Item 1. Business
Metalico, Inc. and subsidiaries (referred to in this Form 10-K Report as the “Company,” “Metalico,” “we,” “us,” “our,” and similar terms) operates in two distinct business segments: (a) scrap metal recycling (“Scrap Metal Recycling”), and (b) lead metal product fabricating (“Lead Fabricating”). As of the date of this filing, the Company’s operating facilities include thirty-one scrap metal recycling facilities, including a combined aluminum de-oxidizing plant and four lead product manufacturing and fabricating plants.
Metalico, Inc. was originally organized as a Delaware corporation in 1997. In 1999, the original Metalico was merged into a Colorado corporation. Later that year, the surviving Colorado corporation was merged into a newly organized Delaware corporation named Metalico, Inc., which continues today as our holding company. Our common stock began trading on the American Stock Exchange (now known as NYSE MKT) on March 15, 2005 under the symbol “MEA.”
We have historically maintained a small corporate team that sets our strategic goals and overall strategy. We allow each subsidiary autonomy for material purchasing and have centralized selling capabilities in our scrap metal recycling segment to make better use of our economies of scale. The corporate team approves all acquisitions and operating budgets, allocates capital to the business units based upon expected returns and risk levels, establishes succession plans, ensures operations maintain a consistent level of quality; evaluates risk and holds the management of each business unit accountable for the performance of its respective business unit.
SUMMARY OF BUSINESS
Scrap Metal Recycling
We have concentrated on acquiring and successfully consolidating scrap operations by initially acquiring companies to serve as platforms into which subsequent acquisitions would be integrated. We believe that through the integration of our acquired businesses, we have enhanced our competitive position and profitability of our operations because of the elimination of redundant functions, greater utilization of operating assets, improved managerial and financial resources and broader distribution channels.
We continue to be one of the largest full-service metal recyclers in Central and Western New York, with twelve recycling facilities located in that regional market. We also have a significant presence in Western Pennsylvania and Eastern Ohio. During 2013, we continued the expansion of our regional markets. Our expansion into new locations in or near our existing territories is consistent with Metalico`s growth strategy of penetrating geographically contiguous markets and benefiting from intercompany and operating synergies that are available through consolidation. In December 2013, we acquired a small auto salvage and parts provider in North East, Pennsylvania. In July 2013, we acquired substantially all of the assets, including real property of a family-owned scrap iron and metal recycling business with facilities in Warren, Pennsylvania and Olean, New York. These acquisitions provide sources of feedstock material for our shredder facility located nearby in suburban Buffalo. In February 2013, we acquired certain accounts, equipment and a lease of certain real property to operate a scrap metal recycling facility in the Greater Pittsburgh area in north suburban Conway, Beaver County, Pennsylvania. This acquisition provides a source of feedstock material for our shredder facility located nearby on Neville Island in Pittsburgh.
Our operations primarily involve the collection and processing of ferrous and non-ferrous metals. We collect industrial and obsolete scrap metal, process it into reusable forms and supply the recycled metals to our ultimate consumers that include electric arc furnace mills, integrated steel mills, foundries, secondary smelters, aluminum recyclers and metal brokers. We acquire unprocessed scrap metals primarily in our local and regional markets and sell to consumers nationally and in Canada as well as to exporters and international brokers. Some of the metal commodities we recycle include steel, copper, aluminum, stainless steel, molybdenum, tantalum,
platinum, lead and many others. We are also able to supply quantities of scrap aluminum to our aluminum recycling facility, and scrap lead to our lead fabricating subsidiaries. We believe that we provide comprehensive product offerings of both ferrous and non-ferrous scrap metals.
Our platform scrap facilities in New York, Ohio and Western Pennsylvania have ready access to highway and rail transportation, a critical factor in our business. In the Pittsburgh, Pennsylvania market, we have waterfront access with barge loading and unloading capabilities. In addition to buying, processing and selling ferrous and non-ferrous scrap metals, we manufacture de-oxidizing aluminum (“de-ox”), a form of alloyed aluminum, for the steel industry.
Our scrap metal recycling business has collection and processing facilities in the following locations as of the date of this filing:
Ferrous Scrap Industry. Our ferrous (iron-based) products primarily include sheared, bundled and shredded scrap metal and other scrap metal, such as plate and structural, turnings, busheling and broken cast iron. We, and others in our industry, anticipate that in the long-term, the demand for recycled ferrous metals will increase due to the continuing transformation of the world’s steel producers from virgin iron ore-based blast furnaces to newer, technologically advanced electric arc furnace mini-mills. The electric arc furnace process, which primarily uses recycled metal compared with the traditional steel-making process that uses significantly less recycled metal, is more environmentally sound and energy efficient. By recycling steel, scarce natural resources are preserved and the need to disrupt the environment with the mining of virgin iron ore is reduced. Further, when recycled metal is used instead of iron ore for new steel production, air and water pollution generated by the production process decreases and energy demand is reduced.
Non-Ferrous Scrap Industry. We also sort, process and package non-ferrous metals, which include aluminum, copper, stainless steel, brass, nickel-based alloys and high-temperature alloys, using similar techniques and through application of our technologies. The geographic markets for purchasing non-ferrous scrap tend to be larger than those for ferrous scrap due to the higher unit value of non-ferrous metals, which justify the cost of shipping over greater distances. Non-ferrous scrap is sold under multi-load commitments or on a
single-load spot basis, either mill-direct or through brokers, to intermediate or end-users which include smelters, foundries and aluminum sheet and ingot manufacturers. Secondary smelters, utilizing processed non-ferrous scrap as raw material, can produce non-ferrous metals at a lower cost than primary smelters producing such metals from ore. This is due to the significant savings in energy consumption, environmental compliance and labor costs enjoyed by the secondary smelters. These cost advantages, and the long lead-time necessary to construct new non-ferrous primary smelting facilities, have generally resulted in sustained demand and strong prices for processed non-ferrous scrap during periods of high demand for finished non-ferrous metal products.
We also recycle the platinum group metals (“PGMs”), platinum, palladium, and rhodium, from the substrate material retrieved from catalytic converters. The scrap catalytic device collection market is highly fragmented and characterized by a large number of suppliers dealing with a wide range of volumes. Converters for recycling are obtained from networks of auto dismantlers, scrap yards, parts dealers and manufacturers. The supply chain network has tended to develop regionally because the economics of collecting and distributing scrap converters to recyclers requires transportation from local scrap yards, often in small batches. Effective procurement is a key competitive strength and a significant barrier to entry as it requires significant knowledge and experience about the PGM loadings in different types of catalytic devices. Over the past few years, due to competitive pressures and our inability to obtain reliable sources of quality substrate, we curtailed our purchases of catalytic converters particularly in the Texas market. The purchase price for converters is determined on the basis of PGM market prices and internal estimates of the quantity of PGMs in each converter purchased. Once purchased, the converters are sorted and cut and the substrate material is removed and shipped to third-party processors which remove the PGMs from the substrate material by means of chemical and mechanical processes. Due primarily to the length of time it takes third-party substrate processors to extract the metal content, we use forward sales contracts with these processors to hedge against the possibility of extremely volatile metal prices. The Company also sells whole unprocessed converters.
Minor Metals recycling includes such metals as molybdenum, tungsten, tantalum, niobium, rhenium and chrome. Specialized uses for these elements combined with a lack of abundance relative to traditional base metals results in higher pricing for these recyclable materials.
In 2012, we expanded our dedicated PGM processing facilities in Texas and New Jersey to full-service scrap processing facilities and we began purchasing and processing all ferrous and non-ferrous metals. In doing so, the economic characteristics of these operations became more aligned with the operations of the components of our Scrap Metal Recycling reporting segment. Beginning in January 2013, we aggregated the operations of our PGM and Minor Metals operating segments into our Scrap Metal Recycling reportable segment.
Lead Fabricating
Through four physical operations located in three states, we consume approximately 40 to 45 million pounds of lead metal per year that are utilized in more than one hundred different base products. Our products are sold nationally into diverse industries such as roofing, plumbing, radiation shielding for pharmaceutical and power generation, electronic solders, ammunition, automotive, Department of Defense contractors, and others. Metalico previously announced plans to consider strategic alternatives for its Lead Fabricating Division, including a possible sale. In 2013, we stated that indications of interest did not satisfy our expectations and a transaction was not pursued.
Our Lead Fabricating segment has facilities in the following locations:
Birmingham, Alabama
Granite City, Illinois
Healdsburg, California
Ontario, California
Our sales are concentrated within five main product lines: sheet lead, shot, extruded strip lead, machined lead parts and cast lead. Sheet lead is produced in a number of sizes, thicknesses, and alloys based upon customer requirements. Sheets are rolled to various thicknesses, cut to customer specifications and shipped to roof flashing manufacturers, fabricators of radiation shielding, sound attenuation and roofing contractors, and other users. Shot is produced and sold nationwide primarily to the recreational re-load market under the Lawrence and West Coast Shot brands. We also sell shot to cartridge manufacturers and industrial consumers. Shot is produced in several lead alloys and sizes. Strip lead is produced in rolls of various widths and lengths. Strip lead is used primarily in the construction industry. Cast lead is typically sold in pig, ingot, brick, cylinder and rectangular form. Extruded wire, cylinders and bar are used in plumbing applications, ammunition, stained glass production, the electronics industry and the radiation shielding industry. Extruded pipe is used in the plumbing and roofing industries. Extruded products are available in flats, rounds, stars, pipe and custom designed configurations. Other lead products include roof flashings, lead wool, anodes and babbitt. Machined lead parts are sold to a diverse variety of industries and consumers.
Business Strategies
Our core business strategy is to grow the operational density of our scrap metal recycling business through greenfield or brownfield projects and through acquisitions or investments in existing, contiguous and new markets. We also seek to enhance our position as a high quality producer of recycled metal products through investments in state-of-the-art equipment and to improve operational density. Scrap metal recycling of ferrous and non-ferrous metals and related services represented approximately 86.3% and 88.4% of our revenues for the years ended December 31, 2013 and 2012, respectively. We focus on increasing our market position for recognition as one of the largest recycled metals processors in our existing regional markets and consistently explore growth opportunities in contiguous and existing markets.
We currently have three scrap metal shredding facilities, each with access to an extensive feeder yard network for sourcing material, and we continue to expand the feed source for our shredding facilities. In 2013, we completed a significant investment in the refurbishment of our shredder and facility in Youngstown, Ohio. In early 2012, our state-of-the-art indoor shredder in Western New York became fully operational. In 2013, we acquired a small auto salvage and parts provider in North East, Pennsylvania and substantially all of the assets of a family-owned scrap iron and metal recycling business with facilities in Warren, Pennsylvania and Olean, New York to support our shredder facility in Buffalo, New York. We also acquired certain accounts, equipment and a lease of certain real property to operate a scrap metal recycling facility in the Greater Pittsburgh area to support our shredder located nearby on Neville Island in the greater Pittsburgh area.
Metalico has grown its lead fabricating business to be one of the largest non-battery lead fabricators in the U.S. We work to maximize cash flows and expand our market share in this business primarily by continued focus on operating efficiencies and new product development. We continually seek to reduce our largest operating expense, which is our raw material cost, by increasing the number of our suppliers of scrap and refined lead and to reduce operating costs through further automation where appropriate. We carefully manage our other operating and administrative costs through continued integration and automation of the work flow process at our Alabama and Illinois facilities. In addition, we intend to grow this business through increased sales and marketing efforts and expansion into new markets.
Some of our specific business strategies are:
Improve operating density. We intend to continue to improve operating density within our existing geographic market. We look to expand our customer base by marketing our range of services to existing and potential customers and consumers as well as by supplementing the activities in our existing platforms with complementary tuck-in acquisitions, or greenfield/brownfield feeder facilities where and as they may become available.
Expand scrap metal recycling. We continue to seek to increase the number of feeder and satellite scrap locations to support our larger platform operations with ferrous and non-ferrous scrap material. In addition, we also look to grow through expanding our feeder network by exploring select joint ventures with metal processors and suppliers. We continue to develop the efficiencies of our auto-shredding capabilities through capital investment in new technologies and better equipment in order to better compete in that segment of the scrap metal recycling industry.
Complete value-creating acquisitions. We target acquisition candidates we believe will earn after-tax returns in excess of our cost of capital. In new markets, we seek to identify platform businesses that can provide market growth and consolidation opportunities. We have had success finding realistically valued acquisition opportunities in markets we target for expansion. However, we often face competition for these targets and we may be dependent on tight capital markets that could make these target acquisitions difficult.
Capture benefits of integration. We have historically sought to capture the benefits of business integration whenever possible. For example, with the completion of our indoor shredder in the Buffalo area, a portion of feedstock previously shipped to a company-owned facility in Pittsburgh has been kept local, reducing transportation costs and decreasing the time to process material. Expansion of our current scrap yard network in Western New York enhances the flow of feedstock to our Buffalo shredder operations. For example, feedstock from our Syracuse and Rochester facilities previously sold to third-party shredders is now processed at our shredder. Our 2013 acquisitions complement our existing network of scrap metal collection facilities by providing additional sources of scrap material for our platform facilities within proximity of their locations. This strategy allows our subsidiaries to take advantage of transportation efficiencies, avoid some of the processing costs associated with preparing scrap for sale to third parties, internalize pricing mark-ups and expand service to consumers. Intercompany revenues for the years ended December 31, 2013, 2012 and 2011 were $50.2 million, $58.5 million and $47.0 million, respectively. In 2012, we made capital investments in our Texas and New Jersey operations in order to broaden the types of recyclable material they could purchase, process and sell, aligning their operations with the majority of our other operations. In addition, we believe we enjoy a competitive advantage over non-vertically integrated lead fabrication companies as a result of our refining capabilities within our lead fabrication operations. Our Granite City, Illinois plant has the ability to process and refine various forms of scrap lead. Typically scrap lead can be purchased, processed and refined for less cost than refined lead can be purchased from existing suppliers. Our Granite City plant has the capacity to supply Mayco with one-half of its refined lead needs on a monthly basis, subject to cost and availability of scrap lead. We also ship batteries to lead smelting operations which in turn supply lead to our lead fabricating operations through tolling arrangements.
Maximize operating efficiencies. Our goal is to continue improving operating efficiency in all business segments in order to maximize operating margins in our business. We have made significant investments in property, plant and equipment designed to make us a more efficient processor, helping us to achieve economies of scale. In July 2011, we acquired 102 used rail cars at scrap value, nearly all of which were refurbished and put back in service to augment our existing transportation fleet. We expanded our fleet of railcars in 2013 by purchasing an additional 47 cars and again by another 16 cars in early 2014, bringing our total to 165 railcars in order to improve transportation efficiency and availability. The lead rolling mill and upgraded plant facilities in Birmingham, Alabama, our primary lead production facility, have significantly increased the plant’s overall efficiency, both in terms of manufacturing costs and utility costs. On a Company-wide basis, we continue to invest in new equipment and make improvements to enhance productivity and to protect the environment, such as upgrading non-ferrous separation systems and installing oil water collectors/separators in our scrap yards.
Mitigate commodity price risk. We believe that, in most economic environments, an operation with diversification among different metal commodities minimizes our exposure to fluctuations in any single metal market. Ferrous, Non-ferrous, other scrap services and lead based products represented 40.4%, 45.2%, 0.7% and 13.7% respectively, of our total revenue for the year ended December 31, 2013 as compared to approximately 37.8%, 49.9%, 0.7%, and 11.6%, respectively, for the year ended December 31, 2012. Our non-ferrous sales are spread over six primary metals groups: aluminum, stainless steel, red metals, platinum group metals, lead and minor metals.
Rapidly turn inventory in order to minimize exposure to commodity price risk and avoid speculation. We consistently turn inventory in order to minimize exposure to commodity price swings and maintain consistent cash flows. We enter into forward sales contracts with PGM substrate processors to limit exposure to rapid and significant fluctuations in platinum prices.
SCRAP METAL RECYCLING
Our recycling operations encompass buying, processing and selling scrap metals. The principal forms in which scrap metals are generated include industrial scrap and obsolete scrap. Industrial scrap is a by-product generated from residual materials from metal product manufacturing processes. Obsolete scrap consists primarily of residual metals from old or obsolete consumer and industrial products such as doors and window frames, appliances, plumbing fixtures, electrical supply components, automobiles and demolition of structures.
Ferrous Operations
Ferrous Scrap Purchasing. We purchase ferrous scrap from two primary sources: (i) manufacturers who generate steel and iron, known as prompt or industrial scrap; and (ii) scrap dealers, peddlers, auto wreckers, demolition firms, railroads and others who generate steel and iron scrap, known as obsolete scrap. We collect ferrous scrap from sources other than those that are delivered directly to our processing facilities by placing retrieval boxes at these sources. In addition to these sources, we purchase, at auction or through competitive bidding, obsolete steel and iron from large industrial accounts. The primary factors that determine prices are market demand, competitive bidding, and the composition, quality, size, and quantity of the materials.
Ferrous Scrap Processing. We prepare ferrous scrap metal for resale through a variety of methods including sorting, torching, shearing, cutting, baling, breaking and shredding. We produce a number of differently sized and shaped products depending upon consumer specifications and market demand.
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Sorting. After purchasing ferrous scrap metal, we inspect the material to determine how it can most efficiently be processed to maximize profitability. In some instances, scrap may be sorted and sold without further processing. We separate scrap for further processing according to its size and metallurgical composition by using conveyor systems, crane-mounted electromagnets and/or grapples.
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Torching, Shearing or Cutting. Pieces of oversized ferrous scrap, such as obsolete steel girders and used drill pipes, which are too large for other processing, are cut with hand-held acetylene torches, crane-mounted alligator shears or stationary guillotine shears. After being reduced to specific lengths or sizes, the scrap is then sold and shipped to those consumers who can accommodate larger materials in their furnaces, such as mini-mills.
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Block Breaking. Obsolete automotive engine blocks are broken into several reusable metal byproducts with specialized machinery that eliminates a labor-intensive process with capability to efficiently and profitably process large volumes. The system also includes two oil/water separation systems that partially recover waste by-product into a re-usable energy source.
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Baling. We process light-gauge ferrous metals such as clips and sheet iron, and by-products from industrial manufacturing processes, such as stampings, clippings and excess trimmings, by baling these materials into large, dense, uniform blocks. We use cranes, front-end loaders and conveyors to feed the metal into hydraulic presses, which compress the materials into cubes at high pressure to achieve higher density for transportation and handling efficiency.
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Breaking of Furnace Iron. We process cast iron which includes blast cast iron, steel pit scrap, steel skulls and beach iron. Large pieces of iron are broken down by the impact of forged steel balls dropped from cranes. The fragments are then sorted and screened according to size and iron content.
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Shredding. We process discarded consumer products such as vehicles and large household appliances through our shredders to separate ferrous and non-ferrous metals from waste materials. Magnets extract
shredded steel and other ferrous materials while a conveyor system carries the remaining non-ferrous metals and non-metallic waste for additional sorting and grading. Shredded ferrous scrap is primarily sold to steel mills seeking a higher consistency of yield and production flexibility that standard ferrous scrap does not offer.
Ferrous Scrap Sales. We sell processed ferrous scrap to end-users such as steel mini-mills, integrated steel makers and foundries, and brokers who aggregate materials for large consumers. Most of our consumers purchase processed ferrous scrap according to a negotiated spot sales contract that establish the price and quantity purchased for the month. The price at which we sell our ferrous scrap depends upon market demand and competitive pricing, as well as quality and grade of the scrap. In many cases, our selling price also includes the cost of rail, barge or truck transportation to the buyer. Ferrous scrap is shipped via truck, barge and rail transportation. Ferrous scrap transported via truck is sold predominately to mills usually located in Pennsylvania, New York and metropolitan Toronto within eight hours of our recycling facilities. Ferrous scrap transported via rail can be shipped anywhere in the continental United States. Ferrous scrap is also shipped by barge to mills on the Mississippi River and exporters located in the Gulf region. Our recycling facilities ship primarily via rail to consumers in Pennsylvania, Ohio, Illinois, and Indiana and export yards to the east coast. Ferrous scrap metal sales accounted for approximately 40.4% and 37.8% of total revenue for the years ended December 31, 2013 and 2012, respectively. We believe our profitability may be enhanced by our offering a broad product line to a diversified group of scrap metal consumers. Our ferrous scrap sales are accomplished through a centrally managed calendar month sales program.
Non-Ferrous Operations
Non-Ferrous Scrap Purchasing. We purchase non-ferrous scrap from four primary sources: (i) manufacturers and other non-ferrous scrap sources who generate waste aluminum, copper, stainless steel, brass, nickel-based alloys, high-temperature alloys and other metals; (ii) producers of electricity, telecommunication service providers, aerospace, defense, and recycling companies that generate obsolete scrap consisting primarily of copper wire, titanium and high-temperature alloys and used aluminum beverage cans; (iii) peddlers who deliver directly to our facilities material which they collect from a variety of sources and (iv) from auto dismantlers, service station and repair shops, auto shredders and towing operators who traditionally separate catalytic converters from other scrap metal that they may generate. The purchase price for converters is determined on the basis of PGM market prices and internal estimates of the quantity of PGMs contained in each converter purchased. We also collect non-ferrous scrap from sources other than those that are delivered directly to our processing facilities by placing re-usable retrieval boxes at the sources. The boxes are subsequently transported to our processing facilities, usually by company owned trucks.
A number of factors can influence the continued availability of non-ferrous scrap such as the level of manufacturing activity and the quality of our supplier relationships. Consistent with industry practice, we have certain long-standing supply relationships which generally are not the subject of written agreements.
Non-Ferrous Scrap Processing. We prepare non-ferrous scrap metals, principally aluminum, stainless steel, copper and brass for resale by sorting, shearing, wire stripping, cutting, chopping, melting or baling.
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Sorting. Our sorting operations separate non-ferrous scrap manually and are aided by conveyor systems and front-end loaders. In addition, many non-ferrous metals are identified and sorted by using spectrometers and by torching. Our ability to identify metallurgical composition is critical to maximizing margins and profitability. Due to the high value of many non-ferrous metals, we can afford to utilize more labor-intensive sorting techniques than are employed in our ferrous operations. We sort non-ferrous scrap for further processing and upgrading according to type, grade, size and chemical composition. Throughout the sorting process, we determine whether the material can be cost effectively processed further and upgraded before being sold.
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Copper and Brass. Copper and brass scrap may be processed in several ways. We sort copper predominantly by hand according to grade, composition and size. We package copper and brass scrap by baling, boxing and other repacking methods to meet consumer specifications.
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Aluminum and Stainless Steel. We process aluminum and stainless steel based on type of alloy and, where necessary, size pieces to consumer specifications. Large pieces of aluminum or stainless steel are cut using crane-mounted alligator shears and stationary guillotine shears and may be baled individually along with small stampings to produce large bales of aluminum or stainless steel. We also recover aluminum from consumer products such as vehicles and large household appliances through our shredding operations. Smaller pieces of aluminum and stainless steel are boxed individually and repackaged to meet consumer specifications.
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Thermal Technology. Our aluminum smelting and recovery facility in Syracuse, New York uses a reverberatory furnace for melting various forms of aluminum scrap providing higher throughput, expanded feedstock and greater recovery efficiencies.
