UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One) | |
[x] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES |
EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2007 | |
OR | |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES |
EXCHANGE ACT OF 1934 | |
For the transition period from _________to _________ |
Commission file number 001-12127
EMPIRE RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 22-3136782 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
One Parker Plaza
Fort Lee, NJ 07024
(Address of Principal Executive Offices) (Zip Code)
(201) 944-2200
(Registrant’s Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Larger Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
Yes [ ] No [X]
Common Stock, par value $0.01 per share | 9,790,184 |
(Class) | (Outstanding on May 10, 2007) |
EMPIRE RESOURCES, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007
INDEX
PART I | FINANCIAL INFORMATION | ||
Item 1 | Financial Statements | Page | |
Condensed Consolidated Balance Sheets as of March 31, 2007 (unaudited) | |||
and December 31, 2006 | 2 | ||
Unaudited Condensed Consolidated Statements of Income for the Three Months Ended | |||
March 31, 2007 and 2006 | 3 | ||
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months | |||
Ended March 31, 2007 and 2006 | 4 | ||
Unaudited Notes to Condensed Consolidated Financial Statements | 5 | ||
Item 2 | Management’s Discussion and Analysis of Financial Condition | ||
and Results of Operations | 9 | ||
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 12 | |
Item 4 | Controls and Procedures | 12 | |
PART II | OTHER INFORMATION | ||
Item 1 | Legal Proceedings | 13 | |
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 13 | |
Item 3 | Defaults upon Senior Securities | 13 | |
Item 4 | Submission of Matters to a Vote of Security Holders | 13 | |
Item 5 | Other Information | 13 | |
Item 6 | Exhibits | 13 | |
Signatures | 14 |
Introduction
We have prepared the condensed consolidated interim financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted pursuant to such rules and regulations. In the opinion of our management, such financial statements reflect all adjustments necessary for a fair presentation of the results for the interim periods presented and to make such financial statements not misleading. Our results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for the full year. We urge you to read these interim financial statements in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report filed on Form 10-K for the year ended December 31, 2006.
Condensed Consolidated Balance Sheets
In thousands, except share and per share amounts
March 31, | December 31, | |||||||
2007 | 2006 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 1,206 | $ | 1,243 | ||||
Restricted cash | 769 | 1,046 | ||||||
Trade accounts receivable (less allowance for doubtful accounts of | ||||||||
$191 and $191) | 86,618 | 62,520 | ||||||
Inventories | 110,069 | 124,249 | ||||||
Other current assets | 3,132 | 2,680 | ||||||
Total current assets | 201,794 | 191,738 | ||||||
Property and equipment, net | 7,752 | 7,739 | ||||||
Deferred financing costs, net of accumulated amortization | 372 | 408 | ||||||
$ | 209,918 | $ | 199,885 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Notes payable - banks | $ | 123,700 | $ | 114,250 | ||||
Current maturities of long-term debt | 119 | 117 | ||||||
Trade accounts payable | 37,195 | 32,545 | ||||||
Accrued expenses and derivative liabilities | 14,356 | 18,148 | ||||||
Dividends payable | 490 | 2,055 | ||||||
Total current liabilities | 175,860 | 167,115 | ||||||
Long-term debt, net of current maturities | 2,140 | 2,171 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
Common stock $.01 par value, 20,000,000 shares authorized and | ||||||||
11,749,651 shares issued at March 31, 2007 and December 31, 2006 | 117 | 117 | ||||||
Additional paid-in capital | 11,604 | 11,604 | ||||||
Retained earnings | 22,826 | 20,905 | ||||||
Accumulated other comprehensive (loss) income | (344 | ) | 258 | |||||
Treasury stock (1,959,467 shares) | (2,285 | ) | (2,285 | ) | ||||
Total stockholders' equity | 31,918 | 30,599 | ||||||
$ | 209,918 | $ | 199,885 | |||||
See Notes to Condensed Consolidated Financial Statements |
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Condensed Consolidated Statements of Income (Unaudited)
In thousands, except per share amounts
Three Months Ended March 31, | ||||||||
2007 | 2006 | |||||||
Net sales | $ | 139,841 | $ | 99,569 | ||||
Cost of goods sold | 131,423 | 91,642 | ||||||
Gross profit | 8,418 | 7,927 | ||||||
Selling, general and administrative expenses | 2,516 | 2,625 | ||||||
Operating income | 5,902 | 5,302 | ||||||
Interest expense | 2,026 | 1,422 | ||||||
Income before income taxes | 3,876 | 3,880 | ||||||
Income taxes | 1,465 | 1,460 | ||||||
Net income | $ | 2,411 | $ | 2,420 | ||||
Weighted average shares outstanding: | ||||||||
Basic | 9,790 | 9,752 | ||||||
Diluted | 10,052 | 10,073 | ||||||
Earnings per share: | ||||||||
Basic | $ | 0.25 | $ | 0.25 | ||||
Diluted | $ | 0.24 | $ | 0.24 |
