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
September 30, 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 [ ]
|
Accelerated
Filer [ ]
|
|
Non-Accelerated
Filer [ ]
|
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).
Common
Stock, par value $0.01 per share
|
|
9,526,184
|
(Class)
|
|
(Outstanding
on November 10, 2008)
|
EMPIRE
RESOURCES, INC.
FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2008
INDEX
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 nine months ended September 30, 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.
PART
I FINANCIAL
INFORMATION
Item
1. FINANCIAL
STATEMENTS
Condensed Consolidated Balance Sheets
In
thousands, except share and per share amounts
|
September
30, 2008
|
|
December
31, 2007
|
|
(unaudited)
|
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$ 2,685
|
|
$ 2,228
|
Trade
accounts receivable (less allowance for doubtful accounts of
$191
and $191)
|
76,404
|
|
63,188
|
Inventories
|
103,459
|
|
105,129
|
Other
current assets, including derivatives
|
19,405
|
|
9,078
|
Total
current assets
|
201,953
|
|
179,623
|
Property
and equipment, net
|
7,507
|
|
7,751
|
Deferred
financing costs, net of accumulated amortization of $129 and
$106
|
396
|
|
357
|
Total
Assets
|
$ 209,856
|
|
$ 187,731
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Notes
payable - banks
|
$ 136,340
|
|
$ 107,867
|
Current
maturities of long-term debt
|
130
|
|
125
|
Trade
accounts payable
|
29,715
|
|
35,495
|
Accrued
expenses and derivative liabilities
|
7,951
|
|
9,940
|
Dividends
payable
|
487
|
|
491
|
Total
current liabilities
|
174,623
|
|
153,918
|
Long-term
debt, net of current maturities
|
1,947
|
|
2,056
|
Commitments
and contingencies
|
|
|
|
Stockholders'
equity:
|
|
|
|
Common
stock $.01 par value, 20,000,000 shares authorized and
11,749,651
shares issued at September 30, 2008 and December 31, 2007
|
117
|
|
117
|
Additional
paid-in capital
|
11,709
|
|
11,709
|
Retained
earnings
|
25,328
|
|
23,490
|
Accumulated
other comprehensive loss
|
(1,426)
|
|
(1,320)
|
Treasury
stock (1,988,967 and 1,923,467 shares)
|
(2,442)
|
|
(2,239)
|
Total
stockholders' equity
|
33,286
|
|
31,757
|
Total
Liabilities and Stockholders' equity
|
$ 209,856
|
|
$ 187,731
|
|
|
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements
|
Condensed Consolidated Statements of Income
(Unaudited)
In
thousands, except per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
$
|
124,510
|
|
|
$
|
109,907
|
|
|
$
|
347,803
|
|
|
$
|
366,528
|
|
Cost
of goods sold
|
|
|
118,236
|
|
|
|
104,783
|
|
|
|
329,036
|
|
|
|
346,465
|
|
Gross
profit
|
|
|
6,274
|
|
|
|
5,124
|
|
|
|
18,767
|
|
|
|
20,063
|
|
Selling,
general and administrative expenses
|
|
|
2,605
|
|
|
|
2,313
|
|
|
|
8,137
|
|
|
|
7,537
|
|
Operating
income
|
|
|
3,669
|
|
|
|
2,811
|
|
|
|
10,630
|
|
|
|
12,526
|
|
Interest
expense
|
|
|
1,897
|
|
|
|
1,955
|
|
|
|
5,354
|
|
|
|
6,062
|
|
Income
before income taxes
|
|
|
1,772
|
|
|
|
856
|
|
|
|
5,276
|
|
|
|
6,464
|
|
Income
taxes
|
|
|
645
|
|
|
|
319
|
|
|
|
1,969
|
|
|
|
2,391
|
|
Net
income
|
|
$
|
1,127
|
|
|
$
|
537
|
|
|
$
|
3,307
|
|
|
$
|
4,073
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,818
|
|
|
|
9,790
|
|
|
|
9,823
|
|
|
|
9,790
|
|
Diluted
|
|
|
9,935
|
|
|
|
10,035
|
|
|
|
9,961
|
|
|
|
10,046
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.05
|
|
|
$
|
0.34
|
|
|
$
|
0.42
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.05
|
|
|
$
|
0.33
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Cash Flows
(Unaudited)
In
thousands
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,307
|
|
|
$
|
4,073
|
|
Adjustments
to reconcile net income to net cash (used in)
provided by operating activities:
|
|
Depreciation
and amortization
|
|
|
328
|
|
|
|
308
|
|
Deferred
income taxes
|
|
|
202
|
|
|
|
318
|
|
Other
|
|
|
(210
|
)
|
|
|
100
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
0
|
|
|
|
1,046
|
|
Trade
accounts receivable
|
|
|
(13,270
|
)
|
|
|
(4,916
|
)
|
Inventories
|
|
|
1,674
|
|
|
|
14,101
|
|
Other
current assets
|
|
|
(10,494
|
)
|
|
|
(9,717
|
)
|
Trade
accounts payable
|
|
|
(5,769
|
)
|
|
|
(3,986
|
)
|
Accrued
expenses
|
|
|
(2,133
|
)
|
|
|
1,918
|
|
Net
cash (used in) provided by operating activities
|
|
|
(26,365
|
)
|
|
|
3,245
|
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
|
|
Investment
in marketable securities
|
|
|
|
|
|
|
130
|
|
Purchases
