected in the accompanying 2007 balance sheet in derivative
assets $2,865,000 and in derivative liabilities ($890,000).
For the
three months ended March 31, 2008 and 2007, hedge ineffectiveness associated
with derivatives designated as fair value hedges was insignificant, and no fair
value hedges were derecognized.
We are a party to interest rate swaps
with a total notional amount of $70 million terminating in
2010. These swaps are designated as a cash flow hedge of the variable
interest on that portion of the credit agreement up to the notional
amount. At March 31, 2008 and December 31, 2007, net unrealized
losses on interest rate swaps amounted to $4,519,000 and
$2,463,000 respectively, which are included in derivative liabilities
with a corresponding debit, net of deferred tax benefit, in accumulated other
comprehensive loss in the accompanying balance sheet
.
11. Comprehensive
Income
(
In thousands
)
|
|
|
Three
months ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net
Income
|
|
$
|
1,112
|
|
|
$
|
2,411
|
|
|
Foreign
currency translation gain (loss)
|
|
|
213
|
|
|
|
(2
|
)
|
|
Change
in fair value of marketable securities, net of tax
|
|
|
|
|
|
|
5
|
|
|
Change
in fair value of interest rate swap,
net
of tax
|
|
|
(1,286
|
)
|
|
|
(605
|
)
|
|
Comprehensive
(loss) income
|
|
$
|
39
|
|
|
$
|
1,809
|
|
12.
Recent Accounting Pronouncements
On
January 1, 2008, we adopted Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements,” (“SFAS 157”) as it relates to financial
assets and financial liabilities. In February 2008, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” which delayed the effective
date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on at least an annual basis, until January 1, 2009 for calendar
year-end entities.
SFAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. This standard is now the single source in generally
accepted accounting principles for the definition of fair value, except for the
fair value of leased property as defined in SFAS 13. SFAS 157 establishes a fair
value hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from independent sources
(observable inputs), (2) assumptions that are other than quoted prices which are
either directly or indirectly observable for the asset or liability through
correlation with market data and (3) an entity’s own assumptions about
market participant assumptions developed based on the best information available
in the circumstances (unobservable inputs). The fair value hierarchy consists of
three broad levels, which gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3).
The three
levels of the fair value hierarchy under SFAS 157 are described
below:
|
|
•
|
|
Level
1—Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities.
|
|
|
•
|
|
Level
2—Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly,
including quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices that are
observable for the asset or liability (e.g., interest rates); and inputs
that are derived principally from or corroborated by observable market
data by correlation or other means.
|
|
|
•
|
|
Level
3—Inputs that are both significant to the fair value measurement and
unobservable. We do not hold any assets or liabilities that
would be classified as Level 3.
The
following section describes the valuation methodologies used by the
Company to measure different financial instruments at fair value,
including an indication of the level in the fair value hierarchy in which
each instrument is generally classified. Where appropriate the description
includes details of the valuation models, the key inputs to those models,
and any significant assumptions.
Derivative
contracts are valued using quoted market prices and significant other
observable inputs. Such financial instruments consist of aluminum, foreign
currency contracts, or interest rates swaps. The fair values for the
majority of these derivative contracts are based upon current quoted
market prices. These financial instruments are typically exchange-traded
and are generally classified within Level 1 or Level 2 of the fair value
hierarchy depending on whether the exchange is deemed to be an active
market or not.
|
Major
categories of assets and liabilities measured at fair value are classified as
follows:
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Assets:
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
90,655
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Derivatives
|
|
$
|
1,495
|
|
|
|
|
|
|
Derivative
Contracts
|
|
$
|
6,403
|
|
|
|
|
|
|
Interest
Rate Swaps
|
|
|
|
|
|
$
|
4,519
|
|
On
January 1, 2008, Statement of Financial Accounting Standards (SFAS)
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (SFAS 159) became effective for us. SFAS 159 permits entities to
choose to measure many financial instruments and certain other assets and
liabilities at fair value on an instrument-by-instrument basis (the fair value
option) with changes in fair value reported in earnings. We already record
marketable securities and derivative contracts at fair value. We did
not elect to value any other financial instruments at fair value and
accordingly, the adoption of SFAS 159 had no effect on our financial
statements.