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Platinum Group Metal Metals. We recover PGMs from scrap ceramic substrate automobile catalytic converters, scrap metal substrate automotive catalysts as well as from catalysts used in stationary and other industrial applications. The converter substrate is removed from the stainless steel shell of used catalytic converters through the use of hydraulic shears or other mechanical means. Once de-canned, the converter substrate material is aggregated and shipped to several third-party processors which recover the PGMs from the substrate material by means of chemical and mechanical processes.
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Other Non-Ferrous Materials. We process other non-ferrous metals, including minor metals, using similar cutting, baling and repacking techniques as are used to process copper and brass. Other significant non-ferrous metals we process come from such sources as titanium and high-temperature nickel-based alloys which are often identified with spectrometers and hand sorted to achieve maximum value. Certain processed minor metals may require third-party processing and refining to separate the desired higher value minor metal from other elements. While third-party processing adds costs to the product, it often produces a much higher grade of raw material for sale.
Non-Ferrous Scrap Sales. We sell processed non-ferrous scrap to end-users such as specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, and brass and bronze ingot manufacturers. Prices for non-ferrous scrap are driven by demand for finished non-ferrous metal goods and by the general level of national and international economic activity, with prices generally linked to quotations for primary metal on the London Metal Exchange or COMEX Division of the New York Mercantile Exchange. Suppliers and consumers of non-ferrous metals also use these exchanges to hedge against metal price fluctuations by buying or selling futures contracts. PGM sales are primarily based on the volume and price of PGMs recovered from processing catalytic converters. The value in PGMs is significant enough that it is even profitable to recover minute particles of precious metal from the dust that ends up in the recycling plant’s air handling system. Scrap steel from the tail pipes of the exhaust sections as well as the metal casing of the catalytic converters generates revenues based on the market prices of stainless steel. Most of our consumers purchase processed non-ferrous scrap according to a negotiated spot sales contract that establishes the price and quantity. Non-ferrous scrap is shipped predominately via third-party truck to consumers generally located east of the Mississippi River. Non-ferrous metal sales including PGM and Minor Metal sales accounted for approximately 45.2% and 49.9% of our total revenue for the years ended December 31, 2013 and 2012, respectively. We do not use futures contracts to hedge prices for our non-ferrous products.
Competition
The markets for scrap metals are highly competitive, both in the purchase of raw scrap and the sale of processed scrap. We compete to purchase raw scrap with numerous independent recyclers and large public scrap processors as well as larger and smaller scrap companies engaged only in collecting industrial scrap. Many of these recycling operations have substantially greater financial, marketing and other resources. Successful procurement of materials is determined primarily by the price and promptness of payment for the raw scrap and the proximity of the processing facility to the source of the unprocessed scrap.
We believe the increase in purchase competition over the past few years has negatively impacted our profit margins in most of our local markets. We compete in a global market with regard to the sale of processed scrap. Competition for sales of processed scrap is based primarily on the price, quantity and quality of the scrap metals, as well as the level of service provided in terms of consistency of quality, reliability and timing of delivery. Our competitive advantage derives from our ability to source and process substantial volumes, deliver a broad, reliable, high quality product line to consumers, transport the materials efficiently, and sell scrap in regional, national and international markets and to provide other value-added services to our suppliers and consumers.
We occasionally face competition for purchases of unprocessed scrap from producers of steel products, such as integrated steel mills and mini-mills that have vertically integrated their current operations by entering the scrap metal recycling business. Many of these producers have substantially greater financial, marketing and other resources. Scrap metals processors also face competition from substitutes for prepared ferrous scrap, such as pre-reduced iron pellets, hot briquetted iron, pig iron, iron carbide and other forms of processed iron. The increased availability and cost of substitutes for ferrous scrap could result in a decreased demand for processed ferrous scrap, which could result in lower prices for such products.
LEAD FABRICATION
Products
We manufacture a wide variety of lead-based products through our sheet lead, machined lead, shot, strip lead, extrusion and cast lead product lines. Our products are sold nationally into diverse industries such as roofing, plumbing, radiation shielding, healthcare, ammunition, automotive, Department of Defense contractors, and others.
Manufacturing Process
Lead Shot: Ingot or bulk lead is melted at the top levels of shot towers and poured into steel sizing pans. The molten lead drops several stories through the tower, forming a sphere and hardening while in air and ultimately landing in a water tank. After additional processing, lead shot that meets specifications is sorted by size, polished, weighed and packaged as finished product.
Sheet Lead: Ingot or bulk lead is melted and alloying elements are added. After impurities are removed from the surface, the molten lead is then poured into heated molds to form various sized slabs. The slabs are rolled down into lead sheet, anodes, rolls and plates of desired thickness and cut to size.
Extruded Product: Lead in alloyed form forced through a precast die providing final shape. The cool, hardened product is then cut to the desired length and its thickness is measured to ensure the product meets specifications.
Cast Product: Lead in alloyed form is melted and poured into precast molds. The cool hardened lead product is trimmed, sized or machined for final use.
Machined parts: Lead plate, sheet lead and extrusions are cut and formed using a variety of machining techniques.
Suppliers
We obtain refined lead through multi-month contracts and on occasion on a spot market basis. Principal sources of refined lead are domestic secondary lead smelters and imported primary lead marketed by brokers. We also generate refined lead by purchasing an extensive variety of scrap lead and refining it in our processing facilities. Changing lead markets may impact the Company’s ability to secure the volume of raw materials needed at pricing considered sustainable before driving consumers to consider substitute products. We also refine various forms of scrap lead by melting the scrap in kettles and removing impurities. We have the capacity to satisfy up to 50% of our refined lead needs through our in-house recovery capabilities.
Sales, Markets and Customers Served
We sell our lead fabrications nationally. Products are sold to distributors, wholesalers, the plumbing and building trades, equipment manufacturers and other consumers. We have stable, long-standing relationships with many of our customers. We sell substantial volumes of lead products used in home construction, such as lead flashings, sheet and strip, in many parts of the nation.
Our sales and marketing department consists of internal salespeople who, in addition to sourcing leads for new business, function in a customer service role, working with existing customers. We also use independent sales representatives and product marketing organizations throughout the country. Lead fabricated product sales accounted for approximately 13.7% and 11.6% of total revenue for the years ended December 31, 2013 and 2012, respectively.
Competition
Our lead fabrication facilities compete against two fabricators of similar but limited products based in the Southwest who distribute nationally and several smaller regional producers of similar products. To a lesser extent, we also compete against products imported from South America, Canada, Europe and Asia.
Seasonality and Other Conditions
Both the Scrap Metal Recycling and Lead Fabricating segments of our business generally experience seasonal slowness in the month of July and winter months, as customers tend to reduce production and inventories and winter weather impacts construction and demolition activity. In addition, periodic maintenance shutdowns or labor disruptions at our larger customers may have an adverse impact on our operations. Our operations can be adversely affected as well by protracted periods of inclement weather or reduced levels of industrial production, which may reduce the volume of material processed at our facilities.
Employees
At March 1, 2014, we had 774 employees. Forty-four employees located at our Lead Fabricating facility in Granite City, Illinois were represented by the United Steelworkers of America and twenty employees located at our scrap processing facility in Akron, Ohio were represented by the Chicago and Midwest Regional Joint Board. Our current three-year agreement with the United Steelworkers of America expires on March 15, 2014 and we are currently in negotiations to renew the agreement. Our current three-year agreement with the Regional Joint Board expires on June 25, 2014 and is also currently in negotiation. We expect both contracts to be renewed on terms acceptable to the Company.
A strike or work stoppage could impact our ability to operate the Granite City facility or the Akron facility. Our profitability could be adversely affected if increased costs associated with any future labor contracts are not recoverable through productivity improvements, price increases or cost reductions. We believe that we have good relations with our employees. However, there can be no guarantee that ongoing or future contract negotiations will be successful or completed without a work stoppage.
Segment Reporting
See Note 17 to the Company’s consolidated financial statements for the years ended December 31, 2013 and 2012, located elsewhere in this report.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy these documents at the SEC’s Public Reference
Room, which is located at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the SEC’s Public Reference Room. In addition, the SEC maintains an Internet website at www.sec.gov which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
We make available at no cost on our website, www.metalico.com, our reports to the SEC and any amendments to those reports as soon as reasonably practicable after we electronically file or furnish such reports to the SEC. Interested parties should refer to the Investors link on the home page of our website located at www.metalico.com. Information contained on our website is not incorporated into this report. In addition, our Code of Business Conduct and Ethics and Insider Trading Policy, and the charters for the Board of Directors’ Audit Committee, Compensation Committee and Nominating Committee, all of which were adopted by our Board of Directors, can be found on the Company’s website through the Corporate Governance link on the Investors page. We will provide these governance documents in print to any stockholder who requests them. Any amendment to, or waiver of, any provision of the Code of Ethics and any waiver of the Code of Business Conduct and Ethics for directors or executive officers will be disclosed on our website under the Corporate Governance link.
Item 1A.
Item 1A. Risk Factors
Set forth below are risks that we believe are material to our business operations. Additional risks and uncertainties not known to us or that we currently deem immaterial may also impair our business operations.
Risks Relating To Our Business
Prices of commodities we own are volatile, which may adversely affect our operating results and financial condition.
Although we seek to turn over our inventory of raw or processed scrap metals as rapidly as markets dictate, we are exposed to commodity price risk during the period that we have title to products that are held in inventory for processing and/or resale. Prices of commodities, including scrap metals, have been extremely volatile and we expect this volatility to continue. Such volatility can be due to numerous factors beyond our control, including:
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general domestic and global economic conditions, including metal market conditions;
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competition;
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the financial condition of our major suppliers and consumers;
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the availability of imported finished metal products;
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international demand for U.S. scrap;
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the availability and relative pricing of scrap metal substitutes;
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import duties and tariffs;
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currency exchange rates;
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geopolitical unrest
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demand for exchange traded funds; and
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domestic and international labor costs.
Although we have historically attempted to raise the selling prices of our scrap recycling and lead fabricating products in response to an increasing price environment, competitive conditions may limit our ability to pass on price increases to our consumers. In a decreasing price environment, we may not have the ability to recoup the cost of raw materials used in fabrication and raw scrap we process and sell to our consumers.
The volatile nature of metal commodity prices makes it difficult for us to predict future revenue trends as shifting international and domestic demand can significantly impact the prices of our products, supply and demand for our products and affect anticipated future results. Most of our consumers purchase processed non-ferrous scrap according to a negotiated spot sales contract that establishes the price and quantity purchased for the month. We use forward sales contracts with PGM substrate processors to hedge against extremely volatile PGM metal prices. In the event our hedging strategy is not successful, our operating margins and operating results can be materially and adversely affected. In addition, the volatility of commodity prices and variability of yields, and the resulting unpredictability of revenues and costs, can adversely and materially affect our operating margins and other results of operations.
The profitability of all of our scrap metal recycling operations depends, in part, on the availability of an adequate source of supply.
We depend on scrap for our operations and acquire our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metals to us. In periods of low industry prices, suppliers may elect to hold scrap waiting for higher prices. If an adequate supply of scrap metal is not available to us, we would be unable to process metals at desired volumes and our results of operations and financial condition would be materially and adversely affected.
The cyclicality of our industry could negatively affect our sales volume and revenues.
The operating results of the metal recycling industry in general, and our operations specifically, are highly cyclical in nature. They tend to reflect and be amplified by general economic conditions, both domestically and internationally. Historically, in periods of national recession or periods of slowing economic growth, the operating results of metal recycling companies have been materially and adversely affected. For example, during recessions or periods of slowing economic growth, the automobile and the construction industries typically experience major cutbacks in production, resulting in decreased demand for steel, copper and aluminum. Cutbacks in the automotive and construction industries can cause significant fluctuations in supply, demand and pricing for our products, which can materially and adversely affect our results of operations and financial condition. Our ability to withstand significant economic downturns that we may encounter in the future will depend in part on our levels of debt and equity capital, operating flexibility and access to liquidity.
The volatility of the import and export markets may adversely affect our operating results and financial condition.
Our business may be adversely affected by increases in steel imports into the United States which will generally have an adverse impact on domestic steel production and a corresponding adverse impact on the demand for scrap metals domestically. Our operating results could also be negatively affected by strengthening or weakening in the US dollar. US dollar weakness provides some support to prices of commodities that are denominated in US dollars but with large non-US consumption and cost bases. For example, appreciation in the Chinese and Indian currencies have increased marginal costs of aluminum and iron ore production, thereby increasing the underlying cost basis for prices. Export markets, including Asia and the Middle East and in particular China and Turkey, are important to the scrap metal recycling industry. Weakness in economic conditions in these export markets and in particular slowing growth in China as well as economic weakness and political uncertainty in Turkey or their consumers, could negatively affect us further.
The volatility of lead pricing may impact our ability to sell product.
Our lead fabricating facilities may be adversely impacted by increases or decreases in lead pricing. Changing lead markets may impact our ability to secure the volume of raw materials needed at pricing considered sustainable before driving consumers to substitute products. Disruptions in domestic or foreign lead refining capacity could impact our ability to secure enough raw materials to meet production requirements. Increases in the cost of lead could reduce the demand for lead products by making nonlead-bearing alternatives more cost attractive. Economic weakness in the U.S. and abroad may negatively impact demand for our products.
An impairment in the carrying value of goodwill or other acquired intangibles could negatively affect our operating results and net worth.
The carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of other intangibles represents the fair value of supplier lists, trademarks, trade names and other acquired intangibles. Goodwill and other acquired intangibles expected to contribute indefinitely to our cash flows are not amortized, but must be evaluated by our management at least annually for impairment. Events and conditions that could result in impairment include changes in the industries in which we operate, as well as competition, a significant product liability or environmental claim, or other factors leading to reduction in forecasted sales or profitability. At September 30, 2013, our actual year-to-date operating results for most reporting units in our Scrap Metal Recycling segment differed significantly enough from our forecast to determine that impairment to the carrying value of their goodwill was probable. We had also experienced an extended period in which the carrying value of our Shareholder’s equity materially exceeded our market capitalization value. Based on these factors, we performed an interim goodwill impairment test at September 30, 2013 for all of our reporting units. As a result of the impairment tests performed, we were required to record a goodwill impairment charge of $32.3 million to several reporting units in our Scrap Metal Recycling segment and an impairment charge of $1.1 million to a trade name that we no longer expect to use. Going forward, if, upon performance of an impairment assessment, it is determined that such assets are impaired, additional impairment charges may be recognized by reducing the carrying amount and recording a charge against earnings. Should current economic and equity market conditions deteriorate, it is possible that we could have additional material impairment charges against earnings in a future period.
Our significant indebtedness may adversely affect our ability to obtain additional funds and may increase our vulnerability to economic or business downturns.
As of December 31, 2013, the total principal amount of our debt outstanding was $127.7 million, before debt discount of $297,000 related to our 7% Convertible Notes. Subject to certain restrictions, exceptions and financial tests set forth in certain of our debt instruments, we may incur additional indebtedness in the future. We anticipate our debt service payment obligations during 2014, will be approximately $14.5 million, comprised of principal of $6.3 million and interest of $8.2 million. As of December 31, 2013, approximately $83.9 million of our debt accrued interest at variable rates. We may experience material increases in our interest expense as a result of increases in general interest rate levels. Based on actual amounts outstanding as of December 31, 2013, if the interest rate on our variable rate debt were to increase by 1%, our annual debt service payment obligations would increase by $248,000 due to interest rate floors on our variable rate debt. The degree to which we are leveraged could have important negative consequences to the holders of our securities, including the following:
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we are exposed to general domestic and global economic conditions, including metal market conditions;
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a substantial portion of our cash flow from operations will be needed to pay debt service and will not be available to fund future operations;
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we have increased vulnerability to adverse general economic and metal recycling industry conditions; and
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we may be vulnerable to higher interest rates because interest expense on borrowings under our loan agreement is based on margins over a variable base rate.
We continue to rely on borrowings under our senior credit facility and from other lenders to acquire other businesses and to operate our business. In November 2013, we entered into a new combined revolving and term credit facility to pay amounts outstanding under the Company’s prior credit agreement and to repurchase $36.7 million of our outstanding Convertible Notes. At December 31, 2013, the term portion of the new credit agreement had $20.0 million in availability remaining which could be used to redeem $23.5 million in Convertible Notes whose holders have the right to put their Convertible Notes back to us, at par, on June 30, 2014. As a result, we may have insufficient availability under our existing credit facility or the ability to borrow from other lenders to pay off maturing debt obligations or acquire additional businesses and to operate our business.
Our debt agreements contain covenants that restrict our ability to engage in certain transactions and failure to comply with the terms of such agreements could result in a default that could have material adverse consequences for us.
Under our senior credit agreement, we are required to satisfy specified financial covenants, including a maximum leverage ratio whereby our total debt may not exceed a certain multiple of our trailing twelve months earnings before interest tax, depreciation and amortization (“EBITDA”) and a limit on our maximum capital expenditures. We have in the past been in default under certain of our prior loan facilities, but we obtained retroactive covenant modifications or had noncompliance waived in each case. In addition, we have in the past adjusted covenants contained in our prior loan facilities to protect against noncompliance and prepaid some of our outstanding debt. Our ability to comply with these specified financial covenants may be affected by general economic and industry conditions, as well as market fluctuations in metal prices and other events beyond our control. We do not know if we will be able to satisfy all such covenants in the future. Our breach of any of the covenants contained in agreements governing our indebtedness, including our senior credit agreement, could result in a default under such agreements. In the event of a default, a lender could elect not to make additional loans to us, could require us to repay some of our outstanding debt prior to maturity, and/or to declare all amounts borrowed by us, together with accrued interest, to be due and payable. In the event that this occurs, we would likely be unable to repay all such accelerated indebtedness.
A portion of our debt is subject to an optional repurchase right exercisable by the holders on June 30, 2014 which, if exercised, would require us to redeem such debt for which we may not have sufficient liquidity.
On November 21, 2013, we entered into a new six-year senior credit facility with revolving and term loan components to replace our former revolving credit facility, to repurchase a significant portion of our outstanding Convertible Notes and to provide liquidity to retire any remaining Convertible Notes. The outstanding Convertible Notes are subject to an optional repurchase right exercisable by the holders that becomes effective on June 30, 2014 which would require us to redeem the Convertible Notes at par. At December 31, 2013, the outstanding balance of the notes was $23.5 million and availability under the term portion of the current credit agreement was $20.0 million, subject to covenant compliance. The Company believes it will be able to redeem the balance of the Convertible Notes prior to or at the time the Note holders exercise their repurchase right with cash on hand, cash generated from operations, availability under existing credit facilities, additional financing alternatives, the potential sale of non-core assets, or if necessary, accessing capital markets with a new debt or equity offering. No assurance can be given that the Company will be able to secure the financing to redeem the Notes.
We have pledged substantially all of our assets to secure our borrowings and are subject to covenants that may restrict our ability to operate our business.
Any indebtedness that we incur under our existing senior credit agreement is secured by substantially all of our assets. If we default under the indebtedness secured by our assets, those assets would be available to the secured creditors to satisfy our obligations to the secured creditors.
We may not generate sufficient cash flow to service all of our debt obligations.
Our ability to make payments on our indebtedness and to fund our operations depends on our ability to generate cash in the future. Our future operating performance is subject to market conditions and business factors that are beyond our control. We might not be able to generate sufficient cash flow to pay the principal and interest on our debt. If our cash flows and capital resources are insufficient to allow us to make scheduled payments on our debt, we may have to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our debt. The terms of our debt, including the security interests granted to our lenders, might not allow for these alternative measures, and such measures might not satisfy our scheduled debt service obligations. In addition, in the event that we are required to dispose of material assets or restructure or refinance our debt to meet our debt obligations, we cannot assure you as to the terms of any such transaction or how quickly such transaction could be completed.
We may seek to make acquisitions that may prove unsuccessful or strain or divert our resources.
From time to time, we evaluate potential acquisitions. We may not be able to complete any acquisitions on favorable terms or at all. Acquisitions present risks that could materially and adversely affect our business and financial performance, including:
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the diversion of our management’s attention from our everyday business activities;
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the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, the acquired business, including managing such acquired businesses either through our senior management team or the management of such acquired business; and
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the need to expand management, administration and operational systems.
If we make such acquisitions we cannot predict whether:
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we will be able to successfully integrate the operations and personnel of any new businesses into our business;
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we will realize any anticipated benefits of completed acquisitions;
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economic conditions could deteriorate after closing; or
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there will be substantial unanticipated costs associated with acquisitions, including potential costs associated with environmental liabilities undiscovered at the time of acquisition.
In addition, future acquisitions by us may result in:
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potentially dilutive issuances of our equity securities;
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the incurrence of additional debt;
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restructuring charges; and
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the recognition of significant charges for depreciation and amortization related to intangible assets.
We may in the future make investments in or acquire companies or commence operations in businesses and industries that are outside of those areas that we have operated historically. We cannot assure that we will be successful in managing any new business. If these investments, acquisitions or arrangements are not successful, our earnings could be materially adversely affected by increased expenses and decreased revenues.
The markets in which we operate are highly competitive. Competitive pressures from existing and new companies could have a material adverse effect on our financial condition and results of operations.
The markets for scrap metal are highly competitive, both in the purchase of raw scrap and the sale of processed scrap. We compete to purchase raw scrap with numerous independent recyclers, large public scrap processors and smaller scrap companies. Successful procurement of materials is determined primarily by the price and promptness of payment for the raw scrap and the proximity of the processing facility to the source of the unprocessed scrap. We occasionally face competition for purchases of unprocessed scrap from producers of steel products, such as integrated steel mills and mini-mills, which have vertically integrated their operations by entering the scrap metal recycling business. Many of these producers have substantially greater financial, marketing and other resources. Our operating costs could increase as a result of competition with these other companies for raw scrap.
We compete in a global market with regard to the sale of processed scrap. Competition for sales of processed scrap is based primarily on the price, quantity and quality of the scrap metals, as well as the level of service provided in terms of consistency of quality, reliability and timing of delivery. To the extent that one or more of our competitors becomes more successful with respect to any key factor, our ability to attract and retain consumers could be materially and adversely affected. Our scrap metal processing operations also face
competition from substitutes for prepared ferrous scrap, such as pre-reduced iron pellets, hot briquetted iron, pig iron, iron carbide and other forms of processed iron. The availability of substitutes for ferrous scrap could result in a decreased demand for processed ferrous scrap, which could result in lower prices for such products.
Our lead fabricating operations compete against two fabricators of similar products in the Southwest who distribute nationally, and several smaller regional producers of competing products across much of our product line. To a lesser extent, we also compete against products imported from Central and South America, Canada, Europe and Asia. To the extent that one or more of our competitors becomes more successful with respect to any key factor, or new competition enters our markets, our ability to attract and retain consumers could be materially and adversely affected.
Unanticipated disruptions in our operations or slowdowns by our shipping companies could adversely affect our ability to deliver our products, which could materially and adversely affect our revenues and our relationship with our consumers.