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Condensed Consolidated Statements of Cash Flows (Unaudited)
In thousands
Three Months Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 2,411 | $ | 2,420 | ||||
Adjustments to reconcile net income to net cash | ||||||||
(used in) provided by operating activities: | ||||||||
Depreciation and amortization | 128 | 49 | ||||||
Deferred income taxes | 36 | |||||||
Changes in: | ||||||||
Restricted cash | 277 | 5,050 | ||||||
Trade accounts receivable | (24,098 | ) | (1,387 | ) | ||||
Inventories | 14,180 | 595 | ||||||
Other current assets | (94 | ) | 1,006 | |||||
Trade accounts payable | 4,650 | 103 | ||||||
Accrued expenses | (4,772 | ) | (5,785 | ) | ||||
Net cash (used in) provided by operating activities | (7,282 | ) | 2,051 | |||||
Cash flows used in investing activities: | ||||||||
Investment in marketable securities | (16 | ) | (140 | ) | ||||
Purchases of property and equipment | (105 | ) | (347 | ) | ||||
Net cash used in investing activities | (121 | ) | (487 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds net of repayments from notes payable – banks | 9,450 | 973 | ||||||
Repayments of mortgage payable | (29 | ) | ||||||
Dividends paid | (2,055 | ) | (2,046 | ) | ||||
Stock options exercised | 22 | |||||||
Net cash provided by (used in) financing activities | 7,366 | (1,051 | ) | |||||
Net increase (decrease) in cash | (37 | ) | 513 | |||||
Cash at beginning of period | 1,243 | 1,560 | ||||||
Cash at end of period | $ | 1,206 | $ | 2,073 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 1,901 | $ | 1,521 | ||||
Income taxes | $ | 310 | $ | 395 | ||||
Non Cash Financing Activities: | ||||||||
Dividend Declared but not yet paid | $ | 490 | $ | 488 |
See Notes to Condensed Consolidated Financial Statements
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Notes to Condensed Consolidated Financial Statements (Unaudited)
1. The Company
We are engaged in the purchase, sale and distribution of principally aluminum semi-finished products to a diverse customer base located throughout the United States and Canada, Europe, Australia and New Zealand. We sell our products through our own marketing and sales personnel as well as independent sales agents who are located in North America and receive commissions on sales. We purchase products from suppliers located throughout the world. The majority of our business typically does not involve purchase of inventory for stock. In general, we place orders with our suppliers based upon orders that we have received from our customers.
The condensed consolidated financial statements include the accounts of Empire Resources, Inc. and its wholly-owned subsidiaries, Empire Resources Pacific Ltd., which acts as a sales agent in Australia, 6900 Quad Avenue LLC (the company which owns our warehouse facility in Baltimore), Imbali Metals BVBA (our European subsidiary), and Empire Extrusions LLC (our extrusion business). All significant inter-company transactions and accounts have been eliminated on consolidation.
2. Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. The principal estimate made relates to the allowance for doubtful accounts. Actual results could differ from these estimates.
3.Concentrations
One major customer accounted for approximately 12% of our consolidated net sales for the three month period ended March 31, 2007 and 15% for the same period ended March 31, 2006.
We purchase aluminum from a limited number of suppliers located throughout the world. One supplier, Hulett Aluminium Ltd., accounted for 51% of total purchases during the three month period ended March 31, 2007 and three other suppliers accounted for 32% of total purchases during that period. The loss of any one of our largest suppliers or a material default by any such supplier in its obligations to us would have a material adverse effect on our business.
4. Stock Options
We account for stock options using Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires recognition of stock-based compensation expense for an award of equity instruments, including stock options, over the vesting period based on the fair value of the award at the grant date. As of January 1, 2007, we did not have any unvested employee stock options, and during the quarter ended March 31, 2007, we did not grant any stock options or any other stock-based awards.
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5. Inventories
Inventories, which consist primarily of purchased semi-finished aluminum products, are stated at the lower of cost or market. Cost is determined by the specific-identification method. Inventory is mostly purchased for specific customer orders. The carrying amount of inventory which is hedged by futures contracts designated as fair value hedges is adjusted to fair value.
6. Notes Payable—Banks
On June 13, 2006 we entered into an amended and restated credit agreement with five commercial banks. JPMorgan Chase Bank, N.A. acted as the agent for the lenders and they were joined by Rabobank International, New York branch, Citicorp USA, Inc., Brown Brothers Harriman & Co., and Fortis Capital Corp. in the credit agreement.