Forward
Looking Statements
The
discussions set forth below and elsewhere herein contain certain statements that
may be considered “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements generally are identified by the words “believes,”
“project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,”
“may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and
similar expressions. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking
statements. Our particular risks include those factors listed under
“Risk Factors,” beginning on page 10 of our Annual Report on Form 10-K for the
year ended December 31, 2007. We are also subject to many other
uncertainties, such as changes in general, national or regional economic
conditions; an act of war or terrorism that disrupts international shipping;
changes in laws, regulations and tariffs; the imposition of anti-dumping duties
on the products imported, including those produced by Hulamin Ltd.; failure to
successfully integrate manufacturing and the sales of extrusions into our
business; changes in the size and nature of our competition; changes in interest
rates, foreign currencies or spot prices of aluminum; counterparty defaults,
loss of one or more foreign suppliers or key executives; loss of one or more
significant customers; increased credit risk from customers; failure to grow
internally or by acquisition and to integrate acquired businesses; and failure
to improve operating margins and efficiencies. We undertake no
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.
Overview
The
following MD&A is intended to help you understand our results of operations
and financial condition. This MD&A is provided as a supplement
to, and should be read in conjunction with, our financial statements and the
accompanying notes to them.
We are
engaged principally in the purchase, sale and distribution of semi-finished
aluminum products to a diverse customer base located throughout the United
States and Canada, Europe, Australia and New Zealand. We also
manufacture
prime
aluminum extruded products in our facility located in Baltimore,
MD. We sell our products through our own marketing and sales
personnel and our independent sales agents who are located in North America and
Europe and who receive commissions on sales. We purchase our products
from suppliers located throughout the world. One supplier, Hulamin
Ltd., furnished approximately 55% of our products in the first three months of
2008. In our North American and Australian businesses we do not
typically purchase inventory for stock, however we do maintain stock for sales
to customers in Europe. In the majority of our North American and
Australian transactions we place orders with our suppliers based upon orders
that we have received from our customers.
The
industry in which we operate is the sale and distribution of semi-finished
aluminum products. These products are manufactured worldwide by
rolling and extrusion facilities, many of which are owned by large integrated
companies and others by independent producers. The products we
purchase are in turn sold to varied metal working industries including
automotive, housing, packaging, as well as distributors.
We do not
typically purchase inventory for stock. Instead we place orders with
aluminum suppliers based upon orders that we have received from our customers.
Inherent in our business is the risk of matching the timing of our contracts. We
buy and sell aluminum products which are based on a constantly moving terminal
market price determined by the London Metal Exchange (“LME”). Were we
not to hedge such exposures we could be exposed to significant losses due to the
continually changing aluminum prices.
We use
aluminum future contracts to manage our exposure to commodity price risk
inherent in our activities. It is our policy to hedge such risks, to
the extent practicable. We enter into hedges to limit our exposure to
volatile price fluctuations in metals which would impact our gross margins on
firm purchase and sales commitments. As an example, we may enter into
fixed price contracts with our suppliers and variable price sales contracts with
our customers. We will utilize the futures market to match the terms of the
purchase and sale through hedging our fixed purchase commitment by entering into
a futures contract and selling the aluminum for future delivery in the month
where the aluminum is to be priced and delivered to the
customer. We use hedges for no purpose other than to avoid
exposure to changes in aluminum prices and foreign currency rates between when
we buy a shipment of aluminum from a supplier and when we deliver it to a
customer.
If the
underlying metal price increases since a sales contract is initiated, we would
suffer a hedging loss and have a derivative liability, but the sales price to
the customer would be based on a higher market price and offset the
loss. Conversely, if the metal price decreases, we would have a
hedging gain and recognize a derivative asset, but the sales price to the
customer would be based on the lower market price and offset the
gain.
We also
enter into foreign exchange forward contracts to hedge our exposure related to
commitments to sell non-ferrous metals denominated in some international
currencies. In such cases, we will sell the foreign currency through
a bank for an approximate date when we anticipate receiving payment from the
foreign customer. When payment is received, we will deliver the foreign currency
to the bank and receive U.S. dollar equivalent based upon our hedged
rate.