Our ability to process and fulfill orders and manage inventory depends on the efficient and uninterrupted operation of our facilities. In addition, our products are usually transported to consumers by third-party truck, rail carriers and barge services. As a result, we rely on the timely and uninterrupted performance of third party shipping companies and dock workers. Any interruption in our operations or interruption or delay in transportation services could cause orders to be canceled, lost or delivered late, goods to be returned or receipt of goods to be refused or result in higher transportation costs. As a result, our relationships with our consumers and our revenues and results of operations and financial condition could be materially and adversely affected.
Our operations consume large amounts of electricity and natural gas, and shortages, supply disruptions or substantial increases in the price of electricity and natural gas could adversely affect our business.
The successful operation of our facilities depends on an uninterrupted supply of electricity. Accordingly, we are at risk in the event of an energy disruption. The electricity industry has been adversely affected by shortages in regions outside of the locations of our facilities. Prolonged black-outs or brown-outs or disruptions caused by natural disasters such as hurricanes or flooding would substantially disrupt our production. Any such disruptions could materially and adversely affect our operating results and financial condition. Electricity prices are volatile and are expect to remain so in the near future. Additional prolonged substantial increases would have an adverse effect on the costs of operating our facilities and would negatively impact our gross margins unless we were able to fully pass through the additional expense to our consumers.
We depend on an uninterrupted supply of natural gas in our de-ox and lead fabricating facilities. Supply for natural gas depends primarily upon the number of producing natural gas wells, wells being drilled, completed and re-worked, the depth and drilling conditions of these wells and access to dependable methods of delivery. The level of these activities is primarily dependent on current and anticipated natural gas prices. Many factors, such as the supply and demand for natural gas, the impact of severe weather, general economic conditions, political instability or armed conflict in worldwide natural gas producing regions and global weather patterns including natural disasters such as hurricanes affect these prices. Natural gas prices in the past have been very volatile. Additional prolonged substantial increases would have an adverse effect on the costs of operating our facilities and would negatively impact our gross margins unless we were able to fully pass through the additional expense to our consumers. We purchase most of our electricity and natural gas requirements in local markets for relatively short periods of time. As a result, fluctuations in energy prices can have a material adverse effect on the costs of operating our facilities and our operating margins and cash flow.
The loss of any member of our senior management team or a significant number of our managers could have a material adverse effect on our ability to manage our business.
Our operations depend heavily on the skills and efforts of our senior management team, including Carlos E. Agüero, our Chairman, President and Chief Executive Officer, Michael J. Drury, our Executive Vice-President
and Chief Operating Officer and the other employees who constitute our executive management team. In addition, we rely substantially on the experience of the management of our subsidiaries with regard to day-to-day operations. We cannot give assurance that we will be able to retain the services of any of these individuals. We face intense competition for qualified personnel, and many of our competitors have greater resources than we have to hire qualified personnel. The loss of any member of our senior management team or a significant number of managers could have a material adverse effect on our ability to manage our business.
The concentration of our consumers and our exposure to credit risk could have a material adverse effect on our results of operations and financial condition.
Sales to our ten largest consumers represented approximately 41.0% of consolidated net sales for the year ended December 31, 2013 and 35.2% of consolidated net sales for the year ended December 31, 2012. Sales to our largest consumer represented approximately 5.8% of consolidated net sales for the year ended December 31, 2013 and 6.3% of consolidated net sales for the year ended December 31, 2012. In connection with the sale of our products, we generally do not require collateral as security for consumer receivables and do not maintain credit insurance. We have significant balances owing from some consumers that operate in cyclical industries and under leveraged conditions that may impair the collectability of those receivables. The loss of a significant consumer or our inability to collect accounts receivable would negatively impact our revenues and profitability and could materially and adversely affect our results of operations and financial condition.
A significant increase in the use of scrap metal alternatives by current consumers of processed scrap metals could reduce demand for our products.
During periods of high demand for scrap metals, tightness can develop in the supply and demand balance for ferrous scrap. The relative scarcity of ferrous scrap, particularly the “cleaner” grades, and its high price during such periods have created opportunities for producers of alternatives to scrap metals, such as pig iron and direct reduced iron pellets, to offer their products to our consumers. Although these alternatives have not been a major factor in the industry to date, the use of alternatives to scrap metals may proliferate in the future if the prices for scrap metals rise or if the levels of available unprepared ferrous scrap decrease. As a result, we may be subject to increased competition which could adversely affect our revenues and materially and adversely affect our operating results and financial condition.
In order to maintain the supply line of catalytic converters for our PGM recycling operations, we make unsecured advances to vendors. A significant downturn in the price of platinum group metals could result in the loss of a significant portion of those unsecured advances.
Vendor advances consist principally of unsecured advances to suppliers for purchase of catalytic converters for recycling. These advances are necessary in order to maintain the supply line of catalytic converters. Management works diligently to monitor such advances. As of December 31, 2013, advances to converter vendors totaled $323,000, and were reduced by an allowance of $49,000 for uncollectible advances. Net advances of $274,000 were reported in prepaid and other current assets in the consolidated balance sheet as of December 31, 2013. A significant downturn in the price of platinum group metals could result in the loss of a significant portion of these advances and have a negative impact to our operating results.
Our operations are subject to stringent regulations, particularly under applicable environmental laws, which could subject us to increased costs.
The nature of our business and previous operations by others at facilities owned or operated by us make us subject to significant government regulation, including stringent environmental laws and regulations. Among other things, these laws and regulations impose comprehensive statutory and regulatory requirements concerning, among other matters, the treatment, acceptance, identification, storage, handling, transportation and disposal of industrial by-products, hazardous and solid waste materials, waste water, storm water effluent, air emissions, soil
contamination, surface and ground water pollution, employee health and safety, operating permit standards, monitoring and spill containment requirements, zoning, and land use, among others. Various laws and regulations set prohibitions or limits on the release of contaminants into the environment. Such laws and regulations also require permits to be obtained and manifests to be completed and delivered in connection with the operations of our businesses, and in connection with any shipment of prescribed materials so that the movement and disposal of such material can be traced and the persons responsible for any mishandling of such material can be identified. This regulatory framework imposes significant actual, day-to-day compliance burdens, costs and risks on us. Violation of such laws and regulations may and do give rise to significant liability, including fines, damages, fees and expenses, and closure of a site. Generally, the governmental authorities are empowered to act to clean up and remediate releases and environmental damage and to charge the costs of such cleanup to one or more of the owners of the property, the person responsible for the release, the generator of the contaminant and certain other parties or to direct the responsible party to take such action. These authorities may also impose a penalty or other liens to secure the parties’ reimbursement obligations.
Environmental legislation, regulation and enforcement continue to evolve and it is possible that we will be subject to even more stringent environmental standards in the future. For these reasons, future capital expenditures for environmental control facilities cannot be predicted with accuracy; however, as environmental control standards become more stringent, our compliance expenditures could increase substantially. Due to the nature of our lead fabricating and scrap metal recycling businesses, it is likely that inquiries or claims based upon environmental laws may be made in the future by governmental bodies or individuals against us and any other scrap metal recycling entities that we may acquire. The location of some of our facilities in urban areas may increase the risk of scrutiny and claims. We cannot predict whether any such future inquiries or claims will in fact arise or the outcome of such matters. Additionally, it is not possible to predict the amounts of all capital expenditures or of any increases in operating costs or other expenses that we may incur to comply with applicable environmental requirements, or whether these costs can be passed on to consumers through product price increases.
Moreover, environmental legislation has been enacted, and may in the future be enacted, to create liability for past actions that were lawful at the time taken but that have been found to affect the environment and to create public rights of action for environmental conditions and activities. As is the case with lead fabricating, scrap metal and PGM and Minor Metals recycling businesses in general, if damage to persons or the environment has been caused, or is in the future caused, by hazardous materials activities of us or our predecessors, we may be fined and held liable for such damage. In addition, we may be required to remedy such conditions and/or change procedures. Thus, liabilities, expenditures, fines and penalties associated with environmental laws and regulations might be imposed on us in the future, and such liabilities, expenditures, fines or penalties might have a material adverse effect on our results of operations and financial condition.
We are subject to potential liability and may also be required from time to time to clean up or take certain remedial action with regard to sites currently or formerly used in connection with our operations. Furthermore, we may be required to pay for all or a portion of the costs to clean up or remediate sites we never owned or on which we never operated if we are found to have arranged for transportation, treatment or disposal of pollutants or hazardous or toxic substances on or to such sites. We are also subject to potential liability for environmental damage that our assets or operations may cause nearby landowners, particularly as a result of any contamination of drinking water sources or soil, including damage resulting from conditions existing prior to the acquisition of such assets or operations. Any substantial liability for environmental damage could materially adversely affect our operating results and financial condition, and could materially adversely affect the marketability and price of our stock.
Certain of our sites are contaminated, and we are responsible for certain off-site contamination as well. Such sites may require investigation, monitoring and remediation. The existence of such contamination may result in federal, local and/or private enforcement or cost recovery actions against us, possibly resulting in disruption of our operations, and/or substantial fines, penalties, damages, costs and expenses being imposed against us. We
expect to require future cash outlays as we incur costs relating to the remediation of environmental liabilities and post-remediation compliance. These costs may have a material adverse effect on our results of operations and financial condition.
Environmental impairment liability insurance is prohibitively expensive and limited in the scope of its coverage. Our general liability insurance policies in most cases do not cover environmental damage. If we incur significant liability for environmental damage not covered by insurance; or for which we have not adequately reserved; or for which we are not adequately indemnified by third parties; our results of operations and financial condition could be materially adversely affected.
In the past we have upon occasion been found not to be in compliance with certain environmental laws and regulations, and have incurred fines associated with such violations which have not been material in amount. We may in the future incur additional fines associated with similar violations. We have also paid some or all of the costs of certain remediation actions at certain sites. On occasion these costs have been material. Material fines, penalties, damages and expenses resulting from additional compliance issues and liabilities might be imposed on us in the future.
Due diligence reviews in connection with our acquisitions to date and environmental assessments of our operating sites conducted by independent environmental consulting firms have revealed that some soil, surface water and/or groundwater contamination, including various metals, arsenic, petrochemical byproducts, waste oils and volatile organic compounds, is present at certain of our operating sites. Based on our review of these reports, we believe that it is possible that migratory contamination at varying levels may exist at some of our sites, and we anticipate that some of our sites could require investigation, monitoring and remediation in the future. Moreover, the costs of such remediation could be material. The existence of contamination at some of our facilities could adversely affect our ability to sell these properties if we choose to sell such properties, and may generally require us to incur significant costs to take advantage of any future selling opportunities.
We believe that we are currently in material compliance with applicable statutes and regulations governing the protection of human health and the environment, including employee health and safety. We can give no assurance, however, that we will continue to be in compliance or to avoid material fines, penalties and expenses associated with compliance issues in the future.
If more of our employees become members of unions, our operations could be subject to interruptions, which could adversely affect our results of operations and cash flow.
As of December 31, 2013, approximately 8% of our workforce was covered by collective bargaining agreements at two of our operating facilities. Forty-three employees located at our Lead Fabricating facility in Granite City, Illinois were represented by the United Steelworkers of America and twenty of our employees located at our scrap processing facility in Akron, Ohio were represented by the Chicago and Midwest Regional Joint Board. Our current three-year agreement with the United Steelworkers of America expires on March 15, 2014 and our current three-year agreement with the Regional Joint Board expires on June 25, 2014. We are currently negotiating renewals of both agreements. Although we are not aware at this time of any current attempts to organize other employees of ours, our employees may organize in the future. If we are unable to successfully negotiate the terms of renewals of the contracts governing our employees at this time or in the future or if we experience any extended interruption of operations at any of our facilities as a result of strikes or other work stoppages, our results of operations and cash flows could be materially and adversely affected.
Our operations present significant risk of injury or death. We may be subject to claims that are not covered by or exceed our insurance.
Because of the heavy industrial activities conducted at our facilities, there exists a risk of injury or death to our employees or other visitors, notwithstanding the safety precautions we take. Our operations are subject to regulation by federal, state and local agencies responsible for employee health and safety, including the
Occupational Safety and Health Administration (“OSHA”), which has from time to time levied fines against us for certain isolated incidents. While we have in place policies to minimize such risks, we may nevertheless be unable to avoid material liabilities for any employee death or injury that may occur in the future. These types of incidents may not be covered by or may exceed our insurance coverage and may have a material adverse effect on our results of operations and financial condition.
Our business is seasonal and affected by weather conditions, which could have an adverse effect on our revenues and operating results.
Both of our business segments generally experience seasonal slowness in the months of July and December, as consumers tend to reduce production and inventories. In addition, periodic maintenance shutdowns or labor disruptions at our larger consumers may have an adverse impact on our operations. Our operations can also be adversely affected by periods of inclement weather, particularly during the winter and during the hurricane season in the Southeast region of the United States, which can adversely impact industrial and construction activity as well as transportation and logistics.
We face certain product liability and warranty claims that may harm our business.
Our operations expose us to product liability claims if our products cause injury or are otherwise found to be defective. Regardless of their merit or eventual outcome, product liability claims may be time consuming and costly to defend and may result in decreased demand for a product, injury to our reputation and loss of revenues. Thus, whether or not we are insured, a product liability claim or product recall may result in losses that could be material. In addition, if we fail to meet contractual requirements for a product, we may be subject to product warranty costs and claims. These costs could both have a material adverse effect on our financial condition and results of operations and harm our reputation.
We intend to develop “greenfield” projects which are subject to risks commonly associated with such projects.
We intend to develop “greenfield” projects, either on our own or through joint ventures. There are risks commonly associated with the start-up of such projects which could result in operating difficulties or delays in the start-up period and may cause us not to achieve our planned production, timing, quality, environmental or cost projections, which could have a material adverse effect on our results of operations, financial condition and cash flows. These risks include, without limitation, difficulties in obtaining permits, equipment failures or damage, errors or miscalculations in engineering, design specifications or equipment manufacturing, faulty construction or workmanship, defective equipment or installation, human error, industrial accidents, weather conditions, failure to comply with environmental and other permits, and complex integration of processes and equipment.
Our industry is exposed to certain risks due to the bulk nature of materials that require quantity estimates.
Our operations involve the intake, processing, and transport of bulk materials. Although we make diligent efforts to monitor and confirm exact amounts of inventory at all phases of our operations, inventory counts from time to time may include estimates of material. We believe our estimates to be reasonable and we apply various internal controls (including, among other methods, weighing deliveries and rolling inventory balances using quantities bought and sold) to check their validity.
Risks Relating to Our Common Stock
We do not expect to pay any dividends for the foreseeable future. Our stockholders may never obtain a return on their investment.
We have never declared or paid dividends on our common stock, and we do not expect to pay cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all our earnings, if any, in
the foreseeable future will be used to finance the operation and growth of our business. In addition, our ability to pay dividends to holders of our capital stock is limited by our senior secured credit facilities, term notes and our outstanding convertible notes. Any future determination to pay dividends on our common stock is subject to the discretion of our Board of Directors and will depend upon various factors, including, without limitation, our results of operations and financial condition.
Our certificate of incorporation, our bylaws, Delaware law and certain instruments binding on us contain provisions that could discourage a change in control.
Some provisions of our certificate of incorporation and bylaws as currently in effect, as well as Delaware law, may be deemed to have an anti-takeover effect or may delay or make more difficult an acquisition or change in control not approved by our Board of Directors, whether by means of a tender offer, open market purchases, a proxy contest or otherwise. These provisions could have the effect of discouraging third parties from making proposals involving an acquisition or change in control, although such a proposal, if made, might be considered desirable by a majority of our stockholders. These provisions may also have the effect of making it more difficult for third parties to cause the replacement of our current management team without the concurrence of our Board of Directors. In addition, our outstanding Convertible Notes and certain of our warrants also contain change in control provisions that could discourage a change in control.
We have incurred and will continue to incur significant costs in order to assess our internal controls over financial reporting and our internal controls over financial reporting may be found to be deficient.
Section 404 of the Sarbanes-Oxley Act of 2002 requires management to assess its internal controls over financial reporting and requires auditors to attest to that assessment. Current regulations of the Securities and Exchange Commission, or SEC, require us to include this assessment in our Annual Report on Form 10-K for each of our fiscal years.
We have incurred and will continue to incur significant costs in maintaining compliance with existing subsidiaries, implementing and testing controls at recently acquired subsidiaries and responding to the new requirements. In particular, the rules governing the standards that must be met for management to assess its internal controls over financial reporting under Section 404 are complex and require significant documentation, testing and possible remediation. Our process of reviewing, documenting and testing our internal controls over financial reporting may cause a significant strain on our management, information systems and resources. We may have to invest in additional accounting and software systems. We have been and may continue to be required to hire additional personnel and to use outside legal, accounting and advisory services. In addition, we will incur additional fees from our auditors as they perform the additional services necessary for them to provide their attestation. If we are unable to favorably assess the effectiveness of our internal control over financial reporting when we are required to, we may be required to change our internal control over financial reporting to remediate deficiencies. In addition, investors may lose confidence in the reliability of our financial statements causing our stock price to decline.
The market price of our common stock has been volatile over the past twelve months and may continue to be volatile.
The market price of our common stock has been and continues to be volatile. We cannot predict the price at which our common stock will trade in the future and it may decline. The price at which our common stock trades may fluctuate significantly and may be influenced by many factors, including our financial results, developments generally affecting our industries, the performance of each of our business segments, our capital structure (including the amount of our indebtedness), general economic, industry and market conditions, the depth and liquidity of the market for our common stock, fluctuations in metal prices, investor perceptions of our business and us, reports by industry analysts, negative announcements by our customers, competitors or suppliers regarding their own performances, and the impact of other “Risk Factors” discussed in this prospectus.
Future sales of our common stock, including sales of our common stock acquired upon the exercise of outstanding options or warrants or upon conversion of our outstanding convertible notes, may cause the market price of our common stock to decline.
We had 48,143,379 shares of common stock outstanding as of December 31, 2013. We also had 303,736 deferred shares granted but unissued to employees under our 2006 Long-Term Incentive Plan. In addition, options to purchase an aggregate of 1,051,288 shares of our common stock were outstanding, of which 1,048,427 were vested as of December 31, 2013. All remaining options will vest over various periods ranging up to a three-year period measured from the date of grant. As of December 31, 2013, the weighted-average exercise price of the vested stock options was $4.01 per share. As of December 31, 2013, we also had warrants outstanding to purchase an aggregate of 1,419,231 shares of common stock, at a weighted-average exercise price of $12.89 per share and convertible notes in the principal amount of $23.5 million outstanding, which are convertible at a price of $14.00 per share into 1,676,358 shares. The convertible notes contain “weighted average” anti-dilution protection which provides for an adjustment of the conversion price of the notes in the event that we issue shares of our common stock or securities convertible or exercisable for shares of our common stock at a price below the conversion price of the notes. The amount of any such adjustment will depend on the price such securities are sold at and the number of shares issued or issuable in such transaction. We also may issue additional shares of stock in connection with our business, including in connection with acquisitions and financings and may grant additional stock options to our employees, officers, directors and consultants under our stock option plans or warrants to third parties. If a significant portion of these shares were sold in the public market, the market value of our common stock could be adversely affected.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable
Item 2.
Item 2. Properties
Our facilities are generally comprised of:
•
indoor and outdoor processing areas;
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various pieces of production equipment and transportation related equipment;
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warehouses for the storage of repair parts and of unprocessed and processed non-ferrous scrap;
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storage yards for unprocessed and processed scrap;
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machine or repair shops for the maintenance and repair of vehicles and equipment;
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scales for weighing scrap;
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loading and unloading facilities;
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administrative offices; and
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garages for transportation equipment.
Our scrap processing facilities have specialized equipment for processing various types and grades of scrap metal, which may include: grapples and magnets and front-end loaders to transport and process both ferrous and non-ferrous scrap, crane-mounted alligator or stationary guillotine shears to process large pieces of scrap, wire stripping and chopping equipment, balers and torch cutting stations. Processing operators transport inbound and outbound scrap on a fleet of rolloff trucks, dump trucks, stake-body trucks and lugger trucks.
A significant portion of our outbound ferrous scrap products are shipped in rail cars generally provided by the railroad company that services seven of our scrap locations.
Fabrication facilities include shot towers, rolling mills of various sizes, extrusion presses, mold casting lines and refining kettles used to process and make a variety of lead-based products.
The following table sets forth information regarding our principal properties:
(1) The lease on our corporate headquarters expires June 30, 2015, subject to an automatic renewal clause for two successive three-year periods that is effective unless we give notice at least 180 days prior to the then-effective termination date. The current annual rent is $162,580.
(2) The lease expires December 31, 2014. The current monthly rent is $8,000 and the annual rent is $96,000.
(3) The lease expires August 31, 2015. The current aggregate monthly rent is $5,125.
(4) The lease expires October 31, 2015. We have rights to renew for an additional term of five years. The annual rent is $30,000. We also have an option to purchase the underlying premises for a price to be determined. The option expires upon the expiration of the term of the lease, including any renewal terms.
(5) This is a month to month lease at $3,500 a month that includes access to 750 feet of railroad track.
(6) The lease expires March 31, 2018. The current monthly rent is $8,932 and the annual rent is $107,184.
(7) The lease expires July 31, 2016. Monthly rent is $5,061. Annual rent is $60,734.
(8) The lease expires December 31, 2020. The annual rent for 2014 including common area maintenance charges and lease incentive is $392,795. The lease contains a right to renew for 5 years upon written notice 12 months prior to expiration of initial term.
(9) The lease expires December 31, 2016. The annual rent is $264,600. Lease contains a right to renew for 60 months upon written notice 120 days prior to expiration of initial term.
(10) The lease expires August 31, 2017 with an option to renew for one five-year period. The annual rent for 2014 is $60,359.
(11) The lease expires April 30, 2018. The annual rent is $34,000.
(12) The lease expires December 30, 2015 with an option to renew for two consecutive extension terms of five (5) years. Annual rent is currently $24,000.
(13) The lease expires November 30, 2017 with options to renew for three consecutive extension terms of four, three, and five years respectively. Annual rent is currently $108,000.
We believe that our facilities are suitable for their present and intended purposes and that we have adequate capacity for our current level of operations.
Item 3.
Item 3. Legal Proceedings
From time to time, we are involved in various litigation matters involving ordinary and routine claims incidental to our business. A significant portion of these matters result from environmental compliance issues and workers compensation-related claims applicable to our operations.
We know of no material existing or pending legal proceedings against the Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest. The outcome of open unresolved legal proceedings is presently indeterminable. Any settlement resulting from resolution of these contingencies will be accounted for in the period when reliable estimates can be made. We do not believe the potential outcome from these legal proceedings will significantly impact our financial position, operations or cash flows.
Item 4.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Trading in our common stock commenced on the American Stock Exchange (now known as NYSE MKT) on March 15, 2005 under the symbol “MEA.” The table below sets forth, on a per share basis for the period indicated, the high and low closing sale prices for our common stock as reported by NYSE MKT.
The closing sale price of our common stock as reported by NYSE MKT on March 5, 2014 was $2.03.
Holders
As of March 5, 2014, there were 362 holders of record of our common stock, 16 holders of warrants to purchase our common stock, and 85 holders of stock options exercisable for shares of our common stock.