of property and equipment
|
|
|
(44
|
)
|
|
|
(240
|
)
|
Net
cash used in investing activities
|
|
|
(44
|
)
|
|
|
(110
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable – banks
|
|
|
28,750
|
|
|
|
1,164
|
|
Repayments
- mortgage payable
|
|
|
(103
|
)
|
|
|
(87
|
)
|
Dividends
paid
|
|
|
(1,474
|
)
|
|
|
(3,034
|
)
|
Deferred
financing costs
|
|
|
(75
|
)
|
|
|
|
|
Treasury
stock purchases
|
|
|
(203
|
)
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
26,895
|
|
|
|
(1,957
|
)
|
Net
increase in cash
|
|
|
486
|
|
|
|
1,178
|
|
Effect
of exchange rate on cash
|
|
|
(29
|
)
|
|
|
|
|
Cash
at beginning of period
|
|
|
2,228
|
|
|
|
1,243
|
|
Cash
at end of period
|
|
$
|
2,685
|
|
|
$
|
2,421
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,132
|
|
|
$
|
6,303
|
|
Income
taxes
|
|
$
|
422
|
|
|
$
|
3,441
|
|
Non
Cash Financing Activities:
|
|
|
|
|
|
|
|
|
Dividend
declared but not yet paid
|
|
$
|
487
|
|
|
$
|
490
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Unaudited Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Empire
Resources, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited
)
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.
3.
Concentrations
One major
customer accounted for approximately 14% of our consolidated net sales for the
nine month period ended September 30, 2008 as compared to 11% for the nine month
period ended September 30, 2007.
We purchase aluminum from a number of suppliers located throughout the
world. One supplier, Hulamin Ltd., accounted for 48% of total purchases
during the nine month period ended September 30, 2008 as compared to 54% during
the nine month period ended September 30, 2007. On June 25, 2008, we
signed a new agreement, effective August 10, 2008, with Hulamin Ltd., our
principal supplier. Hulamin may conclude sales of its products
to those North American customers who wish to procure directly from Hulamin.
Subject to the availability of product, the agreement calls for Hulamin to
continue to work closely with Empire in satisfying market requirements,
recognizing that Empire remains an important customer for Hulamin. This
arrangement is of an evergreen nature and can be terminated by either party on
twelve months written notice.
We do not
know whether or to what extent our new arrangement with Hulamin will affect our
business, and we may not know for some time to come. However, if it
results in a significant degree of effective new competition or disruption to
our supply of products and we are unable to replace the volume from other
sources, it would have a material adverse effect on our business, financial
condition and results of operation.
Three other suppliers accounted for 35% of total purchases during the nine
months of 2008 as compared to 31% during the first nine months 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 nine month period ended September 30, 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., Fortis
Capital Corp. and Brown Brothers Harriman & Co.
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 September 30,
2008 and December 31, 2007, the credit utilized under this agreement amounted to
respectively, $150,309,000 and $112,735,000 (including $28,309,000 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
$2.08 million at September 30, 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 12 million commitment available for loans and
documentary letters of credit. The credit facility expires June 30,
2009. 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 September 30, 2008 and December 31, 2007 the credit utilized under this
agreement amounted to EUR 9.9 million (US $14,340,000 and
US$14,617,000).
7.
Earnings Per Share (In thousands, except per share amounts)
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Weighted
average shares outstanding-basic
|
|
|
9,818
|
|
|
|
9,790
|
|
|
|
9,823
|
|
|
|
9,790
|
|
Dilutive
effect of stock options
|
|
|
117
|
|
|
|
245
|
|
|
|
138
|
|
|
|
256
|
|
Weighted
average shares outstanding-diluted
|
|
|
9,935
|
|
|
|
10,035
|
|
|
|
9,961
|
|
|
|
10,046
|
|
Basic
Earnings per Share
|
|
$
|
.11
|
|
|
$
|
0.05
|
|
|
$
|
.34
|
|
|
$
|
0.42
|
|
Diluted
Earnings per Share
|
|
$
|
.11
|
|
|
$
|
0.05
|
|
|
$
|
.33
|
|
|
$
|
0.41
|
|
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
potential dilutive common shares from assumed exercise of the outstanding stock
options using the treasury stock method.