In
accordance with Financial Accounting Standards No. 133, we designate these
derivative contracts as fair value hedges and recognize them on our balance
sheet at fair value as well as offsetting changes in the fair value of the
related hedged firm purchase and sales commitment attributable to the hedged
risk. The fair value adjustment related to the hedged commitment is recognized
in earnings upon revenue recognition which occurs at the time of delivery to our
customers.
As
disclosed in our 2007 10-K Risk Factors, the potential for losses using our
hedging methodology is based on either counterparty defaults with banks for our
foreign exchange hedging, the LME for our aluminum hedges, or customer
defaults. LME or foreign exchange counterparty default could impact
our results of operations in the event that we had a derivative asset and were
owed monies by these counterparties. In the event of customer defaults we may be
forced to sell the material in the open market and absorb losses for metal or
foreign exchange hedges that were applied to the defaulting customers’
transactions. Results of operations could be materially impacted in these
instances as our hedge would effectively be cancelled due to the
default.
Our
derivatives are straightforward hedging and are held for price protection and
not for purposes of trading in the futures market. We earn our gross
profit margin on the underlying physical product and not on the movement of
aluminum prices. Utilizing this strategy, we insulate our results to the extent
practicable from changes in market prices.
Our
long-term growth will continue to depend upon understanding our customers’
particular requirements and delivering a high level of service and quality
products that meet those requirements consistently. Our growth and
profitability will also depend upon our ability to continue building our market
knowledge and in particular our understanding of the production capabilities of
our suppliers. We will also need to maintain, strengthen and expand
our supplier relationships in light of continued pricing
pressures. Finally, we will need to succeed in identifying and
executing opportunities to provide our customers additional value added
offerings, in both our existing markets and product offerings as well as in
broader or new product groups and geographic areas.
On August
13, 2007, we amended and restated our supply agreement with Hulamin, our largest
supplier. Under the amended agreement, we will remain Hulamin's
exclusive distributor in the U.S. and Canada. In contrast to the
original agreement, which had no term but was terminable by either party on 12
months' written notice, the amended agreement provides for a fixed term that
expires on August 9, 2008 and may be extended by mutual agreement. In
requesting this amendment, Hulamin expressed a desire to improve their
profitability and have stated their intention to review their route to market
this year which may result in our agreement being renewed or modified, or it may
lapse. Although the outcome is not entirely clear, we anticipate that
Hulamin may sell directly to some of our larger customers on a direct basis
while also
continuing
to distribute their product through us. In the meantime, we plan to
continue working closely with Hulamin as well as seeking to expand and diversify
our sources of supply, including with some of our long-term existing suppliers,
and with others that we have developed more recently, as well as with others
with whom we may not have dealt previously. We will also continue to
work to diversify our business through distribution as well as by seeking
opportunities to consider acquisitions both in our traditional and in other
lines of business. We believe that doing so remains strategically
critical to the maintenance and growth of our business, whether or not the
Hulamin agreement is renewed in August.
Application
of Critical Accounting Policies
Our
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America. Certain accounting policies have a significant impact on
amounts reported in the financial statements. A summary of those
significant accounting policies can be found in Note B to our financial
statements included in our 2007 Annual Report on Form 10-K. Except
for the adoption of Statement of Financial Accounting Standards (SFAS)
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”) and Statement of Financial Accounting Standards (SFAS)
No. 157, “Fair Value Measurements,” (“SFAS 157”) we have not adopted any
significant new accounting policies during the three month period ended March
31, 2008.
We report
accounts receivable, net of an allowance for doubtful accounts, to represent our
estimate of the amount that ultimately will be realized in cash. We
review the adequacy of our allowance for doubtful accounts on an ongoing basis,
using historical collection trends, aging of receivables, as well as review of
specific accounts, and we make adjustments in the allowance as we believe to be
necessary. We maintain a credit insurance policy on the majority of
our customers. This policy has a co-insurance provision and specific
limits on each customer’s receivables. The co-pay may be increased in selected
instances, and we sometimes elect to exceed these specific credit limits.
Changes in economic conditions could have an impact on our collection of
existing receivable balances or future allowance considerations.