Dividends
We have never declared or paid dividends on our common stock, and we do not expect to pay cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all our earnings, if any, in the foreseeable future will be used to finance the operation and growth of our business. In addition, our ability to pay dividends to holders of our capital stock is limited by our senior secured credit facility. Any future determination to pay dividends on our common stock is subject to the discretion of our Board of Directors and will depend upon various factors, including, without limitation, our results of operations and financial condition. In addition, at this time our senior secured credit facility prohibits the payment of dividends. We have no preferred stock outstanding.
EQUITY COMPENSATION PLAN INFORMATION
We have one stockholder approved equity compensation plan in effect, the 2006 Long-Term Incentive Plan. Options generally vest in equal monthly installments over three years and may be exercised for up to five years from the date of grant. Our 1997 Long Term Incentive Plan has expired and no grants remain outstanding under it.
The following table provides certain information regarding our equity incentive plans as of December 31, 2013.
(1) Includes 1,048,427 vested options to purchase Metalico common shares and 303,736 restricted shares granted and unissued.
(2) The only type of award outstanding under 2006 Long-Term Incentive Plan that included an “exercise price” was the options.
Shareholder Performance
Set forth below is a line graph comparing the cumulative total stockholder return on our common stock against the cumulative total return of the Russell 2000 Index and the Standard & Poor’s GSCI All Metals Index from January 1, 2009 through December 31, 2013. The graph assumes that $100 was invested in the Company’s Common Stock and each index group on January 1, 2009 and that all dividends were reinvested.
Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate by reference this Form 10-K, in whole or in part, the following Performance Graph shall not be incorporated by reference into any such filings.
Item 6.
Item 6. Selected Financial Data
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. The selected income statement data for the years ended December 31, 2013, 2012 and 2011 and the selected balance sheet data as of December 31, 2013 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this report. The selected income statement data for the years ended December 31, 2010 and 2009 and the selected balance sheet data as of December 31, 2011, 2010 and 2009 have been derived from audited consolidated financial statements that are not included in this Form 10-K. The historical results are not necessarily indicative of the results of operations to be expected in the future.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this annual report. Some of the information contained in this discussion and analysis includes forward-looking statements. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward-looking statements. Please refer to “Special Note Regarding Forward-Looking Statements” for more information. The results for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.
GENERAL
We operate in two distinct business segments: (a) scrap metal recycling (“Scrap Metal Recycling”) and (b) lead metal product fabricating (“Lead Fabricating”). Our operating facilities as of December 31, 2013 include thirty-one scrap metal recycling facilities, including a combined aluminum de-oxidizing plant, and four lead product manufacturing and fabricating plants. The Company markets a majority of its products domestically but maintains several international customers.
Prior to January 1, 2013, we considered three certain operating segments as part of a third reportable segment - PGM and Minor Metals - because the facilities in these operating segments had exclusively processed or dealt with these more distinctive metal types. However, starting in mid-2012, we upgraded some of these facilities so that they now process a wider range of metals including those routinely processed by the Company’s other scrap recycling facilities. As such, effective January 1, 2013, our chief operating decision makers began considering these operating segments as part of the Scrap Metal Recycling reportable segment for purposes of assessing overall performance and resource allocations.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Areas that require significant judgments, estimates, and assumptions include accounting for revenues; accounts receivable and allowance for uncollectible accounts receivable; inventory; put warrants liability; derivatives and hedging activities; environmental and litigation matters; the testing of goodwill and other intangible assets; stock-based compensation; and income taxes. Management uses historical experience and all available information to make these judgments, estimates, and assumptions, and actual results may differ from those used to prepare the Company’s Consolidated Financial Statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes provide a meaningful and fair perspective of the Company.
The critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements are disclosed in Note 1 to the Consolidated Financial Statements located elsewhere in this filing.
Revenue recognition: Revenue from product sales is recognized as goods are shipped, which generally is when title transfers and the risks and rewards of ownership have passed to customers, based on free on board (“FOB”) terms. Brokerage sales are recognized upon receipt of materials by the customer and reported net of costs in product sales. Historically, there have been few sales returns and adjustments in excess of reserves for such instances that would impact the ultimate collection of revenues, therefore, no material provisions have been made when a sale is recognized.
Accounts Receivable and Allowance for Uncollectible Accounts Receivable: Accounts receivable consists primarily of amounts due from customers from product sales. The allowance for uncollectible accounts receivable totaled $524,000 and $572,000 as of December 31, 2013 and 2012, respectively. Our determination of the allowance for uncollectible accounts receivable includes a number of factors, including the age of the accounts, past experience with the accounts, changes in collection patterns and general industry conditions.
Derivatives and Hedging: We are exposed to certain risks relating to our ongoing business operations. The primary risks currently managed by using derivative instruments are commodity price risk. We use forward sales contracts with PGM substrate processors to protect against volatile commodity prices. This process ensures a fixed selling price for the material we purchase and process. We secure selling prices with PGM processors, in ounces of Platinum, Palladium and Rhodium, in incremental lots for material which we expect to purchase within an average 2 to 3 day time period. However, these forward sales contracts with PGM substrate processors are not subject to any hedge designation as they are considered within the normal sales exemption provided by ASC Topic 815.
Goodwill: The carrying amount of goodwill is tested annually as of December 31 and whenever events or circumstances indicate that impairment may have occurred. Judgment is used in assessing whether goodwill should be tested more frequently for impairment than annually. Factors such as unexpected adverse economic conditions, competition and other external events may require more frequent assessments.
We assess qualitative factors to determine whether it is more likely than not that the fair value of any of our reporting units is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The goodwill impairment test follows a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess.
At December 31, 2013, we conducted our annual impairment test and concluded that the computed fair values for each reporting unit with recorded goodwill exceeded their respective carrying value and no impairment charges were required.
For the nine months ended September 30, 2013, we experienced a highly competitive environment in sourcing scrap material combined with lower commodity prices resulting in weaker than expected results. We also experienced an extended period in which the carrying value of shareholder’s equity materially exceeded our market capitalization value. Based on the comparison of our year to date results to our forecasted results though September 30, 2013, the degree to which our results differed from our forecast for most of our Scrap Metal Recycling reporting units, and the material difference between our carrying equity and our market capitalization value, we performed an interim quantitative goodwill impairment assessment at September 30, 2013. Based on our assessment of future operating results, we determined the fair values of certain reporting units, calculated using discounted cash flow analyses, was less than their respective carrying values as of September 30, 2013 and resulted in an impairment charges of $32.3 million.
At September 30, 2012, we identified competitive pressures in sourcing PGM catalysts, its affect on gross margins and expectations of future cash flows, particularly in the Texas market, and determined that these negative factors were significant enough to perform an interim impairment test for these reporting units. Based on our assessment of future operating results for these reporting units, we calculated their respective fair values using a discounted cash flow analyses and had determined that the fair value of these reporting units was less than their respective carrying values and we recorded goodwill impairment charges of $10.0 million and $2.0 million to our Texas and New Jersey PGM Recycling units, respectively, at September 30, 2012.
At December 31, 2012, we performed our annual impairment test. We determined that when we discounted the expected future cash flows of our Ohio and Pittsburgh scrap metal recycling reporting units it resulted in fair values that did not exceed their respective carrying values. This resulted in goodwill impairment charges of $3.5 million for our Ohio reporting unit and $3.7 million for our Pittsburgh scrap metal reporting unit.
In 2010, we entered into a joint venture agreement to co-operate a scrap recycling facility in Ithaca, New York that expired on April 1, 2013. The joint venture’s operation had been supported by, and was included in, our New York State Scrap Recycling reporting unit. The absence of future cash flows from the joint venture and discontinued support from our other New York facilities resulted in an additional goodwill write-down of $303,000 for the year ended December 31, 2012.
As of December 31, 2013, four of our reporting units have recorded goodwill. A list of these reporting units and the amount of goodwill remaining in each as of December 31, 2013, is as follows ($ in thousands):
In determining the carrying value of each reporting unit, where appropriate, management allocates net deferred income taxes and certain corporate maintained liabilities specifically allocable to each reporting unit to the net operating assets of each reporting unit. The carrying amount is further reduced by impairment charges, if any, made to other long-lived assets of a reporting unit.
Since market prices of our reporting units are not readily available, we make various estimates and assumptions in determining the estimated fair values of the reporting units. We use a discounted cash flow (“DCF”) model of a 5-year forecast with terminal values to estimate the current fair value of our reporting units when testing for impairment. The terminal value captures the value of a reporting unit beyond the projection period in a DCF analysis representing growth in perpetuity, and is the present value of all subsequent cash flows.
A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including sales volumes, profit margins, tax rates, capital spending, discount rates, and working capital changes. Forecasts of operating and selling, general and administrative expenses are generally based on historical relationships of previous years. We use an enterprise value approach to determine the carrying and fair values of our reporting units. When applying the DCF model, the cash flows expected to be generated are discounted to their present value equivalent using a rate of return that reflects the relative risk of the investment, as well as the time value of money. This return is an overall rate based upon the individual rates of return for invested capital (equity and interest-bearing debt). The return, known as the weighted average cost of capital (“WACC”), is calculated by weighting the required returns on interest-bearing debt and common equity in proportion to their estimated percentages in an expected capital structure. For our 2013 analysis, using the build-up method under the Modified Capital Asset Pricing (“CAPM”) model, we arrived at a discount rate of 13.39%. The inputs used in calculating the WACC as of December 31, 2013 include a) an after tax cost of Baa-rated debt based on Moody’s Seasoned Corporate Bond Yields of 3.5%, b) a 20% required return on equity and c) a weighting of the prior components equal to 40% for debt and 60% for equity based on an average of capital structure ratios of market participants in our industry. The 20% required return on equity is based on the following inputs: (a) a 3.72% risk free return rate of a 20 year U.S. Treasury note as of December 31, 2013, (b) a beta-adjusted equity risk premium of 8.74% based on guideline U.S. public company common stocks, (c) a small company risk premium of 3.89% and (d) a Metalico-specific risk premium of 1.50%.
Management believes domestic economic conditions reflect slow to moderate growth and have resulted in forecasts which, when used in our DCF model, support the remaining carrying value of goodwill in our reporting
units. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates and volatile commodity prices. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both.
For the reporting units where the fair value exceeds their carrying values, we measure of the sensitivity of the amount of potential future goodwill impairment charges to changes in key assumptions. All of our reporting units with goodwill had fair values that exceeded carrying values by less than 20%, an amount that we deem substantial. We further tested these reporting units to reflect changes in forecasted cash flows and discount rates. Assuming all input variables remain constant, if expected cash flows were 10% less than forecasted or, if the discount rate were increased by two percentage points the amount by which the carrying value exceeded the computed fair value for these reporting units, indicating potential impairment, would be as follows ($ in thousands):
At December 31, 2013, the carrying value of our shareholders equity exceeded the Company’s market by $22.8 million capitalization after considering a control premium of 25% which is one of many factors that are considered when determining a potential impairment to goodwill. Future declines in the overall market value of the Company’s equity and debt securities may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.
Intangible Assets and Other Long-Lived Assets: We test all finite-lived intangible assets (amortizable) and other long-lived assets, such as fixed assets, for impairment only if circumstances indicate that possible impairment exists. To the extent actual useful lives are less than our previously estimated lives, we will increase our amortization expense on a prospective basis. Through September 30, 2013, we determined that the shortfall in year-to-date operating results as compared to forecast was an indication that required an interim impairment test. As result of the testing, we recorded an impairment charge of $5.3 million to write-down the carrying value of a supplier list. No adjustments were made to the estimated lives of finite-lived assets. At December 31, 2013 and 2012, no indicators of impairment were identified and no adjustments were made to the estimated lives of finite-lived assets.
We test indefinite-lived intangibles such as trademarks and trade names for impairment annually and whenever events or circumstances indicate that impairment may have occurred by comparing the carrying value of the intangible to its fair value. Fair value of the intangible asset is calculated using the projected discounted cash flows produced from the intangible. If the carrying value exceeds the projected discounted cash flows attributed to the intangible asset, the carrying value is no longer considered recoverable and we will record impairment. At September 30, 2013, we recorded a $1.1 million impairment charge for the trade name used at our Texas recycling facility which we no longer expect to use. At December 31, 2013, we conducted our annual impairment test and concluded no indicators of impairment were identified, the computed fair value of our indefinite-lived intangibles exceeded their respective carrying values and no impairment charges were required.
Stock-based Compensation: We recognize expense for equity based compensation ratably over the requisite service period based on the grant date fair value. The fair value of deferred stock grants is determined using the average of the high and low trading price for our common stock on the day of grant. For stock option
grants, we calculate the fair value of the award on the date of grant using the Black-Scholes method. Determining the fair value of stock options at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility in our stock price, annual forfeiture rates, and exercise behavior. Any assumptions used may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.
Income taxes: Our provision for income taxes reflects income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial statement and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
RESULTS OF OPERATIONS
The Company is divided into two reportable segments: Scrap Metal Recycling, which includes three general product categories: ferrous, non-ferrous (including the PGM and Minor Metals Recycling operations which had previously been separately reported) and other scrap services; and Lead Fabricating.
The following table sets forth information regarding revenue in each reportable segment ($ and weights in thousands):
The following table sets forth information regarding average Metalico selling prices for the past eight quarters. The fluctuation in pricing is due to many factors, primarily product mix, as well as, domestic and export demand.
(1) Excludes non-ferrous platinum group metals which are priced in troy ounces instead of pounds and non-ferrous minor metals which generally have higher prices per pound and would tend to skew the averages
reflected in the table. PGM prices averaged $985, $1,006 and $1,180 per troy ounce for the years ended December 31, 2013, 2012 and 2011, respectively. Average annual selling prices for minor metals for the years ended December 31, 2013, 2012 and 2011, were $18.86, $24.07 and $25.02 per pound, respectively and accounted for 6.5%, 8.7% and 7.3% of revenues for the years ended December 31, 2013, 2012 and 2011, respectively.
Scrap and Metal Commodity Markets
Recycled iron and steel scrap is a vital raw material for the production of new steel and cast iron products. The steel and foundry industries in the United States have been structured to recycle scrap, and, as a result, are highly dependent upon scrap. According to the Institute of Scrap Recycling Industries, Inc. (“ISRI”), in the United States alone, 75 million metric tons of iron and steel (ferrous) scrap was processed by the scrap recycling industry in 2012 (latest data available), more than 55 percent of the volume of all domestically processed material. Obsolete ferrous scrap is recovered from automobiles, steel structures, household appliances, railroad tracks, ships, farm equipment, and other sources. In addition, prompt scrap, which is generated from industrial and manufacturing sources, accounts for approximately half of the ferrous scrap supply. The United States is the largest exporter of ferrous scrap in the world. Through October 31, 2013, approximately 15.7 million metric tons of ferrous scrap - valued at more than $6.4 billion - was exported. The largest recipients of the exported ferrous scrap include Turkey, China, Taiwan and South Korea in descending order of export tonnage.
Recycling of scrap metal plays an important role in the conservation of energy because the remelting of scrap requires much less energy than the production of iron or steel products from iron ore. Also, consumption of iron and steel scrap by remelting reduces the burden on landfill disposal facilities and prevents the accumulation of abandoned steel products in the environment. In the United States, the primary source of old steel scrap is the automobile. In 2012 (the latest data available), recycled scrap consisted of approximately 47% post-consumer (old, obsolete) scrap, 8% prompt scrap (produced in steel-product manufacturing plants), and 45% home scrap (recirculating scrap from current operations).
Automobiles are the most recycled consumer product. Used cars, vehicle trades and cars used to the end-of-life, all eventually end up being recycled. Each year, the steel industry recycles more than 18 million tons of steel from cars that are no longer fit for the road. This is equivalent to nearly 18 million new cars. When comparing the amount of steel recycled from automobiles each year to the amount of steel used to produce new automobiles that same year, automobiles maintain a recycling rate of nearly 100 percent.
Each year, a significant percentage of cars leaving the road are recycled for their iron and steel content. While some people take their cars directly to the scrap yards, others trade their cars in at automobile dealerships. Regardless of their path, many autos eventually end up at a scrap yard. At the scrap yard reusable parts, such as doors, seats, hoods, trunk lids, windows, wheels and other parts are removed from the cars. During this same process, cars are drained of fluids, mercury switches are removed and the cars are prepared for environmentally responsible recycling. Once the cars are stripped of reusable parts, the remaining automobile hulks enter the shredder. The shredding process for cars lasts only 45 seconds. The shredder rips the car into fist-sized chunks of steel, nonferrous metals and fluff (non-recyclable rubber, glass, plastic, etc). The iron and steel are magnetically separated from the other materials and recycled. The metal scrap is then shipped to secondary processors (often scrap brokers) or steel mills where it is recycled to produce new steel.
A significant issue currently facing the scrap metal industry is deteriorating profit margins. Increased competition for scrap metal has created bidding wars among large shredders resulting in premium scale prices to keep shredders running. This has resulted in tightening margins for large shredders, causing many to cut operating hours and some to shut down. In medium and large metro areas, small scrap dealers and feeder yards are in price wars with their competitors to acquire material, while at the same time playing one shredder against others to get top dollar for their scrap. Another dynamic is that medium to large scrap yards are being forced to pay top prices for heavy melting steel (HMS) that normally goes to make cut grades, but shredders are using it to feed their equipment.
Disruption in the scrap export markets caused by political turmoil and economic uncertainty in countries which have been large consumers of U.S. scrap metal has also affected pricing.
According to the Raw Material Data Aggregation Service (RMDASTM), the average monthly U.S spot market price for No.2 shredded scrap started 2013 at $397 per gross ton reaching a short term peak in March of $411 per gross ton. After falling through the second and third quarters of the year and bottoming at $360 per gross ton in October, prices rebounded and closed the year at their peak of $417 per ton.
According to reports published by the U.S. Geological Survey (“USGS”), in 2012, old scrap, converted to refined metal and alloys, provided 170,000 tons of copper, equivalent to 10% of apparent consumption. Purchased new scrap, derived from fabricating operations, yielded 650,000 tons of contained copper. Of the total copper recovered from scrap (including aluminum- and nickel-based scrap), brass mills recovered 71%; miscellaneous manufacturers, foundries, and chemical plants, 15%; ingot makers, 9%; and copper smelters and refiners, 5%. Copper in all old and new, refined or remelted scrap contributed about 33% of the U.S. copper supply. The COMEX spot copper price began 2013 at its highs of the year reaching $3.72 per pound at the end of January but fell steadily through April to settle into a $3.00 to $3.30 per pound trading range for most of the remainder of the year. December saw prices break out reaching $3.47 per pound by year’s end. Despite projected growth in demand, new copper capacity coming online in early 2014 could flood the market in the short term, keeping copper prices somewhat muted in 2014.
The outlook is somewhat better for aluminum, as the steadily improving U.S. economy, along with U.S. auto sales, has resulted in more robust aluminum shipments. According to recent figures from the Aluminum Association, Washington, D.C., U.S. and Canadian producers shipped 24.5 million pounds of aluminum forgings in November 2013, which is nearly 20 percent more than what was shipped in November 2012. Despite the year-over-year improvement, concerns remain. Shipments in November 2013 declined 7.4 percent from the previous month, while shipments in the first 11 months of 2013 totaled 268.5 million pounds, a 2 percent drop from the prior year’s 11-month total. The Aluminum Association notes that the domestic aluminum industry purchased more aluminum scrap during the first nine months of 2013. Supporting this information, estimates from the U.S. Geological Survey (USGS) find that the recovery of aluminum and aluminum alloys increased by 5.3 percent through the first nine months of 2013 compared with the same time in 2012.
The lead-acid battery industry continues to be the principal user of lead. The International Lead and Zinc Study Group (ILZSG) forecast global increases in lead consumption and production in 2013 and 2014. Global lead consumption in 2013 was expected to increase by 5% to 11.0 million metric tons and by 4.6% in 2014 to 11.51 metric tons, primarily owing to increased consumption in China for use in lead-acid batteries. Through October 2013, total U.S. imports of lead for consumption were 65% greater than during the same period in 2012. The increase was partially attributed to lead consumers and traders accumulating lead stocks in anticipation of a planned yearend closure of a significant lead producer’s primary lead smelter facility in Herculaneum, MO. Through October 2013, total exports of lead, exclusive of scrap, were 6% more than those in the corresponding period of 2012. LME lead prices continued to be volatile, starting 2013 at around $2,400 per metric ton in January, falling below $2,000 per metric ton in May, and rebounding to finish the year at approximately $2,200 per metric ton in December. Global stocks of lead held in LME warehouses decreased by 33% from 318,000 to 214,000 metric tons for the calendar year 2013.
Market Outlook
The scrap recycling industry is highly cyclical and commodity metal prices can be volatile and fluctuate widely. Such volatility can be due to numerous factors beyond our control, including but not limited to general domestic and global economic conditions, including metal market conditions, competition, availability of transportation, the financial condition of our major suppliers and consumers and international demand for domestically produced scrap.
Although we seek to turn over our inventory of raw or processed scrap metals as rapidly as markets dictate, we are exposed to commodity price risk during the period that we have title to products that are held in inventory for processing and/or resale. Our estimates of future earnings could prove to be unreliable because of the unpredictability and potential magnitude of commodity price swings and the related effect on scrap volume purchases and shipments.
The volatile nature of metal commodity prices makes it difficult for us to predict future revenue trends as shifting international and domestic demand can significantly impact the prices of our products, supply and demand for our products and affect anticipated future results. However, looking ahead we anticipate continued moderate economic improvement in the manufacturing and industrial sectors.
Domestic steel production has been relatively steady going into 2014 at 75% - 77% of reported industry capacity. Finished steel prices have been moving lower in early 2014 but continue to be supported by strong demand for automotive and energy related products, although a significant portion of the demand is being met by imported steel. While demand for ferrous scrap has been buoyed by the automotive industry and increases in construction activity, selling prices for scrap have been weak due to economic and political uncertainty in Turkey a significant importer of U.S. scrap from the East Coast. Less demand from Turkey has lowered export ferrous scrap prices allowing U.S. steel mills to lower the prices paid for scrap. Ferrous scrap normally destined for the export market has provided additional supply domestically weighing on selling prices. Ferrous scrap available for purchase by scrap dealers has already been tight and has become more competitive with disruptive winter weather. Until such time as export demand stabilizes, we expect lower ferrous scrap selling prices to continue. A break in winter weather could provide some relief to availability of scrap but we expect continued fierce competition for supply in the months ahead.
Diminished lower scrap supply being generated and fierce competition for available material created a difficult business environment for nonferrous scrap operations in 2013 and we believe similar market conditions will likely continue into 2014. Non-ferrous metal selling prices ended 2013 on a down note finishing near or at their lowest levels of the year in nearly all base non-ferrous commodities as overall worldwide growth in gross domestic product remained weak. China, which has been a significant driver of global demand for non-ferrous metals, has slowed at a faster pace than many observers expected, contributing to the weak pricing environment. Additionally, reallocation of investments by private investors, funds and banks away from metals into lower risk options have also affected pricing. Despite the negative influences on pricing, the U.S. economy continues to improve, though slowly posting positive economic indicators over the past few quarters. Automobile production and strength in residential and commercial construction have been good support to counterbalance some of the pricing pressures. Volatility remains, however, preventing sustained improvement in nonferrous metals.