8.
Dividends
On
September 18, 2008 our Board of Directors declared a cash dividend of $0.05 per
share or $487,000 to stockholders of record at the close of business on
September 30, 2008, which was paid on October 16, 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 September
30, 2008 amounted to approximately $28,309,000.
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 earlier 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 moot. On May 2, 2008, we and the other defendants
filed motions to dismiss the amended complaint for failure to state a claim.
The briefing of those motions has been completed but the court has not yet
ruled. We believe that we have meritorious defenses to the complaint and
intend to defend against its 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.
At
September 30, 2008 and December 31, 2007, net unrealized gains and losses on our
open foreign exchange forward contracts amounted to approximately $968,000 and
($890,000), respectively. Net unrealized gains on aluminum futures contracts at
September 30, 2008 and December 31, 2007, were approximately $15,302,000 and
$2,865,000 respectively.
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 September 30,
2008, open derivative contracts are reflected in the accompanying balance sheet
in derivative assets $16,270,000. On December 31, 2007, such amounts
are reflected in the accompanying 2007 balance sheet in derivative liabilities
($2,865,000) and in derivative liabilities $890,000.
For the
nine months ended September 30, 2008 and 2007, hedge ineffectiveness associated
with derivatives designated as fair value hedges was insignificant, and no fair
value hedges were derecognized.
In
connection with our revolving line of credit, we are a party to interest rate
swaps with a total notional amount of $70 million terminating in
2010. In addition, we are a party to an interest rate swap for $2.08
million in connection with the mortgage on our Baltimore
warehouse. 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 September 30, 2008 and December 31, 2007, net unrealized
losses on interest rate swaps amounted to $2,590,000 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 September 30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
Income
|
|
$
|
1,127
|
|
|
$
|
537
|
|
|
$
|
3,307
|
|
|
$
|
4,073
|
|
Foreign
currency translation (loss) gain
|
|
|
(204
|
)
|
|
|
111
|
|
|
|
(22
|
)
|
|
|
117
|
|
Change
in fair value of marketable securities, net of tax
|
|
|
(2
|
)
|
|
|
(26
|
)
|
|
|
(5
|
)
|
|
|
(14
|
)
|
Change
in fair value of interest rate swap, net of tax
|
|
|
15
|
|
|
|
(862
|
)
|
|
|
(79
|
)
|
|
|
(843
|
)
|
Comprehensive
(loss) income
|
|
$
|
936
|
|
|
$
|
(240
|
)
|
|
$
|
3,201
|
|
|
$
|
3,333
|
|
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. Derivative contracts are valued using quoted market prices and
significant other observable inputs. Such financial instruments consist of
aluminum contracts, 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 financial assets and liabilities measured at fair value at
September 30, 2008 are classified as follows:
|
|
Level
1
|
|
Level
2
|
Assets:
|
|
|
|
|
Foreign
Currency Future Contracts
|
|
$
|
968
|
|
|
Aluminum
Future Contracts
|
|
$
|
15,302
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Interest
Rate Swap Contracts
|
|
|
|
|
$2,590
|
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.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities — an
amendment of FASB Statement No. 133 (“SFAS No. 161”).
SFAS No. 161 requires entities that utilize derivative instruments to
provide qualitative disclosures about their objectives and strategies for using
such instruments, as well as any details of credit-risk-related contingent
features contained within derivatives. SFAS No. 161 also requires
entities to disclose additional information about the amounts and location of
derivatives located within the financial statements, how the provisions of
SFAS 133 have been applied and the impact that hedges have on an entity’s
financial position, financial performance, and cash flows.
SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. The Company has not yet determined the
impact SFAS No. 161 may have on the required disclosures in its
consolidated financial statements.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 6 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 the our competition; changes in
interest rates, foreign currencies or spot prices of aluminum; counterparty
defaults, inability of our banks to fund as per our agreement, 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 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 48% of our products in the first nine
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 to 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 futures 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 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 Form 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 or
supplier 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. In the event of a supplier default, we may be forced to purchase
material in the open market and absorb losses for metal hedges that were applied
to the defaulting suppliers’ 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 June
25, 2008 we announced that we signed a new agreement with Hulamin Ltd., our
principal supplier, which became effective on August 10,
2008. Hulamin may conclude sales of its products to those North
American customers who wish to procure directly from Hulamin. Subject to the
availability of product, the agreement calls for Hulamin to continue to work
closely with Empire in satisfying market requirements, recognizing that Empire
remains an important customer for Hulamin. This arrangement is of an evergreen
nature and can be terminated by either party on twelve months written
notice.