Results
of Operations for the Three Months Ended March 31, 2008 (in
thousands)
During
the first three months of 2008, net sales decreased by $20,812 to $119,029 from
$139,841, or a 15% decrease from the first three months of
2007. This decrease was primarily due to lower shipment volumes in
our North
American market.
Gross
profit for the period ended March 31, 2008 was $6,210, a decline of $2,208, or
26%, as compared to our gross profit of $8,418 in the first three months of
2007. Our gross profit margin was negatively impacted by lower sales
as well as continued pricing pressures due to increased competition in our North
American market from both domestic and overseas sources. This strong
competition compressed the fabrication premiums which we in turn can charge our
customers. Additionally, our extrusion manufacturing facility
continued to operate significantly below capacity, which resulted in excessive
fabrication costs and diminished our overall profitability.
SG&A
increased by $260 from $2,516 to $2,776 or an increase of about
10%. The main components of the increases were insurance premiums,
consulting fees, and travel costs.
Interest
expense for the first three months of 2008 was $1,659, a decrease of $367, or
18%, from our interest expense of $2,026 in the comparable period of
2007. The decrease is mainly attributable to reduced loan balances as
a result of the decrease in inventory and accounts receivable in the first
quarter of 2008 as compared to the first quarter of 2007.
Net
income for the first quarter of 2008 was $1,112, a 54% decline from our net
income of $2,411 in the first quarter of 2007.
Liquidity
and Capital Resources (in thousands, except per share data)
Our cash
flow provided by operations during the first three months of 2008 was
$1,391, as compared to $7,282 used by operations during the first
three months of 2007. Net cash provided by operations was primarily
the result of decreases in inventories of $15,659, increases in
accrued expenses of $8,452 and net income of $1,112 less increases in accounts
receivable of $16,651, and decreases in trade accounts payable of
$5,239.
Cash
flows used in financing activities during the first three months of 2008
amounted to $596 as compared to $7,366 provided by financing during the first
three months of 2007. The cash used in financing activities consists
mainly of payment of $491 in dividends.
We
currently operate under a $175 million revolving line of credit, including a
commitment to issue letters of credit, with five commercial
banks. Amounts borrowed bear interest of Eurodollar, money market or
base rates, at our option, plus an applicable margin. The applicable
margin is determined by our leverage ratios. Our borrowings under
this line of credit are secured by substantially all of our assets. The credit
agreement contains financial and other covenants including but not limited to,
covenants requiring maintenance of minimum tangible net worth and compliance
with leverage ratios, as well as an ownership minimum and limitations on other
indebtedness, liens, and investments and dispositions of assets. This
facility will expire on June 30, 2011.
The
credit agreement provides that amounts under the facility may be borrowed and
repaid, and re-borrowed, subject to a borrowing base test, until the maturity
date of June 30, 2011. As of March 31, 2008 and December 31, 2007,
the credit utilized amounted to, respectively, $135,312 and $112,735 (including
approximately $42,062 and $19,485 of outstanding letters of
credit).
In addition, our European subsidiary,
Imbali Metals has entered into a separate credit facility for EUR 10 million,
which includes a commitment to issues letters of credit with a commercial
bank. Amounts borrowed bear interest at EUROBOR plus an applicable
margin. The borrowings under this line of credit are secured by all
of the assets of Imbali Metals and are unconditionally guaranteed by Empire
Resources, Inc. This agreement contains financial and other
covenants. The agreement has a one year term and may be renewed only
by mutual agreement of both Imbali Metals and the bank. As of March 31, 2008 the
credit utilized under this agreement amounted to EUR 9.9 million (US
$15,680).
On March
18, 2008, our Board of Directors declared a cash dividend of $0.05 per share to
stockholders of record at the close of business on March 31,
2008. The dividend totaling $491 is reflected in dividends payable
and was paid on April 14, 2008. The Board of Directors will review
its dividend policy on a quarterly basis, and a determination by the Board of
Directors will be made subject to the profitability and free cash flow and the
other requirements of our business.
Management believes that cash from
operations, together with funds available under our credit facility, will be
sufficient to fund the
anticipated cash
requirements relating to our existing operations through the expiration of our
current credit facility
.