We believe prices for platinum and palladium will be supported by the automotive industry, which continues to show strong production levels. Sourcing and supply of catalyst material should remain competitive consistent with the recent past.
We cautiously anticipate the financial performance of our Lead Fabricating segment will continue to show positive operating results. Favorable product mix, relative stability in raw material prices, the ability to selectively raise selling prices for some of our value added finished products and the introduction and growth in new products should keep volumes and profit margins at the high end of recent results. We are wary of the potential impact of imports and cheaper shotgun cartridges on our shot products.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Consolidated net sales decreased by $43.6 million, or 7.6%, to $530.0 million in the year ended December 31, 2013, compared to consolidated net sales of $573.6 million in the year ended December 31, 2012. Acquisitions added $9.8 million to consolidated net sales. Excluding acquisitions, the Company reported decreases in average metal selling prices representing net sales of $58.9 million offset by a $5.5 million increase due to higher selling volume.
Operating Income (Loss)
We reported a consolidated operating loss of $39.3 million for the year ended December 31, 2013, an increase of $24.1 million, compared to an operating loss of $15.2 million for the year ended December 31, 2012 due primarily to impairment charges to goodwill and other intangible assets. For the years ended December 31, 2013 and 2012, our consolidated operating losses included goodwill and other intangible asset impairment charges of $38.7 million and $19.6 million, respectively. Acquisitions added operating income of $309,000 to our consolidated operating loss for the year ended December 31, 2013. Operating results in fiscal 2013 were negatively impacted by reductions in metal prices for all scrap commodities compared to the prior year. Softening demand for scrap metal, particularly in the second quarter of 2013, combined with continued material supply constraints and strong competition in sourcing material negatively impacted selling prices and produced lower metal margins in our Scrap Metal Recycling segment. Consolidated operating costs increased but were offset by reductions in selling, general and administrative costs. Excluding the effect of impairment charges, our Scrap Metal Recycling segment reported a $3.4 million increase in operating loss combined with a $1.7 million reduction in operating income in our Lead Fabricating segment. See the Financial Results by Reportable Segment section below for more detailed discussion on factors impacting our results by segment.
Financial and Other Income (Expense)
Consolidated interest expense was $9.0 million for the year ended December 31, 2013, compared to $9.1 million for the year ended December 31, 2012. The $97,000 decrease in interest expense reflects changes in debt balances and corresponding interest rates.
Other (expense) income for the year ended December 31, 2013 includes income of $3,000 to adjust financial instruments to their respective fair values compared to income of $196,000 for the year ended December 31, 2012 due to a reduction in the market price of our common stock. Other income for the year ended December 31, 2012 includes a $4.6 million gain related to the settlement of a dispute with the former owners of a previous acquisition.
For the year ended December 31, 2013, we recorded income of $107,000 related to the sale and 40% share of loss through the date of disposition of our investment in a manufacturer of radiation shielding solutions for the nuclear medicine community compared to our 40% share of income of $11,000 for the year ended December 31, 2012.
For the year ended December 31, 2013 we recorded a gain of $123,000 net of unamortized issue costs, for the repurchase of $45.3 million in convertible notes compared to a gain of $63,000 net of unamortized issue costs, for the repurchase of $7.3 million in convertible notes in cash for the year ended December 31, 2012.
For the year ended December 31, 2013, we wrote off $310,000 in unamortized debt issuance costs in connection with the refinance of a significant portion of our senior debt. We also recorded a $347,000 gain on the dissolution of our joint venture in Ithaca, New York.
Income Taxes
For the year ended December 31, 2013, we recognized a consolidated income tax benefit of $13.1 million on a loss from continuing operations of $48.0 million resulting in an effective tax rate of 27%. For the year ended December 31, 2012, we recognized a consolidated income tax benefit of $6.3 million on a loss from continuing operations of $19.4 million resulting in an effective tax rate of 32%. Our effective rate may differ from the blended expected statutory income tax rate due to permanent differences between income for tax purposes and income for book purposes. These permanent differences include fair value adjustments to financial instruments, stock based compensation, amortization of certain intangibles and certain non-deductible expenses such as impairment charges to goodwill acquired in stock acquisitions.
Financial Results by Reportable Segment
Scrap Metal Recycling
Due to the many different ferrous and non-ferrous commodities that we buy, process and sell as well the various grades of material within those commodities and the mix of material sold through each of our locations, sales totals can vary.
Ferrous Sales
Ferrous sales decreased by $2.7 million, or 1.2%, to $213.9 million in the year ended December 31, 2013, compared to ferrous sales of $216.6 million in the year ended December 31, 2012. Acquisitions added $8.8 million and 25,600 tons to ferrous sales in 2013. Excluding acquisitions, ferrous sales decreased by $11.5 million. The decrease in ferrous sales was attributable to lower average selling prices totaling $16.8 million offset by higher volume sold of 12,800 tons amounting to $5.3 million. Ferrous selling prices were affected by both planned and unplanned mill outages at several of our large steel mill customers. The lower demand from these mills resulted in lower scrap prices, particularly through the second and third quarters of 2013. These mills have since resolved their production issues and/or completed the various plant upgrades. These improvements contributed to the higher pricing in the latter part of the year with production levels expected to increase in 2014. Steel prices were negatively impacted by cheaper imports, oversupply in the market, weak demand in the U.S. and Europe and tempered growth in Asia. All of these factors combined put additional downward pressure on ferrous scrap prices. The average selling price for ferrous products was approximately $371 per ton for the year ended December 31, 2013, compared to $403 per ton for the year ended December 31, 2012.
Further softening in export markets and a stronger U.S dollar is weighing on ferrous pricing in early 2014, particularly on the U.S East Coast. Steel prices have been impacted by cheaper imports, oversupply in the market, weak demand in the U.S. and Europe and tempering growth in Asia, resulting in additional pressure to ferrous scrap prices. Improving growth in the domestic economy and demand from the auto manufacturing industry should temper significant ferrous price declines. The U.S. steel industry continues to be impacted by excess capacity and high costs inviting competition from imported steel, which may affect scrap demand. Weaker demand for scrap by Turkey caused by political unrest and economic uncertainty is also pressuring selling prices of scrap sold domestically.
Non-Ferrous Sales
Non-ferrous sales decreased by $47.0 million, or 16.4%, to $239.5 million in the year ended December 31, 2013, compared to non-ferrous sales of $286.5 million in the year ended December 31, 2012. Acquisitions added $376,000 and 631,000 pounds to non-ferrous sales. Excluding acquisitions, non-ferrous sales decreased by $47.4 million. Excluding acquisitions, base non-ferrous, PGM and minor metal sales decreased by $9.6 million, $22.4 million and $15.4 million, respectively. Slightly higher sales volume in base non-ferrous metals totaling $137,000 was offset by lower average selling prices amounting to $9.7 million. The average selling price for base non-ferrous products was $0.93 per pound for the year ended December 31, 2013, compared to $0.99 per pound for the year ended December 31, 2012. PGM and minor metal commodity sales were lower primarily due to lower volumes amounting to $28.5 million but also resulted from lower average selling prices totaling of $9.4 million. The average selling price for PGM material was approximately $985 per troy ounce for the year ended December 31, 2013 compared to $1,006 per troy ounce for the year ended December 31, 2012, a decrease of approximately 2.1%. After falling from higher spot prices early in the year, platinum prices stabilized into a lower trading range by year’s end but continue to be volatile. Total PGM sales volumes amounted to 35,600 troy ounces for the year ended December 31, 2013, compared to 52,200 troy ounces sold for the year ended December 31, 2012 due to lower purchases of PGM catalyst material.
Operating expenses - Scrap Metal Recycling
Operating expenses in our Scrap Metal Recycling segment decreased by $43.3 million, or 9.2%, to $425.4 million for the year ended December 31, 2013, compared to operating expenses of $468.7 million for the year ended December 31, 2012. Acquisitions added $8.8 million to operating expenses. Excluding acquisitions, the decrease in operating expenses was due to a $50.7 million decrease in the cost of purchased metals and a $1.4 million decrease in other operating expenses. The decrease in the cost of purchased metals is due primarily to pricing as metal prices fell across all scrap metal commodity groups due to lower global demand. A decrease in purchases of PGM catalyst material also contributed to the reduction in cost of purchased metals. Despite lower prices, our gross metal margin percentage increased slightly by approximately 0.8 of a point. Other significant changes in operating expense include a decrease in wages and benefits of $1.5 million due in part to the dissolution of our joint venture in Ithaca, New York in early 2013 and the termination of several management employees late in 2012 who were not replaced in 2013. Outbound freight charges declined $447,000 due to an increase in ferrous material sold using our own fleet of railcars and other miscellaneous operating expenses decreased by $464,000. These expense reductions were offset by increases in shredder waste disposal costs of $680,000 and a $395,000 increase in expense for wear parts, small tools and supplies both due to the increase in production at our New York shredder operations over the prior year.
Selling, General and Administrative - Scrap Metal Recycling
Selling, general and administrative expenses in our Scrap Metal Recycling segment decreased by $4.0 million to $13.6 million for the year ended December 31, 2013, compared to $17.6 million for the year ended December 31, 2012. Acquisitions added $466,000 to selling, general, and administrative expenses in 2013. Excluding acquisitions, selling, general and administrative costs decreased by $4.5 million. In the previous year, we recorded bad debt charges of $1.8 million and reserved $551,000 for preference claims related to our exposure to a single customer that declared bankruptcy in 2012. The reduction in current year bad debt expense and favorable settlement of the preference claims in 2013 resulted in a $2.6 million swing in our year over year change in expense.
Other significant changes in component expenses of selling, general and administrative costs include a decrease in wages and benefits of $1.3 million due in part to reductions in certain administrative management personnel and lower bonus payouts, reductions of $225,000 in advertising and promotional expenses, $94,000 in insurance expense and $219,000 in various other expenses.
Depreciation and Amortization - Scrap Metal Recycling
Depreciation and amortization expenses in our Scrap Metal Recycling segment increased by $585,000 to $16.1 million for the year ended December 31, 2013, compared to $15.5 million for the year ended December 31, 2012. Acquisitions added $186,000 to depreciation and amortization expense. Excluding acquisitions, depreciation and amortization expense increased by $399,000 due to effect of capital expenditures made in the current and recent preceding years. We expect depreciation and amortization expense to remain relatively stable in the next year as the Company adheres to a lower maintenance capital expenditure budget.
Impairment charges - Scrap Metal Recycling
In 2013, we performed an interim impairment analysis at September 30 as actual operating results for the year to date did not meet our previously forecasted expectations. As a result of the impairment tests performed, the Company recorded a goodwill impairment charge of $32.3 million to several reporting units in our Scrap Metal Recycling segment. We also recorded impairment charges of $5.3 million to write-down the carrying value of a supplier list at our Akron, Ohio Scrap Recycling Reporting Unit and $1.1 million to a trade name that the Company no longer expects to use. In September 2012, we identified competitive pressures in sourcing PGM catalysts, its effect on gross margins and anticipated future cash flows as a triggering event with respect to our
PGM reporting units and we performed an interim impairment analysis at September 30, 2012, which resulted in a goodwill impairment charge of $12.0 million and a $100,000 impairment charge to a trade name. At December 31, 2012, we performed our annual impairment test and determined that the expected future cash flows of our Ohio and Pittsburgh scrap metal recycling reporting units, when discounted, resulted in fair values that did not exceed their respective carrying values. This resulted in additional goodwill impairment charges of $3.5 million for our Ohio reporting unit and $3.7 million for our Pittsburgh reporting unit.
Lead Fabricating
Lead fabricating sales increased by $6.4 million, or 9.6%, to $72.8 million in the year ended December 31, 2013, compared to lead fabrication sales of $66.4 million in the year ended December 31, 2012. The increase was due to higher average selling prices amounting to $5.7 million and by higher volume sold totaling $728,000. The average selling price for lead fabricated products was approximately $1.69 per pound for the year ended December 31, 2013, compared to $1.56 per pound for the year ended December 31, 2012, an increase of approximately 8.3%. The increase in pricing was due primarily to price increases passed through to consumers. The increase in volume was mainly due to increases in various products sold.
Operating Expenses - Lead Fabricating
Operating expenses in our Lead Fabricating segment increased by $6.8 million to $62.1 million for the year ended December 31, 2013, compared to operating expenses of $55.3 million for the year ended December 31, 2012. The increase in operating expenses was due to a $5.8 million increase in the cost of purchased metals and a $1.0 million increase in other operating expenses. The increase in underlying lead commodity prices was driven mainly by higher global demand for lead. Other operating expense changes include increases in wages and benefits of $814,000 due primarily to increases in staff, a $296,000 increase in production and fabrication supplies both related to the increase in volumes produced, an increase in rent and occupancy costs of $196,000 due primarily to a new lease of additional warehouse space in Birmingham, Alabama entered into in January, 2013 and other miscellaneous operating expense increases of $153,000. These increases were offset by a reduction in freight expense of $461,000 due to in part to a change in freight carriers and a reduction in shipments between our own production facilities.
Selling, General and Administrative - Lead Fabricating
Selling, general and administrative expenses in our Lead Fabricating segment increased by $128,000 to $3.9 million for the year ended December 31, 2013, compared to $3.8 million for the year ended December 31, 2012. Significant changes in component expenses of selling, general and administrative costs include increases in wages and benefits of $285,000. Decreases in selling, general and administrative costs include $45,000 in consulting and professional fees, $33,000 in insurance expense, $30,000 in advertising and promotional costs and $49,000 in miscellaneous other expenses.
Depreciation and Amortization - Lead Fabricating
Depreciation and amortization expenses in our Lead Fabricating segment decreased by $49,000 to $1.7 million for the year ended December 31, 2013, compared to $1.7 million for the year ended December 31, 2012. We expect depreciation and amortization expense to remain relatively stable in the next year as the Company adheres to a lower maintenance capital expenditure budget.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Consolidated net sales decreased by $87.3 million, or 13.2%, to $573.6 million in the year ended December 31, 2012, compared to consolidated net sales of $660.9 million in the year ended December 31, 2011. Acquisitions added $1.6 million to consolidated net sales. Excluding acquisitions, the Company reported
decreases in average metal selling prices representing net sales of $45.7 million and a $43.2 million decrease due to lower selling volume.
Operating Income (Loss)
We reported a consolidated operating loss of $15.2 million for the year ended December 31, 2012 a decrease of $47.7 million, compared to operating income of $32.6 million for the year ended December 31, 2011. For the year ended December 31, 2012, our consolidated operating loss included goodwill and other intangible asset impairment charges of $19.6 million and acquisitions added a loss of $283,000 to our consolidated operating loss. Operating results in fiscal 2012 were negatively impacted by reductions in metal prices for all commodities compared to the prior year. Softening of demand for scrap metal, particularly in the second half of 2012, negatively impacted selling prices while a constrained supply and increased competition in sourcing material resulted in compression in operating margins. Our Scrap Metal Recycling segment reported a $52.5 million decrease in operating income due primarily to reduction in PGM volumes and related pressured margins. This reduction was offset by our Lead fabricating segment which experienced an increase in operating income of $4.0 million and Corporate and other increased operating income by $807,000. See the Financial Results by Reportable Segment section below for more detailed discussion on factors impacting our results by segment.
Financial and Other Income (Expense)
Consolidated interest expense was $9.1 million for the year ended December 31, 2012, compared to $9.4 million for the year ended December 31, 2011. The $275,000 decrease in interest expense reflects changes in debt balances and corresponding interest rates.
Other (expense) income for the year ended December 31, 2012 includes income of $196,000 to adjust financial instruments to their respective fair values compared to income of $3.6 million for the year ended December 31, 2011 due to a reduction in the market price of our common stock. Other income for the year ended December 31, 2012 includes a $4.6 million gain related to the settlement of a dispute with the former owners of a previous acquisition.
For the year ended December 31, 2012, we recorded income of $11,000 for our 40% share of income from our investment in a manufacturer of radiation shielding solutions for the nuclear medicine community compared to a loss of $46,000 for the year ended December 31, 2011.
For the year ended December 31, 2012, we recorded a gain of $63,000 net of amortized issue costs, for the repurchase of $7.3 million in convertible notes compared to a gain of $243,000 net of amortized issue costs, for the repurchase of $5.0 million in convertible notes in cash for the year ended December 31, 2011.
Income Taxes
For the year ended December 31, 2012, we recognized a consolidated income tax benefit of $6.3 million on a loss from continuing operations of $19.4 million resulting in an effective tax rate of 32%. For the year ended December 31, 2011, we recognized income tax expense of $9.7 million on income from continuing operations of $27.1 million. Included in income tax expense for 2011 is $571,000 related to the recognition of a state income tax audit assessment for previous periods. Excluding this assessment income tax was $9.1 million resulting in an effective tax rate of 34%. Our effective rate may differ from the blended expected statutory income tax rate due to permanent differences between income for tax purposes and income for book purposes. These permanent differences include fair value adjustments to financial instruments, stock based compensation, amortization of certain intangibles and certain non-deductible expenses.
Financial Results by Reportable Segment
For the years ended December 31, 2012 and 2011, we operated in two distinct business segments; Scrap Metal Recycling (including the PGM and Minor Metals Recycling operations which had previously been separately reported) and Lead Fabricating. Additional financial information relating to these reporting segments is contained in Note 17 - Segment Information in the Notes to the Consolidated Financial Statements included in this report.
Scrap Metal Recycling
Due to the many different ferrous and non-ferrous commodities that we buy, process and sell as well the various grades of material within those commodities and the mix of material sold through each of our locations, sales totals can vary.
Ferrous Sales
Ferrous sales decreased by $17.3 million, or 7.4%, to $216.6 million in the year ended December 31, 2012, compared to ferrous sales of $233.9 million in the year ended December 31, 2011. Acquisitions added $829,000 to ferrous sales in 2012. Excluding acquisitions, ferrous sales decreased by $18.1 million. The decrease in ferrous sales was attributable to lower average selling prices totaling $18.4 million offset by higher volume sold of 1,200 tons amounting to $295,000. Steel prices were impacted by a glut in imports, oversupply in the market, weak demand in Europe and tempering growth in Asia, resulting in a decline in ferrous scrap selling prices as compared to the prior year. The average selling price for ferrous products was approximately $403 per ton for the year ended December 31, 2012, compared to $437 per ton for the year ended December 31, 2011.
Non-Ferrous Sales
Non-ferrous sales decreased by $62.1 million, or 17.8%, to $286.5 million in the year ended December 31, 2012, compared to non-ferrous sales of $348.6 million in the year ended December 31, 2011. Acquisitions added $445,000 to non-ferrous sales. Excluding acquisitions, non-ferrous sales decreased by $62.5 million. Base non-ferrous metal sales increased by $24.0 million but were offset by a reduction of $86.5 million in sales of PGM and minor metal commodities. Higher sales volume in base non-ferrous metals totaling $35.7 million was offset by lower average selling prices amounting to $11.7 million. The average selling price for base non-ferrous products was $0.99 per pound for the year ended December 31, 2012, compared to $1.06 per pound for the year ended December 31, 2011. The increase in volumes is the result of an increase in non-ferrous material sold by our Pittsburgh location and sales by our New York shredder facility that were not in the previous period. Demand for non-ferrous base metals, particularly aluminum for the automotive industry, should remain very solid as the economy recovers and many foreign markets continue to grow. The decrease in PGM and minor metal commodities was due primarily to lower volumes amounting to $75.4 million but also resulted from lower average selling prices totaling of $11.1 million. Due to competitive pressures in sourcing PGM catalysts, particularly in the Texas market, we significantly reduced catalyst purchasing due to the inability to obtain reliable, profitable material, which in turn, is reflected in the reduction in volume sold. The average selling price for PGM material was approximately $1,006 per troy ounce for the year ended December 31, 2012 compared to $1,180 per troy ounce for the year ended December 31, 2011, a decrease of approximately 14.7%. Total PGM sales volumes amounted 52,200 troy ounces for the year ended December 31, 2012, compared to 119,800 troy ounces sold for the year ended December 31, 2011.
Operating expenses - Scrap Metal Recycling
Operating expenses in our Scrap Metal Recycling segment decreased by $52.3 million, or 10.0%, to $468.7 million for the year ended December 31, 2012, compared to operating expenses of $521.0 million for the year ended December 31, 2011. Acquisitions added $1.4 million to operating expenses. Excluding acquisitions,
the increase in operating expenses was due to a $55.6 million decrease in the cost of purchased metals and a $2.0 million increase in other operating expenses. The decrease in the cost of purchased metals is due primarily to a decrease in purchases of PGM catalyst material. Lower prices in all commodities also contributed to the lower cost of metals. Other operating expense changes include increases in freight charges of $3.3 million due to an increase in ferrous material using our own fleet of railcars; and waste and disposal costs of $1.2 million due to waste material produced by our shredder in New York not in operation in the previous year. These higher expenses were offset by a reduction in wages and benefits of $1.1 million due to a reduction in staff to process less material particularly at our Texas PGM facility, lower energy costs of $937,000 due to more material being shipped by rail, maintenance and repair expense of $438,000 and other expenses of $19,000.
Selling, General and Administrative - Scrap Metal Recycling
Selling, general and administrative expenses in our Scrap Metal Recycling segment increased by $1.5 million to $17.6 million for the year ended December 31, 2012, compared to $16.1 million for the year ended December 31, 2011. Acquisitions added $277,000 to selling, general, and administrative expenses in 2012. Excluding acquisitions, selling, general and administrative costs increased by $1.2 million. Significant changes in component expenses of selling, general and administrative costs include decreases in consulting and professional fees of $392,000 due to legal fees related to a dispute incurred in the previous year and reductions in wages and benefits of $361,000 due in part to reductions in certain management personnel and other expenses of $187,000. These lower expenses were offset by a $1.8 million increase in bad debt expense for the Company’s exposure to a single customer that declared bankruptcy in 2012.
Depreciation and Amortization - Scrap Metal Recycling
Depreciation and amortization expenses in our Scrap Metal Recycling segment increased by $2.3 million to $15.5 million for the year ended December 31, 2012, compared to $13.2 million for the year ended December 31, 2011. Acquisitions added $157,000 to depreciation and amortization expense. Excluding acquisitions, depreciation and amortization expense increased by $2.1 million due to increases in capital expenditures made in the current and previous years. At the end of 2011, the construction at our shredder facility in New York was completed and the current year reflects a full year of depreciation and represents $1.1 million of the increase. The balance of the increase is the result of a full year of depreciation charged on other capital expenditures made in 2011 and partial year depreciation charged on $14.6 million in capital expenditures made in 2012.