We do not
know whether or to what extent our new arrangement with Hulamin will affect our
business, and we may not know for some time to come. However, if it
results in a significant degree of effective new competition or disruption to
our supply of products and we are unable to replace the volume from other
sources, it would have a material adverse effect on our business, financial
condition and results of operation.
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 nine month period ended September
30, 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 Nine Months Ended September 30, 2008 (in
thousands)
During
the first nine months of 2008, net sales decreased by $18,725 from $366,528 to
$347,803, or a 5% decrease from the first nine months of 2007. This decrease was
due to lower unit volumes shipped in North America during the nine month
period. Gross profit declined by $1,296 to $18,767 from $20,063
for
the period, or a 6% decrease, in the first nine months of 2008 as compared to
the first nine months of 2007. Additionally, the Company continued to
face challenges in bringing its extrusion production facility to full capacity
utilization, negatively impacting the gross profit margins.
During
the first nine months of 2008, interest expense declined by $708 to $5,354 from
$6,062 over the same nine month period in 2007. This 12% reduction in
interest expense resulted from the lower interest rate environment during the
nine month period.
Net
income decreased from $4,073 in the first nine months of 2007 to $3,307 in the
first nine months of 2008 primarily due to the decline in sales and increase in
sales, general and administrative expense, of insurance, legal, and payroll
costs, during the nine month period.
Results
of Operations for the Three Months Ended September 30, 2008 (in
thousands)
Net
sales increased by $14,603 or 13% during the third quarter of 2008 from $109,907
in 2007 to $124,510 in 2008. This increase is due to higher underlying aluminum
ingot pricing. Gross profit increased in the current three month period by
$1,150 from $5,124 to $6,274 as compared to the same period in
2007. The gross profit margin was positively impacted by sales of a
favorable product mix. However, the Company continues to face
challenges in bringing its extrusion production facility to full capacity
utilization, negatively impacting the gross profit margins.
Interest
expense decreased during the three month period by $58 from $1,955 to $1,897.
This 3% decrease in interest expense is due to the lower interest rate
environment during the period.
Net
income increased by $590, or 110%, from $537 to $1,127 for the three months
ended September 30, 2008 as a result of increased sales as well as favorable
product mix.
Liquidity
and Capital Resources (in thousands, except per share data)
Our cash
flow used in operations during the first nine months of 2008 was $26,365, as
compared to cash provided by operations during the first nine months of 2007 of
$3,245. Net cash used in operations was primarily the result of
increases in accounts receivable of $13,270, decreases in accounts payable of
$5,769, increases in other current assets of $10,494 and net
income of $3,307.
Cash
flows provided by financing activities during the first nine months of 2008
amounted to $26,895 as compared to cash used in financing activities during the
first nine months of 2007 of $1,957. The cash provided by financing
activities consists primarily of $28,750 in proceeds from notes
payable.
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 September 30, 2008 and December 31,
2007, the credit utilized amounted to, respectively, $150,309 and $112,735
(including approximately $28,309 and $19,485 of outstanding letters of
credit).
In addition, our European subsidiary,
Imbali Metals has entered into a separate credit facility for EUR 12 million,
which includes a commitment to issues letters of credit with a commercial bank
which expires on June 30, 2009. 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 September 30, 2008 the credit utilized under this agreement amounted to EUR
9.9 million (US $14,340).
On
September 24, 2008, our Board of Directors declared a cash dividend of $0.05 per
share to stockholders of record at the close of business on September 30,
2008. The dividend totaling $487 is reflected in dividends payable
and was paid on October 16, 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 $28,309 to certain of our suppliers as of
September 30, 2008.
As
discussed above, we have unconditionally guaranteed the EUR 12 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 September 30, 2008, there were loans of
EUR 9.9 million (US $14,430) 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.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
No
response required because of registrant’s filing status as a smaller reporting
company.
Item 4A (T). Controls and Procedures
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 September 30, 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 September 30, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II OTHER
INFORMATION
Item 1. Legal Proceedings
.
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 earlier 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 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 intend to defend against its claims vigorously.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
.
None.
Item 3. Defaults Upon Senior
Securities
.
None.
Item 4. Submission of Matters to a Vote of Security
Holders.
None.
Item 5. Other Information
.
None.
Item 6. Exhibits.
The
following are included as exhibits to this report:
* Filed
herewith
**
Furnished herewith
SIGNATURES
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.
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EMPIRE
RESOURCES, INC.
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Dated:
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November
14, 2008
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By:
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/s/
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Sandra Kahn
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Sandra
Kahn
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Chief
Financial Officer
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(signing
both on behalf of the registrant and in her capacity as Principal
Financial and Principal Accounting
Officer)
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-12-