We may
require additional debt financing in connection with any future expansion of our
operations.
Commitments
and Contingencies (in thousands)
We had
outstanding letters of credit totaling $42,061 to certain of our suppliers as of
March 31, 2008.
As
discussed above, we have unconditionally guaranteed the EUR 10 million, one-year
renewable credit facility of our wholly owned Belgian subsidiary,
Imbali. Loans under the facility bear interest at a rate of 1.75% per
annum in excess of EURIBOR, and as of March 31, 2008, there were loans of EUR
9.9 million (US $15,680) outstanding.
Except as
noted, there have been no material changes to our commitments and contingencies
from that disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2007.
We hedge
metal pricing and foreign currency for the portion of our purchase and sales
contracts that we deem appropriate. There is a risk of a counterparty default in
fulfilling the hedge contract. Should there be a counterparty
default, we could be exposed to losses on the original hedged
contract.
No
response required because of registrant’s filing status as a smaller reporting
company.
Disclosure
Controls and Procedures. As required by Rule 13a-15 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management
conducted an evaluation with the participation of our Chief Executive Officer
and Chief Financial Officer, regarding the effectiveness of our disclosure
controls and procedures, as of March 31, 2008 (the “Evaluation Date”). In
designing and evaluating our disclosure controls and procedures, we and our
management recognize that any controls and procedures, no matter how well
designed and operated, can provide only a reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating and implementing possible controls and procedures. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the Evaluation Date, our disclosure controls and
procedures are effective to ensure that material information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms. We intend to
continue to review and document our disclosure controls and procedures,
including our internal controls and procedures for financial reporting, and we
may from time to time make changes to the disclosure controls and procedures to
enhance their effectiveness and to ensure that our systems evolve with our
business.
There was
no change in our internal control over financial reporting that occurred during
the quarter ended March 31, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
A.
W. Financial Services, S.A., a French company ("AWF"), filed a complaint against
us, as well as against the transfer agent for our shares, American Stock
Transfer & Trust Company ("AST"), and AST's agent or sub-contractor,
Affiliated Computer Services, Inc. ("ACS"), on September 28, 2007, in the U.S.
District Court, Southern District of New York, claiming that 30,426 shares of
the Company's common stock owned by AWF, as well as related dividends, were
improperly delivered to the State of Delaware as unclaimed (escheated)
property. AWF alleges that the escheatment resulted from, among other
things, the negligence of each defendant and a breach of fiduciary duty by
us. In addition, AWF alleges that through the escheatment we and the
other defendants converted its property. AWF claims that it has
suffered damages of not less than $870,000, reflecting in general the difference
between the value of the shares when liquidated by the State of Delaware (or its
agent, ACS) and when AWF claims to have first inquired about selling the shares
in the spring of 2006, plus dividends that it would have received in that
period, plus interest, plus an amount reflecting the loss in value of the dollar
against the euro. AWF is also seeking specific performance, namely
that we deliver to it a stock certificate in its name representing 30,426 shares
of the Company's common stock. Since the initial complaint, AST has
filed cross-claims against us and ACS seeking indemnity for any losses resulting
to it from AWF's claims. We first received actual notice of this lawsuit on
March 5, 2008. On March 18, 2008, we filed an answer to the complaint
denying its material allegations and asserting affirmative
defenses. On April 4, 2008, AWF filed an amended
complaint. Counsel for AST has agreed that, as a result, its
cross-claim is currently moot. On May 2, 2008, we filed a motion to
dismiss the amended complaint for failure to state a claim. The
briefing of that motion is ongoing. We believe that we have
meritorious defenses to the complaint and the cross-claim and intend to defend
against these claims vigorously.
None.
None.
None.
None.
The
following are included as exhibits to this report:
-------------------------
* Filed
herewith
**
Furnished herewith
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
|
|
|
|
|
EMPIRE
RESOURCES, INC.
|
|
|
|
|
|
|
|
Dated:
|
May
15, 2008
|
By:
|
/s/
|
Sandra Kahn
|
|
|
|
|
|
Sandra
Kahn
|
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
(signing
both on behalf of the registrant and in her capacity as Principal
Financial and Principal Accounting
Officer)
|
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