Impairment charges - Scrap Metal Recycling
In September 2012, we identified competitive pressures in sourcing PGM catalysts, its effect on gross margins and anticipated future cash flows as a triggering event with respect to our PGM reporting units and we performed an interim impairment analysis at September 30, 2012, which resulted in a goodwill impairment charge of $12.0 million and a $100,000 impairment charge to the trade name of our Texas reporting unit. At December 31, 2012, we performed our annual impairment test and determined that the expected future cash flows of our Ohio and Pittsburgh scrap metal recycling reporting units, when discounted, resulted in fair values that did not exceed their respective carrying values. This resulted in additional goodwill impairment charges of $3.5 million for our Ohio reporting unit and $3.7 million for our Pittsburgh reporting unit.
Lead Fabricating
Lead fabrication sales decreased by $6.2 million, or 8.5%, to $66.4 million in the year ended December 31, 2012, compared to lead fabrication sales of $72.6 million in the year ended December 31, 2011. The decrease was due to lower average selling prices amounting to $2.6 million and by lower volume sold totaling $3.6 million. The average selling price for lead fabricated products was approximately $1.56 per pound for the year ended December 31, 2012, compared to $1.62 per pound for the year ended December 31, 2011, a decrease of approximately 3.7%. During most of 2012, lead commodity prices were lower due to global economic
weakness reducing demand for lead. However, new product development should have a positive impact on future product shipments.
Operating Expenses - Lead Fabricating
Operating expenses in our Lead Fabricating segment decreased by $8.4 million to $55.3 million for the year ended December 31, 2012, compared to operating expenses of $63.7 million for the year ended December 31, 2011. The decrease in operating expenses was due to a $7.6 million decrease in the cost of purchased metals and an $861,000 decrease in other operating expenses. The cost of lead sold fell partly due to lower volumes however improvements from efficient production and raw material procurement aided by scrap refining improved our metal margin. Other operating expense changes include decreases in wages and benefits of $678,000 due primarily to changes in benefit plans, decreases in repair and maintenance expenses of $126,000 and other operating costs of $57,000.
Selling, General and Administrative - Lead Fabricating
Selling, general and administrative expenses in our Lead Fabricating segment decreased by $499,000 to $3.8 million for the year ended December 31, 2012, compared to $4.3 million for the year ended December 31, 2011. Significant changes in component expenses of selling, general and administrative costs include decreases in wages and benefits of $215,000 and consulting and professional fees of $189,000 and $95,000 in other expenses.
Depreciation and Amortization- Lead Fabricating
Depreciation and amortization expenses in our Lead Fabricating segment increased by $346,000 to $1.7 million for the year ended December 31, 2012, compared to $1.4 million for the year ended December 31, 2011. The previous year included a $286,000 gain on disposal netted with expense. Excluding the impact of the prior year gain, depreciation expense remained constant.
QUARTERLY FINANCIAL INFORMATION
(Unaudited)
LIQUIDITY AND CAPITAL RESOURCES
The Company has certain contractual obligations and commercial commitments to make future payments. The following table summarizes these future obligations and commitments, excluding discounts as of December 31, 2013 ($ in thousands):
(1) Approximately 66% of our debt obligations as of December 31, 2013 accrued interest at a variable rate (the lender’s base rate plus a margin, an effective rate of 6.53% as of December 31, 2013). The remaining 34% of debt obligations as of December 31, 2013 required accrued interest at fixed rates having a weighted average rate of 5.96%.
(2) Includes $23,469 in Convertible Notes maturing April 2028. An optional repurchase right exercisable by the Note holders that becomes effective on June 30, 2014 would require the Company to redeem the Notes at par and would otherwise require classification of the Convertible Notes as a short term obligation. However, current availability under the Financing Agreement provides liquidity to redeem the Convertible Notes permitting long-term classification.
(3) Includes capital leases and installment notes for capital equipment. Interest expense on capital lease obligations for 2013 is estimated to approximate $339,000 calculated by multiplying the outstanding principal balance by the obligation’s applicable interest rate in effect at December 31, 2013.
Cash Flows
For the year ended December 31, 2013, we generated $21.9 million of cash flows from our operating activities. We incurred a net loss of $34.9 million which was offset by net noncash items totaling $48.9 million and a $7.9 million decrease in non-cash working capital components. Non-cash items included $18.9 million in depreciation and amortization; $38.7 million in impairment charges for goodwill and other intangibles; $925,000 in stock-based compensation; $375,000 for the write-off of deferred financing costs due to debt modifications; a $298,000 charge for increases to our reserve for bad debts vendor advances and a $152,000 loss on the disposition of property and equipment. These items were offset by $10.1 million of deferred tax benefit, a $123,000 gain in the extinguishment of debt; $107,000 for our 40% share of earnings and related gain on sale of our investment in a manufacturer of radiation shielding products and a $105,000 gain on the acquisition of a scrap metal recycling business. Changes in working capital items for 2013 include $5.4 million for a decrease in accounts receivable due to lower sales and timing of collections, $5.8 million for decreases in inventory due primarily to lower levels of base non-ferrous and lead inventory on hand, $1.4 million for decreases in prepaid expenses and other items. These working capital items were offset by a $4.6 million decrease in accounts payable and accrued expenses due primarily to timing of purchases and the need for certain accruals in the previous year. For the year ended December 31, 2012, we generated $22.4 million of cash flows from our operating activities. We incurred a net loss of $13.1 million which was offset by net non-cash items totaling $33.1 million and a $2.4 million decrease in non-cash working capital components. Non-cash items included $18.1 million in depreciation and amortization; $19.6 million in impairment charges for goodwill and other intangibles; $1.7 million in stock-based compensation and $1.9 million charge for bad debts and $416,000 in reserves for vendor advances. The items were offset by $6.4 million of deferred tax benefit, a $1.0 million gain in the disposal of property and equipment, a $1.0 million gain from settlements and $196,000 in fair value adjustments to financial instruments. Changes in working capital items for 2012 include $11.3 million for decreases in inventory and $1.8 million for decreases in prepaid expenses and other items. These working capital items were offset by a $10.0 million decrease in accounts receivable and a $761,000 increase in accounts payable and accrued expenses. For the year ended December 31, 2011, we generated $33.0 million of cash flows from our operating activities. Our net income of $17.4 million and net non-cash items totaling $22.2 million were offset by a $6.6 million change in working capital components. Noncash items included $15.8 million in depreciation and amortization; $2.2 million in stock-based compensation and $8.1 million of deferred income taxes. The items were offset by $3.6 million in fair value adjustments to financial instruments and a $265,000 gain in the disposal of property and equipment. Changes in working capital items for 2011 include $11.0 million for an increase in inventory, $1.7 million for increases in prepaid expenses and other items and a $608,000 decrease in accounts payable and accrued expenses. These working capital items were offset by $6.7 million in decreased accounts receivable balances.
For the year ended December 31, 2013, we used $12.1 million in cash for investing activities. We paid $10.5 million to purchase equipment and make capital improvements. We also paid $2.1 million to acquire three scrap metal recycling businesses and had a $303,000 increase in other assets. These items were offset by $600,000 in proceeds from the sale of our 40% investment in a manufacturer of radiation shielding products and $211,000 in cash proceeds received on the disposal of property and equipment. For the year ended December 31, 2012, we used $23.9 million in cash for investing activities. We paid $23.2 million to purchase equipment and
make capital improvements. We also paid $2.0 million to acquire two businesses and invested $600,000 in cash in a joint venture scrap facility in Cleveland, Ohio. These items were offset by $1.4 million in proceeds from the disposal of property and equipment and a decrease in other assets of $534,000. For the year ended December 31, 2011, we used $27.9 million in cash for investing activities. For the year ended December 31, 2011, we paid $26.2 million to purchase equipment and make capital improvements. We also paid $1.8 million to acquire a business and increases to other assets of $455,000. These items were offset by $578,000 in proceeds from the disposal of property and equipment.
For the year ended December 31, 2013, we used $8.2 million in financing activities. We received $42.9 million in proceeds from new borrowings, primarily from the term portion of the Financing Agreement entered into in November 2013 used to repurchase our 7% Convertible Notes. We also received $8.8 million in proceeds from our revolving credit facility. These amounts were offset by principal payments on debt of $52.8 million which included Note repurchases of $42.9 million and we paid $7.0 million in debt issue costs primarily related to the Financing Agreement. For the year ended December 31, 2012, we generated $1.0 million from financing activities. We received $9.6 million in proceeds from our revolving credit facility; $6.1 million in proceeds from other new borrowings and $36,000 in proceeds from the exercise of common stock options. These amounts were offset by principal payments on debt of $14.1 million and $564,000 in debt issue costs paid. For the year ended December 31, 2011, we used $2.6 million in financing activities. We received $13.0 million in proceeds from new borrowings and $542,000 in proceeds from the exercise of common stock options. These amounts were offset by principal payments on debt of $10.5 million, a reduction of $5.4 million in our outstanding revolving credit balance and $196,000 in debt issue costs paid.
Financing and Capitalization
Senior Credit Facilities:
On November 21, 2013, we entered into a Financing Agreement (the “Financing Agreement”) with a syndicate of lenders led by TPG Specialty Lending, Inc. (“TPG”), as agent. The new six-year agreement consists of senior secured credit facilities in the aggregate amount of $125.0 million, including a $65.0 million revolving line of credit and two term loan facilities totaling $60.0 million. The revolving line of credit provides for revolving loans that, in the aggregate, are not to exceed the lesser of $65.0 million or a “Borrowing Base” amount based on specified percentages of eligible accounts receivable and inventory and bear interest at the “Base Rate” (a rate determined by reference to the prime rate but in any event not less than 4.00%) plus 2.00% or, at our election, a LIBOR-based rate (the current LIBOR rate but in any event not less than 1.00%) plus 3.00% (an aggregate effective rate of 4.25% at December 31, 2013). The term loans bear interest at the Base Rate plus 7.50% or, at our election, the LIBOR-based rate plus 8.50% (an aggregate effective rate of 9.61% at December 31, 2013). We are subject to certain financial covenants, including maximum leverage, maximum capital expenditures and minimum availability, and are restricted from, among other things, paying cash dividends, repurchasing our common stock over certain stated thresholds, and entering into certain transactions without the prior consent of the lenders. Obligations under the Financing Agreement are secured by substantially all of our assets. The proceeds of the Financing Agreement were used to retire our revolving credit agreement with JPMorgan Chase Bank, N.A., and to repurchase $36.7 million in outstanding Convertible Notes. The remaining availability under the revolving portion of the Financing Agreement will be used for working capital and for general corporate purposes. The remaining availability under the term portion of the facility will be used to repurchase our Convertible Notes, including any that may be put us on June 30, 2014 under the terms of the Notes. At December 31, 2013, availability under the revolving portion of the Financing Agreement was $7.3 million and availability under the term portion of the facility was $20.0 million.
On March 2, 2010, we entered into a credit agreement dated as of February 26, 2010 (the “Credit Agreement”) with a syndicate of lenders led by JPMorgan Chase Bank, N.A and including RBS Business Capital and Capital One Leverage Finance Corp. Through a series of amendments up to and including the Ninth Amendment (“Ninth Amendment”) dated August 7, 2013, the Credit Agreement, as amended, provided for senior secured credit facilities consisting of a $90.0 million revolving line of credit and a small term loan. The
outstanding balance under the Credit Agreement at December 31, 2012 was $40.1 million at an effective interest rate of 4.50%. Upon the effectiveness of the Financing Agreement described in the preceding paragraph, we terminated the Credit Agreement with JPMorgan Chase Bank, N.A., and repaid outstanding indebtedness under the Credit Agreement in the aggregate principal amount of $44.2 million. Unamortized deferred financing costs related to the Credit Agreement of $310,000 were expensed. At December 31, 2012, the Company was not in compliance with the quarterly minimum EBITDA covenant of the Credit Agreement. We subsequently entered into an amendment to the Credit Agreement to reduce the covenant retroactively to establish compliance.
On December 12, 2011, we entered into an Equipment Finance Agreement (the “Equipment Finance Agreement”) with First Niagara Leasing, Inc. (“First Niagara”) providing up to $10.4 million. We used $6.6 million to repay an additional term loan provided under the Second Amendment to the Credit Agreement. The First Niagara loan is secured by our Buffalo, New York shredder and related equipment. Upon entering the Financing Agreement with TPG, we amended the Equipment Finance Agreement with First Niagara and adopted the covenants prescribed by the Financing Agreement. We also modified the maturity and repayment terms. The loan modification increased the required monthly payments from $110,000 to $141,000 and the maturity was shortened to coincide with the maturity of the Financing Agreement in November 2019. The interest rate under the First Niagara loan remains unchanged at 4.77% per annum. As of December 31, 2013 and 2012, the outstanding balance under the loan was $8.7 million and $9.6 million, respectively.
Senior Unsecured Convertible Notes Payable:
On April 23, 2008, we entered into a Securities Purchase Agreement with accredited investors (“Note Holders”) which provided for the sale of $100.0 million of Senior Unsecured Convertible Notes (the “Notes”) convertible into shares of our common stock (“Note Shares”). The initial and current conversion price of the Notes is $14.00 per share. The Notes bear interest at 7% per annum, payable in cash, and will mature in April 2028. In addition, the Notes contain (i) an optional repurchase right exercisable by the Note Holders on June 30, 2014 and the eighth and twelfth anniversaries of the date of issuance of the Notes, whereby each Note Holder will have the right to require the Company to redeem its Note at par and (ii) an optional redemption right exercisable by the Company beginning on May 1, 2011, the third anniversary of the date of issuance of the Notes, and ending on the day immediately prior to the sixth anniversary of the date of issuance of the Notes, whereby the Company shall have the option but not the obligation to redeem the Notes at a redemption price equal to 150% of the principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon, limited to 30% of the aggregate principal amount of the Notes as of the issuance date. From July 1, 2014, the Company shall have the option to redeem any or all of the Notes at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon.
As of December 31, 2013, the outstanding balance on the Notes was $23.2 million (net of $297,000 in unamortized discount related to the original fair value of warrants issued with the Notes). An optional repurchase right exercisable by the Note holders that becomes effective on June 30, 2014 would require the Company to redeem the Notes at par. Availability under the Financing Agreement provides liquidity to redeem the Notes should the Note Holders exercise their repurchase right. However, if we fail to meet certain covenants prescribed by the Financing Agreement, we may not be able to use the amounts available under the Financing Agreement to redeem the notes.
The Notes also contain (i) certain repurchase requirements upon a change of control, (ii) make-whole provisions upon a change of control, (iii) “weighted average” anti-dilution protection, subject to certain exceptions, (iv) an interest make-whole provision in the event that the Note Purchasers are forced to convert their Notes between the third and sixth anniversaries of the date of issuance of the Notes whereby the Note Purchasers would receive the present value (using a 3.5% discount rate) of the interest they would have earned had their Notes so converted been outstanding from such forced conversion date through the sixth anniversary of the date of issuance of the Notes, and (v) a debt incurrence covenant which limits our ability to incur debt under certain circumstances.
Convertible Note Repurchases
At various times during the year ended December 31, 2013, we repurchased an aggregate $45.3 million in Notes including $36.5 million in conjunction with the refinancing of our senior credit facility as described above. Total repurchases during the year resulted in a gain of $123,000, net of $1.8 million in unamortized deferred financing costs and $541,000 in unamortized warrant discount.
At various times during the year ended December 31, 2012, we repurchased an aggregate $7.3 million in convertible notes, in cash for $6.8 million, using proceeds of the revolving credit facility with JPMorgan Chase described above resulting in a gain of $63,000 net of $97,000 in unamortized warrant discount and $320,000 in unamortized deferred financing costs.
On September 28, 2011, we repurchased Convertible Notes totaling $5.0 million for $4.5 million using proceeds of the Chase revolver, resulting in a gain of $243,000, net of $69,000 in unamortized warrant discount and $226,000 in unamortized deferred financing costs.
All convertible notes surrendered in these repurchases were retired and cancelled.
Future Capital Requirements
As of December 31, 2013, we had $7.1 million in cash, availability under the revolver and term portion of the Financing Agreement of $7.3 million and $20.0 million, respectively. As of December 31, 2013, our current liabilities totaled $28.1 million. We expect to fund our current working capital needs, interest payments and capital expenditures with cash on hand and cash generated from operations, supplemented by borrowings available under our current Financing Agreement and potentially available elsewhere, such as vendor financing, manufacturer financing, operating leases and other equipment lines of credit that are offered to us from time to time. We may also access equity and debt markets for possible acquisitions, working capital and to restructure current debt.
Historically, the Company has entered into negotiations with its lenders when it was reasonably concerned about potential breaches and prior to the occurrences of covenant defaults. A breach of any of the covenants contained in lending agreements could result in default under such agreements. In the event of a default, a lender could refuse to make additional advances under the revolving portion of a credit facility, could require the Company to repay some or all of its outstanding debt prior to maturity, and/or could declare all amounts borrowed by the Company, together with accrued interest, to be due and payable. In the event that this occurs, the Company may be unable to repay all such accelerated indebtedness, which could have a material adverse impact on its financial position and operating performance.
At December 31, 2013, the outstanding balance of our Convertible Notes was $23.5 million. Availability under the term portion of our Financing Agreement was $20.0 million. We believe we will be able to redeem the balance of the Notes prior to or at the time the Note holders exercise their repurchase right with cash on hand, cash generated from operations, additional financing alternatives, the potential sale of non-core assets, or if necessary, accessing capital markets with a new debt or equity offering. However, if we fail to meet certain covenants prescribed by the Financing Agreement, we may not be able to use the amounts available under the Financing Agreement to redeem the notes. No assurance can be given that we will be able to redeem the Convertible Notes when they are put to us.
Off-Balance Sheet Arrangements
Other than operating leases, we do not have any significant off-balance sheet arrangements that are likely to have a current or future effect on our financial condition, result of operations or cash flows.
Acquisitions
As described in Note 2 to the financial statements, in the year ended December 31, 2013, we acquired substantially all of the operating assets of Furlow’s North East Auto, Inc. an automotive salvage and parts provider in North East, Pennsylvania; we acquired substantially all of the assets, including real property, of Segel and Son, Inc. a family-owned scrap iron and metal recycling business with facilities in Warren, Pennsylvania and Olean, New York; and we acquired certain accounts, equipment and a lease of certain real property from Three Rivers Scrap Metal, Inc. to operate a scrap metal recycling facility in the Greater Pittsburgh area in north suburban Conway, Beaver County, Pennsylvania.
In the year ended December 31, 2012, we acquired 100% of the outstanding capital stock of Skyway Auto Parts, Inc., an auto dismantler located in Buffalo, New York; we acquired substantially all of the assets, including real property, of Bergen Auto Recycling LLC., an auto dismantler located in Bergen, New York; and we formed a joint venture to operate a new scrap recycling facility in Cleveland, Ohio.
We will continue to seek opportunities to acquire smaller tuck-in operations on terms we deem favorable.
Capital Expenditures
At the end of 2012, we concluded a two-year plan of expansion via capital expenditure spending and made significant reductions in capital expenditure levels for 2013. For the year ended December 31, 2013, capital expenditures totaled $10.5 million which included $6.9 million for the purchase of equipment and vehicles used throughout our operations. The $3.6 million balance in capital expenditures for 2013 included facility improvements at several of our locations, including $934,000 in additions to our Western New York Shredder facility. For the year ended December 31, 2012, we made significant investments in our operations and expended $23.2 million on capital improvements and equipment. Our additions in 2012 included the purchase of the land and building and significant additions to the facility where our Texas PGM recycling facility operates in order to expand that operation into the traditional scrap metal market for a total of $3.7 million. We completed the Buffalo, New York shredder facility and added related support equipment at a total cost of $4.3 million. We also refurbished our shredder and made site improvements to our facility in Youngstown, Ohio, at a cost of $4.2 million.
Contingencies
We are involved in certain legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such other proceedings and litigation will not materially affect the Company’s consolidated financial position, results of operations, or cash flows.
The Company does not carry, and does not expect to carry for the foreseeable future, significant insurance coverage for environmental liability because the Company believes that the cost for such insurance is not economical. However, we continue to monitor products offered by various insurers that may prove to be practical. Accordingly, if the Company were to incur liability for environmental damage in excess of accrued environmental remediation liabilities, its consolidated financial position, results of operations, and cash flows could be materially adversely affected. The Company and its subsidiaries are at this time in material compliance with all of their pending remediation obligations.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial risk resulting from fluctuations in interest rates and commodity prices. We seek to minimize these risks through regular operating and financing activities.
Interest rate risk
We are exposed to interest rate risk on our floating rate borrowings. As of December 31, 2013, $83.9 million of our outstanding debt consisted of variable rate borrowings pursuant to the Financing Agreement entered into on November 21, 2013. Borrowings under the Financing Agreement bear interest at either, the prime rate of interest plus a margin or LIBOR plus a margin. Increases in either the prime rate or LIBOR may increase interest expense. Assuming our variable borrowings at December 31, 2013 were to equal the average borrowings under our Financing Agreement during a fiscal year, a hypothetical increase or decrease in interest rates by 1% would increase or decrease interest expense on our variable borrowings by approximately $248,000 per year due to interest rate floors on our variable rate debt with a corresponding change in cash flows. We have no open interest rate protection agreements as of December 31, 2013.
Commodity price risk
We are exposed to risks associated with fluctuations in the market price for both ferrous, non-ferrous, PGM and lead metals which are at times volatile. See the discussion under the section entitled “Risk Factors - The metals recycling industry is highly cyclical and export markets can be volatile” located in this Annual Report. We attempt to mitigate this risk by seeking to turn our inventories quickly as markets allow instead of holding inventories in anticipation of higher commodity prices. We use forward sales contracts with PGM substrate processors to hedge against the extremely volatile PGM metal prices. The Company estimates that if selling prices decreased by 10% in any of the business units in which it operates, there would not be a material write-down of any reported inventory values.
Foreign currency risk
International sales account for an immaterial amount of our consolidated net sales and all of our international sales are denominated in U.S. dollars. We also purchase a small percentage of our raw materials from international vendors and these purchases are denominated in local currencies. Consequently, we do not enter into any foreign currency swaps to mitigate our exposure to fluctuations in the currency rates.
Risk from Common Stock market price
We are exposed to risks associated with the market price of our own common stock. In connection with certain financings, we have issued warrants that can be “put” to us upon a change of control. We are required to use the value of our common stock as an input variable to determine the fair value of the liability associated with the put warrant. Fluctuations in the market price of our common stock have an effect on the liability. For example, if the price of our common stock was $1.00 higher as of December 31, 2013, the increase in our put warrant liability would not be material.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements data required by this Item 8 are set forth at the pages indicated at Item 15(a)(1).
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2013 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control - Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
The scope of management’s assessment of the effectiveness of internal control over financial reporting includes all of our businesses. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2013.
There were no material changes in our internal control over financial reporting during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The report called for by Item 308(a) of Regulation S-K is included herein as “Management’s Report on Internal Control Over Financial Reporting.”
At December 31, 2013, the Company is no longer considered an accelerated filer. Section 404(b) of the Sarbanes-Oxley Act requiring an Independent Registered Public Accounting Firm Report on Internal Control over Financial Reporting shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-29 under the Exchange Act.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Information required under this item is incorporated by reference from sections entitled “Proposal 1 - Election of Directors,” “Directors and Executive Officers,” “Board Committees,” “Compensation Committee Interlocks and Insider Participation,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Ethics” in our definitive proxy statement, which will be filed with the SEC before April 30, 2014.
Item 11.
Item 11. Executive Compensation
Information required under this item is incorporated by reference from sections entitled “Executive Compensation” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year End,” “Employment Agreements,” “Executive Bonus Plan,” “2006 Long-Term Incentive Plan”, “Compensation Committee Report,” and “Director Compensation” in our definitive proxy statement, which will be filed with the SEC before April 30, 2014.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required under this item is incorporated by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement, which will be filed with the SEC before April 30, 2014.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required under this item is incorporated by reference from the section entitled “Certain Relationships and Related Transactions” in our definitive proxy statement, which will be filed with the SEC before April 30, 2014.
Item 14.
Item 14. Principal Accounting Fees and Services
Information required under this item is incorporated by reference from the section entitled “Audit and Non-Audit Fees” in our definitive proxy statement, which will be filed with the SEC before April 30, 2014.
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a) FINANCIAL STATEMENTS
The following financial statements are included as part of this Form 10-K beginning on page:
(b) EXHIBITS
An Exhibit Index has been filed following the signatures to this Annual Report on Form 10-K and is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
METALICO, INC.
(Registrant)
By:
/S/ CARLOS E. AGÜERO
Carlos E. Agüero
Chairman, President and Chief Executive Officer
Date: March 17, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO FINANCIAL STATEMENTS
The following financial statements are included as part of this Form 10-K beginning on page:
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Metalico, Inc.
We have audited the accompanying consolidated balance sheets of Metalico, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive (loss) income, equity and cash flows for each of the three years in the period ended December 31, 2013. Metalico, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Metalico, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the results of the operations and the cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
/s/ CohnReznick LLP
Roseland, New Jersey
March 17, 2014
Metalico, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2013 and 2012
See Notes to Consolidated Financial Statements.
Metalico, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2013, 2012 and 2011
See Notes to Consolidated Financial Statements.
METALICO, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss) Income
Years Ended December 31, 2013, 2012 and 2011
See Notes to Consolidated Financial Statements.
Metalico, Inc. and Subsidiaries
Consolidated Statements of Equity
Years Ended December 31, 2013, 2012 and 2011
See Notes to Consolidated Financial Statements.
Metalico, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2013, 2012 and 2011
See Notes to Consolidated Financial Statements.
Metalico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
($ thousands, except per share data)
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of business: Metalico Inc. and subsidiaries (the “Company”) operates in two distinct business segments: (a) scrap metal recycling (“Scrap Metal Recycling”) and (b) lead metal product fabricating (“Lead Fabricating”). Its operating facilities as of December 31, 2013 include thirty-one scrap metal recycling facilities, including a combined aluminum de-oxidizing plant, and four lead product manufacturing and fabricating plants. The Company markets a majority of its products domestically but maintains several international customers.
Liquidity and Risk: The Company expects to fund current working capital needs, interest payments and capital expenditures through the next twelve months with cash on hand and cash generated from operations, supplemented by borrowings available under the current senior credit agreement and potentially available elsewhere, such as vendor financing or other equipment lines of credit. On November 21, 2013, the Company entered into a new six-year senior credit facility (as further described below in Note 9) with revolving and term components to replace their former revolving credit facility, repurchase a significant portion of the Company’s outstanding 7% Convertible Notes (the “Notes”) and to provide liquidity to retire any Notes subject to an optional repurchase right exercisable by the note holders that becomes effective on June 30, 2014 under which the Company would be required to redeem the Notes at par. At December 31, 2013, the outstanding balance of the notes was $23,469. Availability under the term portion of the current credit agreement was $20,000 subject to certain covenants. The Company believes it will be able to redeem the balance of the notes prior to or at the time the note holders exercise their repurchase right with cash on hand, cash generated from operations, additional financing alternatives, the potential sale of non-core assets, or if necessary, accessing capital markets with a new debt or equity offering. No assurance can be given that the Company will be able to secure the financing to redeem the Notes.
A summary of the Company’s significant accounting policies follows:
Use of estimates in the preparation of financial statements: The preparation of financial statements in conformity 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 their reported amounts of revenues and expenses during the reporting period. The Company uses estimates in determining the reported amounts for reserves for uncollectible accounts receivable and vendor advances, inventory, deferred income tax asset and intangible asset valuations, put warrant liability and stock-based compensation. Actual results could differ from those estimates.
Principles of consolidation: The accompanying financial statements include the accounts of Metalico, Inc. and its consolidated subsidiaries, which are comprised of those entities in which it has an investment equal to or more than 50%, or a controlling financial interest. A controlling financial interest exists when the Company holds an interest of less than 50% in an entity, but possesses (i) control over more than 50% of the voting rights by virtue of indirect ownership by certain officers and shareholders of the Company, (ii) the power to govern the entity’s most significant financial and operating policies by agreement or statute or ability to appoint management, (iii) the right to appoint or remove the majority of the board of directors, or (iv) the power to assemble the majority of voting rights at meetings of the board of directors or other governing body. All significant intercompany accounts and transactions have been eliminated.
Trade receivables: Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. Management determines the
allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The Company generally does not charge interest on past-due amounts or require collateral on trade receivables.
Concentration of credit risk: Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, money market mutual funds and trade receivables. At times, cash in banks is in excess of the FDIC insurance limit. The Company has not experienced any loss as a result of those deposits.
Inventories: Inventories are valued at the lower of cost or market determined on a first-in, first-out basis. A portion of operating labor and overhead costs has been allocated to inventory.
Property and equipment: Property and equipment are stated at cost. Depreciation, less estimated salvage value, is provided on a straight-line basis, over the estimated service lives of the respective classes of property and equipment ranging between 3 and 10 years for office furniture and fixtures, 3 and 10 years for vehicles, 2 and 20 years for machinery and equipment and 3 and 39 years for buildings and improvements.
Goodwill: The Company records as goodwill the excess of the purchase price over the fair value of identifiable net assets acquired. Accounting Standards Codification (“ASC”) prescribes a two-step quantitative process for impairment testing of goodwill, which is performed at least annually, or when the Company has determined that an event triggering impairment may have occurred. Prior to performing the two step quantitative process, the Company may perform a qualitative assessment to determine the likelihood that the fair value of any of its reporting units may be less than its respective carrying value. The first step in the qualitative assessment tests for impairment by comparing the estimated fair value of each reporting unit to its carrying value. The fair values of the reporting units are estimated by a 5 year discounted cash flows forecast plus an estimated terminal value. Forecasts of future cash flows are based on the Company’s best estimate of future net sales and operating expenses. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and its carrying value. The Company performs its annual analysis as of December 31 of each fiscal year.
Other intangible and other assets: Covenants not to compete are amortized on a straight-line basis over the terms of the agreements, not exceeding 5 years. Debt issue costs are amortized over the average term of the related credit agreement using the effective interest method. Supplier lists are amortized on a straight-line basis not to exceed 20 years and trademarks and know-how have indefinite lives and are therefore not amortized.
Impairment of long-lived assets: The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of definite-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are impaired, the impairment is recognized as the amount by which the carrying amount exceeds the estimated discounted fair value of the asset. Assets to be sold are reported at the lower of the carrying amount or the fair value less costs to sell. Indefinite-lived assets are tested for impairment annually or when impairment is suspected by a comparison of the carrying amount of the asset to the net present value of future cash flows expected to be generated by the asset.
Equity method of accounting: The Company accounts for its unconsolidated investees using the equity method of accounting. Under the equity method, the investment is carried at cost of acquisition, plus the Company’s equity in undistributed earnings or losses since acquisition, less distributions received since acquisition. Equity in the losses of the unconsolidated investee is recognized according to the Company’s percentage ownership in the unconsolidated investee until the Company contributed capital has been fully depleted. Reserves are provided where management determines that the investment or equity in earnings is not realizable. Changes in equity in undistributed earnings or losses since acquisition are reflected in financial and other income (expense) in the consolidated statements of operations.
Income taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits and penalties in income tax expense.
Revenue recognition: Revenue from product sales is recognized as goods are shipped, which generally is when title transfers and the risks and rewards of ownership have passed to customers, based on free on board (“FOB”) terms. Brokerage sales are recognized upon receipt of materials by the customer and reported net of costs in product sales. Historically, there have been very few sales returns and adjustments in excess of reserves for such instances that would impact the ultimate collection of revenues; therefore, no material provisions have been made when a sale is recognized.
Derivative financial instruments: All derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings).
Stock-based compensation: For employee stock options, the Company calculates the fair value of the award on the date of grant using the Black-Scholes method and recognizes that expense over the service period for awards expected to vest. The fair value of restricted stock awards is determined based on the number of shares granted and the average of the high and low quoted market price of the Company’s common stock on the date of grant. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
Environmental remediation costs: The Company is subject to comprehensive and frequently changing Federal, state and local environmental laws and regulations, and will incur additional capital and operating costs in the future to comply with currently existing laws and regulations, new regulatory requirements arising from recently enacted statutes, and possible new statutory enactments. The Company accrues losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recorded no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.
Determining (a) the extent of remedial actions that are or may be required, (b) the type of remedial actions to be used, (c) the allocation of costs among potentially responsible parties (“PRPs”) and (d) the costs of making such determinations, on a site-by-site basis, require a number of judgments and assumptions and are inherently difficult to estimate. The Company utilizes certain experienced consultants responsible for site monitoring, third party environmental specialists, and correspondence and progress reports obtained from the various regulatory agencies responsible for site monitoring to estimate its accrued environmental remediation costs. The Company generally contracts with third parties to fulfill most of its obligations for remedial actions. The time period
necessary to remediate a particular site may extend several years, and the laws governing the remediation process and the technology available to complete the remedial action may change before the remedial action is complete. Additionally, the impact of inflation and productivity improvements can change the estimates of costs to be incurred. It is reasonably possible that technological, regulatory or enforcement developments, the results of environmental studies, the nonexistence or inability of other PRPs to contribute to the settlements of such liabilities or other factors could necessitate the recording of additional liabilities which could be material. The majority of the Company’s environmental remediation accrued liabilities are applicable to its now discontinued secondary lead smelting operations.
Earnings (loss) per common share: Basic earnings (loss) per share (“EPS”) data has been computed on the basis of the weighted-average number of common shares outstanding during each period presented. Diluted EPS data has been computed on the basis of the assumed conversion, exercise or issuance of all potential common stock instruments, unless the effect is to reduce the loss or increase the net income per common share.
Note 2. Business Acquisitions and Dissolution
Business acquisition (scrap metal recycling segment): On December 23, 2013, the Company, through its Goodman Services, Inc. subsidiary, acquired substantially all of the operating assets of Furlow’s North East Auto, Inc. an automotive salvage and parts provider in North East, Pennsylvania. Closing on the real property was completed on March 3, 2014. The Company plans to grow the facility’s salvage car buying capabilities and continue its “pick-and-pull” auto parts business while taking advantage of additional access to scrap metal to feed its shredder in suburban Buffalo, New York. The purchase price was paid using cash provided under the Company’s Financing Agreement and notes payable to the sellers. The allocation of the purchase price did not result in any goodwill. Unaudited pro forma results are not presented as they are not material to the Company’s overall consolidated financial statements.
Business acquisition (scrap metal recycling segment): On July 23, 2013, the Company, through its Goodman Services, Inc. subsidiary, acquired substantially all of the assets, including real property, of Segel & Son, Inc. a family-owned scrap iron and metal recycling business with facilities in Warren, Pennsylvania and Olean, New York. The acquisition provides a source of feedstock material for the Company’s shredder facility located nearby in suburban Buffalo. The purchase price was paid using cash provided under the Company’s Credit Agreement. The allocation of the purchase price resulted in a bargain purchase gain of $105 (net of $67 in deferred income taxes) and no goodwill was recorded. The Company also issued common stock valued at $25 to a former Segel officer as an inducement to enter into a one-year employment agreement. Unaudited pro forma results are not presented as they are not material to the Company’s overall consolidated financial statements.
Business acquisition (scrap metal recycling segment): On February 4, 2013, the Company, through its Metalico Pittsburgh subsidiary, acquired certain accounts, equipment and a lease of certain real property from Three Rivers Scrap Metal, Inc. to operate a scrap metal recycling facility in the Greater Pittsburgh area in north suburban Conway, Beaver County, Pennsylvania. The acquisition provides a source of feedstock material for the Company’s shredder facility located nearby on Neville Island in Pittsburgh. The purchase price was paid using cash provided under the Company’s Credit Agreement. The financial statements include a final purchase price allocation which did not result in the recording of any goodwill. Unaudited pro forma results are not presented as they are not material to the Company’s overall consolidated financial statements.
Business acquisition (scrap metal recycling segment): On December 6, 2012, the Company, through its Metalico Rochester subsidiary, acquired substantially all of the assets, including real property, of Bergen Auto Recycling LLC., an auto dismantler located in Bergen, New York. The acquisition provides a source of feedstock material for the Company’s shredder facility located nearby in suburban Buffalo. The purchase price was paid using cash provided under the Company’s credit agreement. The Company also assumed a mortgage secured by the real property in the amount of $373. The financial statements include a purchase price allocation which included a non-compete agreement valued at $42 and $123 of goodwill. The goodwill will be deductible for income tax purposes. Unaudited pro forma results are not presented as they are not material to the Company’s overall consolidated financial statements.
Joint Venture (scrap metal recycling segment): On December 5, 2012, the Company formed a joint venture with JBI Scrap Processors, Inc. (“JBI”), a scrap metal recycling company in Cleveland, Ohio. The Company invested $1,200, comprised of $600 in cash and $600 in Company stock, issuable in six monthly $100 installments to the principals of JBI, for a 50.1% interest in the venture. The initial assets of the venture consisted of the heavy iron and steel ferrous scrap metal supplier list of JBI, valued at $1,200. The principal of JBI has entered into an employment agreement and manages the day-to-day operations. The Company has deemed to have purchased the supplier list from JBI and contributed it to the joint venture in exchange for its member interest in the joint venture. The principal of JBI has entered into a non-compete covenant, also valued at $1,200 in exchange for its member interest in the joint venture.
Business acquisition (scrap metal recycling segment): On February 29, 2012, the Company acquired 100% of the outstanding capital stock of Skyway Auto Parts, Inc., an auto dismantler located in Buffalo, New York. The acquisition provides a source of feedstock material for the Company’s shredder facility located nearby in suburban Buffalo. The purchase price was paid entirely in cash using a drawdown under the Company’s credit agreement. The financial statements include a purchase price allocation which resulted in $603 of goodwill. The goodwill will not be deductible for income tax purposes. Unaudited pro forma results are not presented as they are not material to the Company’s overall consolidated financial statements.
Business dissolution (scrap metal recycling segment): On April 1, 2013, the Company’s Joint Venture operations in Ithaca, New York automatically terminated under the terms of the joint venture agreement. On September 6, 2013, upon final dissolution, the Company recorded a gain of $348 that is reported in other income for the year ended December 31, 2013.
Note 3. Major Customer
Revenues for the years ended December 31, 2013, 2012 and 2011, includes net revenues to the following customer together with the trade receivables due from such customer as of December 31, 2013 and 2012. No other customer accounted for more than 10% of total revenues in any year presented.
Note 4. Inventories
Inventories as of December 31, 2013 and 2012 were as follows:
Note 5. Property and Equipment
Property and equipment as of December 31, 2013 and 2012 consisted of the following:
For the year ended December 31, 2013, the Company did not capitalize any interest expense. For the year ended December 31, 2012, the Company capitalized interest expense of $85 related to facility construction projects.
Note 6. Goodwill
The Company’s goodwill resides in multiple reporting units. The carrying amount of goodwill is tested annually as of December 31 or whenever events or circumstances indicate that impairment may have occurred. In 2013, the Company experienced significantly lower commodity prices than was forecasted in the previous year‘s impairment analysis. When comparing actual year-to-date operating results to forecast for most reporting units in its Scrap Metal Recycling segment, the Company’s operating results differed significantly enough to determine that impairment to the carrying value of its goodwill was probable. The Company has also experienced an extended period in which the carrying value of its shareholders’ equity materially exceeded its market capitalization value. Based on these factors, the Company performed an interim goodwill impairment test at September 30, 2013 for all of its reporting units. As a result of the impairment tests performed, the Company recorded a goodwill impairment charge of $32,330 to several reporting units in its Scrap Metal Recycling segment. At December 31, 2013, in its annual impairment test, the Company did not identify any additional impairment. At December 31, 2012, in its annual impairment test, the Company determined that the fair value of its Akron, Ohio and Pittsburgh scrap metal recycling reporting units did not exceed their respective carrying values resulting in goodwill impairment charges of $3,494 for the Akron, Ohio reporting unit and $3,674 for its Pittsburgh reporting unit. Additionally, the Company determined it would terminate its Ithaca, New York, joint venture agreement upon its expiration on April 1, 2013, resulting in an additional impairment charge of $303.
Changes in the carrying amount of goodwill, by segment, for the years ended December 31, 2013 and 2012 were as follows:
Changes in the cumulative amount of impairment charges to goodwill, by segment, for the year ended December 31, 2013 were as follows:
Adverse changes in general economic and market conditions and future volatility in the equity and credit markets could have further impact on the Company’s valuation of its reporting units and may require the Company to assess the carrying value of its remaining goodwill and other intangibles prior to normal annual testing dates.
Note 7. Other Intangible Assets
The Company tests all finite-lived intangible assets and other long-lived assets, such as fixed assets, for impairment only if circumstances indicate that possible impairment exists. Estimated useful lives of intangible assets are determined by reference to both contractual arrangements such as non-compete covenants and current and projected cash flows for supplier lists.
Based on the comparison of year-to-date operating results to forecast and the degree to which those results differed from forecast, the Company performed an interim impairment test on all of its intangible assets at September 30, 2013. As a result of the testing, the Company recorded an impairment charge of $5,307 to write-down the carrying value of a supplier list at its Akron, Ohio Scrap Recycling Reporting Unit. As indicated above, actual operating results for the nine months ended September 30, 2013 differed materially from forecasted results due primarily to lower commodity prices than was anticipated. The Company also recorded an impairment charge of $1,100 to a trade name that the Company no longer expects to use. At December 31, 2013, no adjustments were made to the estimated lives of finite-lived assets. During 2012, no indicators of impairment were identified other than for a $100 impairment of a trade name, and no adjustments were made to the estimated lives of finite-lived assets. Other intangible assets as of December 31, 2013 and 2012 consisted of the following:
The changes in the net carrying amount of amortized intangible and other assets by classifications for the years ended December 31, 2013 and 2012 were as follows:
Amortization expense recognized on all amortizable intangible assets totaled $3,063, $2,817 and $2,700 for the years ended December 31, 2013, 2012 and 2011, respectively. Estimated aggregate amortization expense on amortizable intangible and other assets for each of the next five years and thereafter is as follows:
Note 8. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of December 31, 2013 and 2012 consisted of the following:
Note 9. Pledged Assets, Short-Term Debt, Long-Term Debt and Warrants
On November 21, 2013, the Company entered into a Financing Agreement (the “Financing Agreement”) with a syndicate of lenders led by TPG Specialty Lending, Inc. (“TPG”), as agent. The new six-year agreement consists of senior secured credit facilities in the aggregate amount of $125,000, including a $65,000 revolving line of credit and two term loan facilities totaling $60,000. The revolving line of credit provides for revolving loans which, in the aggregate, are not to exceed the lesser of $65,000 or a “Borrowing Base” amount based on specified percentages of eligible accounts receivable and inventory and bear interest at the “Base Rate” (a rate determined by reference to the prime rate but in any event not less than 4.00%) plus 2.00% or, at the Company’s election, a LIBOR-based rate (the current LIBOR rate but in any event not less than 1.00%) plus 3.00% (an aggregate effective rate of 4.25% at December 31, 2013). The term loans bear interest at the Base Rate plus 7.50% or, at the Company’s election, the LIBOR-based rate plus 8.50% (an aggregate effective rate of 9.61% at December 31, 2013) and deferred financing costs are being amortized over the term of the Financing Agreement. The Company is subject to certain financial covenants, including maximum leverage, maximum capital expenditures and minimum availability, and is restricted from, among other things, paying cash dividends, repurchasing its common stock over certain stated thresholds, and entering into certain transactions without the prior consent of the lenders. Obligations under the Financing Agreement are secured by substantially all of the Company’s assets. The proceeds of the Financing Agreement were used to retire the Company’s revolving credit agreement with JPMorgan Chase Bank, NA, Inc., and to repurchase $36,741 of the Company’s Notes. The remaining availability under the revolving portion of the Financing Agreement will be used for working capital and for general corporate purposes. The remaining availability under the term portion of the facility will be used to repurchase the Company’s Notes including any that may be put to the Company on June 30, 2014 under the terms of the Notes. At December 31, 2013, availability under the revolving portion of the Financing Agreement was $7,251 and availability under the term portion of the facility was $20,000.
Listed below are the material debt covenants as prescribed by the Financing Agreement.
Maximum Leverage Ratio - ratio of total debt to trailing four-quarter EBITDA at December 31, 2013 must not exceed covenant:
Maximum Leverage Ratios under the Financing Agreement for the next four quarterly periods are as follows:
Maximum Consolidated Capital Expenditures - capital expenditures for the quarter ended December 31, 2013 must not exceed covenant:
On March 2, 2010, the Company entered into a credit agreement dated as of February 26, 2010 (the “Credit Agreement”) with a syndicate of lenders led by JPMorgan Chase Bank, N.A and including RBS Business Capital and Capital One Leverage Finance Corp. Through a series of amendments up to and including the Ninth Amendment (“Ninth Amendment”) dated August 7, 2013, the Credit Agreement, as amended, provided for senior secured credit facilities consisting of a $90,000 revolving line of credit (the “Revolver”) and a small term loan. The outstanding balance under the Credit Agreement at December 31, 2012 was $40,100 at an effective
interest rate of 4.50%. Upon the effectiveness of the Financing Agreement described in the preceding paragraph, the Company terminated the Credit Agreement with JPMorgan Chase Bank, NA, Inc. and repaid outstanding indebtedness under the Credit Agreement in the aggregate principal amount of $44,168. Unamortized deferred financing costs related to the Credit Agreement of $310 and were expensed. At December 31, 2012, the Company was not in compliance with the quarterly minimum EBITDA covenant of the Credit Agreement. The Company subsequently entered into an amendment to the Credit Agreement to retroactively reduce the covenant to establish compliance. The Credit Agreement was terminated upon the effectiveness of the Financing Agreement with TPG described above.
On December 12, 2011, the Company entered into an Equipment Finance Agreement (the “Equipment Finance Agreement”) with First Niagara Leasing, Inc. (“First Niagara”) providing up to $10,418. The Company used $6,585 to repay an additional term loan provided under the Second Amendment to the Credit Agreement. The loan is secured by the Buffalo, New York shredder and related equipment. Upon entering the Financing Agreement with TPG, the Company and First Niagara entered into an amendment adopting the covenants prescribed by the Financing Agreement and modifying the maturity and repayment terms. The loan modification shortened the First Niagara maturity to coincide with the maturity of the Financing Agreement in November 2019 and accordingly increased the required monthly payments from $110 to $141. The interest rate under the loan remains unchanged at 4.77% per annum. As of December 31, 2013 and 2012, the outstanding balance under the loan was $8,708 and $9,615, respectively.
Senior Unsecured Convertible Notes Payable
On April 23, 2008, the Company entered into a Securities Purchase Agreement with accredited investors (“Note Purchasers”) which provided for the sale of $100,000 of Senior Unsecured Convertible Notes convertible into shares of the Company’s common stock (“Note Shares”). The Notes are convertible to common stock at all times. The initial and current conversion price of the Notes is $14.00 per share. The Notes bear interest at 7% per annum, payable in cash, and will mature in April 2028. In addition, the Notes contain (i) an optional repurchase right exercisable by the Note holders on the sixth, eighth and twelfth anniversary of the date of issuance of the Notes, whereby each Note holder will have the right to require the Company to redeem the Notes at par and (ii) an optional redemption right exercisable by the Company which began on May 1, 2011, the third anniversaries of the date of issuance of the Notes, and ends on the day immediately prior to the sixth anniversary of the date of issuance of the Notes, whereby the Company shall have the option but not the obligation to redeem the Notes at a redemption price equal to 150% of the principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon, limited to 30% of the aggregate principal amount of the Notes as of the issuance date, and from and after the sixth anniversary of the date of issuance of the Notes, the Company shall have the option to redeem any or all of the Notes at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon. An optional repurchase right exercisable by the note holders that becomes effective on June 30, 2014 would require the Company to redeem the Notes at par and would otherwise require classification of the Notes as a short term obligation. However, availability under the Financing Agreement provides liquidity to redeem the Notes permitting long-term classification.
The Notes also contain (i) certain repurchase requirements upon a change of control, (ii) make-whole provisions upon a change of control, (iii) “weighted average” anti-dilution protection, subject to certain exceptions, (iv) an interest make-whole provision in the event that the Note Purchasers are forced to convert their Notes between the third and sixth anniversary of the date of issuance of the Notes whereby the Note Purchasers would receive the present value of the interest they would have earned had their Notes so converted been outstanding from such forced conversion date through the sixth anniversaries of the date of issuance of the Notes, and (v) a debt incurrence covenant which limits the ability of the Company to incur debt, under certain circumstances.
Listed below is the material debt limit as prescribed by the Notes.
Consolidated Funded Indebtedness to trailing twelve month EBITDA must not exceed covenant.
The occurrence of a Consolidated Funded Indebtedness ratio in excess of 3.50 to 1.00 is not a default under the Notes. However, until such time as the Consolidated Funded Indebtedness ratio falls below 3.50 to 1.00, the Company will be restricted from directly or indirectly incurring, guaranteeing or assuming any indebtedness other than “Permitted Indebtedness” (as described under the Notes). “Permitted Indebtedness” includes indebtedness under the Financing Agreement, capital leases, equipment notes secured by the underlying equipment leased or purchased, and indebtedness subordinated to the Convertible Notes.
Convertible Note Purchases
At various times during the year ended December 31, 2013, the Company repurchased an aggregate $45,341 in Notes including $36,741 in conjunction with the refinancing of its senior credit facility as described above. Total repurchases during the year resulted in a gain of $123, net of $1,788 in unamortized deferred financing costs and $541 in unamortized warrant discount.
At various times during the year ended December 31, 2012, the Company repurchased an aggregate $7,300 in convertible notes, in cash for $6,820, using proceeds of the Revolver described above resulting in a gain of $63, net of $320 in unamortized deferred financing costs and $97 in unamortized warrant discount.
On September 28, 2011, the Company repurchased convertible notes totaling $5,000 for $4,463 using proceeds of the Revolver described above resulting in a gain of $243, net of $68 in unamortized warrant discount and $226 in unamortized deferred financing costs.
As of December 31, 2013 and 2012, the outstanding balance on the Notes was $23,172 and $67,927, respectively (net of $297 and $883, respectively, in unamortized discount related to the original fair value of warrants issued with the Notes).
Aggregate annual maturities, excluding discounts, required on all debt outstanding as of December 31, 2013 are as follows:
Note 10. Accumulated Other Comprehensive Loss
Other comprehensive income (loss) for the years ended December 31, 2013, 2012 and 2011 of $77, $(15) and $(119), net of income tax (expense) benefit of $(41), $9 and $63, respectively is due to changes in the funded status of the defined benefit pension plan.
The components of accumulated other comprehensive loss, net of income tax, as of December 31, 2013 and 2012 of $372 and $449, respectively represents the funded status of the defined benefit pension plan.
Note 11. Capital Stock
Capital stock voting rights, par value, dividend features and authorized, issued and outstanding shares are summarized as follows as of December 31, 2013 and 2012:
Each outstanding share of common stock entitles the record holder to one vote on all matters submitted to a vote of the Company’s shareholders. Common shareholders are also entitled to dividends when and if declared by the Company’s Board of Directors.
The Board of Directors of Metalico, Inc. is authorized to issue preferred stock from time to time in one or more classes or series thereof, each such class or series to have voting powers (if any), conversion rights (if any), dividend rights, dividend rate, rights and terms of redemption, designations, preferences and relative, participating, optional or other special rights and privileges, and such qualifications, limitations or restrictions thereof, as shall be determined by the Board and stated and expressed in a resolution or resolutions of the Board providing for the issuance of such preferred stock. The Board is further authorized to increase (but not above the total number of authorized shares of the class) or decrease (but not below the number of shares of any such series then outstanding) the number of shares in any series, the number of which was fixed by it, subsequent to the issuance of shares of such series then outstanding, subject to the powers, preferences, and rights, and the qualifications, limitations, and restrictions of such preferred stock stated in the resolution of the Board originally fixing the number of shares of such series.
Stock Purchase Warrants
In conjunction with the issuance of the Notes in May 2008, Note Purchasers were issued a total of 250,000 warrants for shares of the Company’s common stock at an exercise price of $14.00 per share (subject to adjustment) with a term of six years. The Company also issued warrants to purchase 1,169,231 shares of the Company’s common stock at an exercise price of $12.65 per share (subject to adjustment) with a term of six years in connection with a private placement of the Company’s common stock in March 2008. Both sets of warrants (the “Put Warrants”) provide that, in the event of a change of control, at the request of the holder delivered before the ninetieth (90th) day after the consummation of such change in control, the Company (or its successor entity) shall purchase the warrant from the requesting holder by paying the holder, within five (5) days of such request (or, if later, on the effective date of the change of control), cash in an amount equal to the Black-Scholes value of the remaining unexercised portion of the Put Warrants on the date of such change of control. At December 31, 2013, all 1,419,231 warrants were outstanding.
These warrants are accounted for as long-term liabilities and marked-to-market each balance sheet date with a charge or credit to “Financial instruments fair value adjustments” in the consolidated statements of operations. At each balance sheet date, any change in the calculated fair market value of the warrant obligations must be recorded as additional other expense or income.
At December 31, 2013 and 2012, the estimated fair value of the liability related to the outstanding Put Warrants was $0 and $3, respectively. The change in fair value of the warrant liability resulted in income of $3, $196 and $3,586 for the years ended December 31, 2013, 2012 and 2011, respectively. See Note 21 regarding fair value measurements. Any recorded liability existing at the date of exercise or expiration would be reclassified as an increase in additional paid-in capital.
Note 12. Income Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are presented below:
The net change in the total valuation allowance was an increase of $658 and $17 in 2013 and 2012, respectively. The valuation allowance at December 31, 2013 was primarily related to state tax credits, state net operating loss carryforwards, and certain investments that, in the judgment of management, are not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2013. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
At December 31, 2013, the Company has net operating loss carryforwards for state income tax purposes of $69,157 which will expire, if unused, in 2013 through 2033. $1,932 will expire in 2013, $18,544 will expire between 2014 and 2016, and $48,681 will begin to expire after 2016.
At December 31, 2013, the Company has credit carryforwards for state income tax purposes of $2,176 which have an indefinite life.
The provision (benefit) for income taxes for the years ended December 31, 2013, 2012 and 2011 consisted of the following:
The income tax (benefit) provision differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pretax income (loss) for the years ended December 31, 2013, 2012 and 2011, due to the following:
A reconciliation of the beginning and ending amount of total unrecognized tax benefits for the years ended December 31, 2013 and 2012 is as follows:
Included in the balance of total unrecognized tax benefits at December 31, 2013 are potential benefits of $114 that if recognized, would affect the effective tax rate.
The Company, including its domestic subsidiaries, files consolidated federal and state income tax returns. For years before 2008, the Company is no longer subject to federal or state income tax examinations. The New York Department of Revenue concluded their examination of the Company’s income tax returns for 2006 to 2009. The outcome of the New York audits did not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. The Internal Revenue Service concluded their examination of the Company’s income tax returns for 2008 and 2009 in 2012 and proposed no adjustments. The Company does not expect a significant change in the uncertain tax positions in the next twelve months.
Interest expense recognized related to uncertain tax positions amounted to $21 in 2013, $16 in 2012 and $103 in 2011, and penalties amounted to $3 in 2013, $31 in 2012 and $116 in 2011. Total interest and penalties expensed for the year ended December 31, 2013 was $24 and were included in income tax expense.
Note 13. Stock-Based Compensation Plans
The Company established the 2006 Long-Term Incentive Plan (the “2006 Plan”) which allows for a number of shares of the Company’s common stock equal to up to 10% of the total issued and outstanding amount of common shares and common share equivalents to be issued upon the exercise of stock based awards granted to officers, consultants, board members and certain other employees from time to time. The purpose of the 2006 Plan is to attract and retain qualified individuals and to align their interests with those of the stockholders by providing certain employees of the Company and its affiliates and members of the Board with the opportunity to receive stock-based and other long-term incentive grants. The 2006 Plan is administered by the Compensation Committee of the Board of Directors. Awards may be granted in various forms, including options, warrants, appreciation rights, restricted stock and common stock and are granted based upon several factors, including seniority, job duties and responsibilities, job performance and overall Company performance. Awards vest over a period as determined by the Compensation Committee.
Stock Options
Under the terms of the 2006 Plan, officers, consultants and other employees may be granted awards to purchase common stock at exercise prices set on the date an award is granted and as determined by the Compensation Committee of the Board of Directors. Awards issued under the 2006 Plan generally vest ratably over three years and are exercisable for up to five years from the date of grant. The Company receives no monetary consideration for the granting of stock-based awards pursuant to the 2006 Plan. However, it receives the option price for each share issued to grantees upon the exercise of the options.
A summary of the status of the fixed stock option awards at December 31, 2013, 2012 and 2011, and changes during the years ended on those dates are as follows:
(a) As of December 31, 2013, there was $3 of unrecognized compensation costs related to nonvested stock options that is expected to be recognized over a weighted-average period of 2.4 years. The total fair value of options vested during the year ended December 31, 2013 was $331.
For the years ended December 31, 2013, 2012 and 2011, the fair value of each option award was estimated at the grant date using the Black-Scholes method with the following assumptions for grants:
(1) Based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options.
(2) The expected life of stock options is estimated based on historical experience.
(3) Expected volatility is based on the average of historical volatility determined by observing actual prices of the Company’s stock over a period commensurate with the expected life of the awards.
A further summary about awards outstanding at December 31, 2013, was as follows:
Stock options outstanding that have vested, are expected to vest and are not expected to vest as of December 31, 2013 were as follows:
At December 31, 2013, there were 639 options with an intrinsic value of less than $1 based on the closing price of the Company’s common stock on December 31, 2013 of $2.07.
Deferred Stock
Deferred stock awards granted vest and are issued ratably over a three-year period from the date of grant. A summary of the status of the nonvested fixed deferred stock awards at December 31, 2013, 2012 and 2011, and changes during the years ended on those dates is as follows:
As of December 31, 2013, there was $418 of unrecognized compensation costs related to nonvested stock awards that is expected to be recognized over a weighted-average period of 1.8 years.
Note 14. Pension Plans
At December 31, 2013, the Company has two defined-contribution 401(k) pension plans, one for employees not covered by a collective bargaining agreement (Non-union), and one for employees at its Granite City, Illinois plant covered by a collective bargaining agreement (Union). The plans offer substantially all employees a choice to elect to make contributions pursuant to salary reduction agreements upon attaining certain age and length-of-service requirements. Under the Non-union plan, the Company may make matching contributions on behalf of the participants of the plan up to a maximum percentage of a participant’s compensation as defined by the plan. For the years ended December 31, 2013 and 2012, the Company made matching contributions of 2% in each year respectively to the Non-union plan. Under the Union plan, and in accordance with its labor contract that covers the Company’s union employees at the Granite City, Illinois plant, Company contributions are required based on a specified rate per month. For the Union plan, the Company matched participant contributions up to the maximum required under the union collective bargaining agreement. The Non-union and Union plans also provide a profit sharing component where the Company can make a discretionary contribution to the plans, which is allocated based on the compensation of eligible employees. No profit sharing contributions were made
for 2013, 2012 and 2011. Company matching and profit-sharing contributions are subject to vesting schedules, and forfeitures are applied to reduce Company contributions. Participants are immediately vested in their elective contributions. Combined 401(k) and pension expense for the years ended December 31, 2013, 2012 and 2011 was $361, $422 and $290, respectively.
In connection with a 2004 business acquisition, the Company assumed plan sponsorship of a frozen defined benefit pension plan at the Granite City, Illinois plant covering substantially all hourly employees at such location. The Company uses a December 31 measurement date for the defined benefit pension plan.
Information relative to this defined benefit pension plan, as of and for the years indicated, is presented as follows:
Obligations and Funded Status
The expected long-term rate of return on plan assets for determining net periodic pension cost for each fiscal year is chosen by the Company from a best estimate range determined by applying anticipated long-term returns and long-term volatility for various asset categories to the target asset allocation of the defined benefit pension plan, as well as taking into account historical returns.
Using the asset allocation policy as currently in place for the defined benefit pension plan (60% in total equity securities - 45% large/mid cap stocks and 15% small cap stocks; 40% in fixed income securities), the Company determined the expected rate of return at a 50% probability of achievement level based on forward-looking rate of return expectations for passively-managed asset categories over a 20-year time horizon which produced an expected rate of return of 6.67% which was rounded to 7.00%.
Plan Assets
For the purposes of fair value measurement, all plan assets are considered to be Level 1, having quoted prices in active markets.
Cash Flows
The Company expects to contribute approximately $77 to its defined benefit pension plan in the year ended December 31, 2014.
The following benefit payments are expected to be paid:
Note 15. Lease Commitments
The Company leases administrative and operations space under non-cancelable operating lease agreements that expire between 2014 and 2021, and require various minimum annual rentals. In addition, certain leases also require the payment of property taxes, normal maintenance, and insurance on the properties. The Company also leases certain vehicles and equipment under non-cancelable operating lease agreements that expire between 2014 and 2018.
The approximate minimum rental commitment as of December 31, 2013, excluding executory costs, is due as follows:
Total rental expense for the years ended December 31, 2013, 2012, and 2011, was $2,711, $ 2,627 and $2,689, respectively.
Note 16. Other Commitments and Contingencies
Environmental Remediation Matters
The Company formerly conducted secondary lead smelting and refining operations in Tennessee. Those operations ceased in 2003. The Company also sold substantially all of the lead smelting assets of its former Gulf Coast Recycling (“GCR”) subsidiary, in Tampa, Florida in 2006.
As of December 31, 2013 and 2012, estimated remaining environmental monitoring costs reported as a component of accrued expenses were $870 and $943, respectively. No further remediation is anticipated. Of the $870 accrued as of December 31, 2013, $109 is reported as a current liability and the remaining $761 is estimated to be paid as follows: $70 from 2015 through 2017, $75 from 2018 through 2019 and $616 thereafter. These costs primarily include the post-closure monitoring and maintenance of the landfills at the former lead facilities in Tennessee, and Tampa, Florida. While changing environmental regulations might alter the accrued costs, management does not currently anticipate a material adverse effect on estimated accrued costs.
The Company and its subsidiaries are at this time in material compliance with all of their obligations under all pending consent orders in College Grove, Tennessee and the greater Tampa area.
The Company does not carry, and does not expect to carry for the foreseeable future, significant insurance coverage for environmental liability because the Company believes that the cost for such insurance is not economical. Accordingly, if the Company were to incur liability for environmental damage in excess of accrued environmental remediation liabilities, its financial position, results of operations, and cash flows could be materially adversely affected. The Company and its subsidiaries are at this time in material compliance with all of their pending remediation obligations.
The Company does not believe compliance with environmental regulations will have a material impact on earnings or its competitive position.
Employee Matters
As of December 31, 2013, approximately 8% of the Company’s workforce was covered by collective bargaining agreements at two of the Company’s operating facilities. Forty-three employees located at the Company’s Lead Fabricating facility in Granite City, Illinois were represented by the United Steelworkers of America and twenty employees located at the scrap processing facility in Akron, Ohio were represented by the Chicago and Midwest Regional Joint Board. The agreement with the United Steelworkers of America expires on March 15, 2014 and the Company is currently in contract negotiations with the United Steel workers. The agreement with the Joint Board expires on June 25, 2014. The Company expects both contracts to be renewed on terms acceptable to the Company.
Aggregate retirement plan contributions for union employees for the years ended December 31, 2013, 2012 and 2011 amounted to $108, $102 and $71, respectively.
Other Matters
The Company is involved in certain other legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such other proceedings and litigation will not materially affect the Company’s financial position, results of operations, or cash flows.
Note 17. Segment Reporting
The Company currently aggregates its operating segments into two reportable segments - Scrap Metal Recycling and Lead Fabricating. The operating segments (and their respective processing facilities) within each reportable segment are economically similar in regards to the nature of their products, services, customers, processing operations, distribution methods, regulatory environment and financial results. Prior to January 1, 2013, the Company considered three certain operating segments as part of a third reportable segment - PGM and Minor Metals - because the facilities in these operating segments had exclusively processed or dealt with these more unique metal types. However, starting in mid-2012, the Company upgraded some of these facilities such that they now also process a wider range of metals including those routinely processed by the Company’s other scrap recycling facilities. As such, effective January 1, 2013, the Company’s chief operating decision makers began considering these operating segments as part of the Scrap Metal Recycling reportable segment for purposes of assessing overall performance and resource allocations. Previously reported amounts have been adjusted in the tables below to reflect this change. The two reportable segments are distinguishable by the nature of their operations and the types of products sold. Corporate and Other includes the cost of providing and maintaining corporate headquarters functions, including salaries, rent, legal, accounting, travel and entertainment expenses, depreciation, utility costs, outside services and interest cost other than direct equipment financing and income (loss) from equity investments. Listed below is financial data as of or for the years ended December 31, 2013, 2012 and 2011 for these reportable segments.
The Company’s revenue by product line or service for the years ended December 31, 2013, 2012 and 2011 consisted of the following:
Note 18. Investment
The Company holds a non-controlling interest in Beacon Energy Holdings, Inc. (“Beacon”) a company organized to produce and market biofuels refined from waste vegetable oil, fats, and agricultural feedstocks. At December 31, 2013 and 2012, the carrying amount of the investment was $0 due to historical losses and writedowns. The Company is not obligated to fund any of Beacon’s future losses. On February 8, 2011, Beacon completed a merger with Environmental Quality Management, Inc. (“EQM”) through the issuance of common shares to EQM. As a result, the Company’s ownership in Beacon was reduced to 5.9% and Beacon changed its name to “EQM Technologies & Energy, Inc.” The Company is a 5.5% holder of EQM Common stock at December 31, 2013.
Note 19. Statement of Cash Flows Information
The Company (received refunds) made net cash payments for income taxes of approximately $(4,612), $(2,384) and $4,283 (net of (payments) refunds $(178), $(891) and $598) and for interest of approximately $8,299, $8,189 and $8,549 during the years ended December 31, 2013, 2012 and 2011, respectively.
The following describes the Company’s noncash investing and financing activities:
Note 20. Earnings (loss) Per Share
Following is information about the computation of the earnings (loss) per share (“EPS”) for the years ended December 31, 2013, 2012 and 2011:
The Company excludes stock options, warrants and convertible notes with exercise or conversion prices that are greater than the average market price from the calculation of diluted EPS because their effect would be anti-dilutive.
As of December 31, 2013, there were 1,419,231 warrants, 1,051,288 options, 303,736 deferred shares and 1,676,358 shares issuable upon conversion of convertible notes excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive.
As of December 31, 2012, there were 1,419,231 warrants, 1,762,385 options, 482,765 deferred shares and 4,914,990 shares issuable upon conversion of convertible notes excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive.
As of December 31, 2011, there were 1,083,764 options, 312,175 deferred shares, 1,419,231 warrants and 5,436,418 shares issuable upon conversion of convertible notes excluded in the computation of diluted EPS because their effect would have been anti-dilutive.
Note 21. Fair Value Disclosure
Accounting Standard Codification (“ASC”) Topic 820 “Fair Value Measurements and Disclosures” (“ASC Topic 820”) requires certain assets and liabilities to be recorded at fair value and clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. The three levels of the fair value hierarchy under ASC Topic 820 are described below:
Basis of Fair Value Measurement:
•
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
•
Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, quoted prices for similar assets, or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
•
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value:
Cash and cash equivalents, trade receivables, accounts payable and accrued expenses: The carrying amounts approximate the fair value due to the short maturity of these instruments.
Notes payable and long-term debt: The carrying value of notes payable and long-term debt reported in the accompanying consolidated balance sheets, with the exception of the 7% Convertible Notes, approximates fair value as substantially all of this debt bears interest based on prevailing market rates currently available.
The Company has determined that the carrying value of its 7% Notes approximates fair value due to the short-term nature of an optional repurchase right exercisable by the Note Purchasers on June 30, 2014. Under the terms, each Note Purchaser will have the right to require the Company to redeem the Notes at par. The Notes are included in the consolidated balance sheet as of December 31, 2013 at $23,172 which is inclusive of unamortized discount of $297. The Notes are unsecured, bear interest at 7% per annum, payable in cash, and will mature in April 2028.
The majority of the Company’s non-financial instrument assets, which include goodwill, intangible assets and property, plant and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or tested at least annually for goodwill and indefinite lived intangible assets) such that a non-financial instrument asset is required to be evaluated for impairment, based upon a comparison of the non-financial instrument asset’s fair value to its carrying value, an impairment is recorded to reduce the carrying value to the fair value, if the carrying value exceeds the fair value. Such values are generally determined using Level 3 inputs.
The following table presents the Company’s liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of:
Following is a description of valuation methodologies used for liabilities recorded at fair value:
Put Warrants: The Company values put warrants using the Black-Scholes method. For the years ended December 31, 2013, 2012 and 2011, the average value per outstanding warrant listed below was estimated using the following input assumptions:
ASC Topic 820 requires a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period. For the years ended December 31, 2013 and 2012, there were no transfers in or out of Level 3. For these Level 3 liabilities, the reconciliation is as follows:
Note 22. Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This new guidance provides specific financial statement presentation requirements of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance states that an unrecognized tax benefit in those circumstances should be presented as a reduction to the deferred tax asset. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
EXHIBIT INDEX
* Management contract or compensatory plan or arrangement.