The credit agreement provides for a $150 million revolving line of credit, including a commitment to issue letters of credit and a swing-line loan sub facility. The credit agreement provides that amounts under the facility may be borrowed, repaid and re-borrowed, subject to a borrowing base test, until the maturity date of June 30, 2011. As of March 31, 2007 and December 31, 2006, the credit utilized amounted to respectively, $131,865,000 and $135,486,000 (including $8,165,000 and $21,236,000 of outstanding letters of credit).
Amounts borrowed under our credit agreement bear interest at LIBOR, Eurodollar, money market or base rates, at our option, plus an applicable margin. The applicable margin is determined by our leverage ratios. Borrowings under the credit agreement are collateralized by security interests in substantially all of our assets. The credit agreement contains financial and other covenants including, but not limited to, covenants requiring maintenance of minimum tangible net worth and compliance with leverage ratios, as well as an ownership minimum and limitations on other indebtedness, liens, and investments and dispositions of assets.
In connection with the revolving line of credit, we are a party to interest rate swaps with a total notional amount of $70 million terminating in 2010. These swaps are designated as a cash flow hedge of the variable interest on that portion of the credit agreement up to the notional amount. We will pay a weighted average fixed rate of 5.14% plus a spread to the bank, and in return the bank pays us floating LIBOR rate plus a spread. This floating rate resets monthly.
In addition, we are a party to a mortgage and an interest rate swap that we entered into in 2004 in connection with the purchase of our Baltimore warehouse. The mortgage loan, which had an outstanding balance of $2.3 million at March 31, 2007 and $2.3 million at December 31, 2006, requires monthly payments of approximately $21,600, including interest at LIBOR + 1.75%, and matures in December 2014. Under the related interest rate swap, which has been designated as a cash flow hedge and remains effective through the maturity of the mortgage loan, we pay a monthly fixed interest rate of 6.37% to the counterparty bank on a notional principal equal to the outstanding principal balance of the mortgage. In return, the bank pays us a floating rate, namely, LIBOR, which resets monthly, plus 1.75% on the same notional principal amount.
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7. Earnings Per Share
Three months ended | ||||
March 31, | ||||
2007 | 2006 | |||
Weighted average shares | 9,790 | 9,752 | ||
outstanding-basic | ||||
Dilutive effect of stock options | 262 | 321 | ||
Weighted average shares | 10,052 | 10,073 | ||
outstanding-diluted | ||||
Basic Earnings per Share | $.25 | $.25 | ||
Diluted Earnings per Share | $.24 | $.24 |
Basic earnings per share are based upon weighted average number of common shares outstanding during each period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during each period, plus dilutive potential common shares from assumed exercise of the outstanding stock options using the treasury stock method.
8. Dividends
On March 14, 2007, our Board of Directors declared a cash dividend of $0.05 per share to stockholders of record at the close of business on March 29, 2007. The dividend totaling $489,500 is reflected in dividends payable and was paid on April 25, 2007.
9. Commitments and Contingencies
We have outstanding letters of credit to certain of our suppliers, which at March 31, 2007 amounted to approximately $8,165,000.
10. Derivative Financial Instruments and Risk Management
Statement of Financial Accounting Standards No. 133, “Accounting For Derivative Instruments and Hedging Activities,” issued by the Financial Accounting Standards Board requires us to recognize all derivatives in the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending upon the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings (fair value hedge), or recognized in other comprehensive income until the hedged item is recognized in earnings (cash flow hedge). The ineffective portion of a derivative’s change in fair value, if any, is immediately recognized in earnings. When a hedged item in a fair value hedge is sold, the adjustment in the carrying amount of the hedged item is recognized in earnings. At March 31, 2007 and December 31, 2006, approximately $769,000 and
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$1,046,000, respectively, was deposited with various brokers for margin in connection with derivative contracts. Such deposits are classified as restricted cash on the accompanying balance sheet.
At March 31, 2007 and December 31, 2006, net unrealized losses on our open foreign exchange forward contracts amounted to approximately $732,000 and $731,000 respectively. Net unrealized losses on aluminum futures contracts at March 31, 2007 and December 31, 2006 amounted to approximately $12,400 and $3,311,000, respectively.
These amounts, which represent the fair value of the open derivative contracts, were offset through earnings by like amounts for the changes in the fair value of inventories and commitments which were hedged. In March 2007, open derivative contracts are reflected in the accompanying balance sheet in derivative liabilities ($744,000). In December 2006, such amounts are reflected in the accompanying 2006 balance sheet in derivative liabilities ($4,042,000).
For the three months ended March 31, 2007 and 2006, hedge ineffectiveness associated with derivatives designated as fair value hedges was insignificant, and no fair value hedges were derecognized.
We are a party to interest rate swaps with a total notional amount of $70 million terminating in 2010. These swaps are designated as a cash flow hedge of the variable interest on that portion of the credit agreement up to the notional amount. At March 31, 2007 the fair value of the interest rate swaps amounted to ($654,000) and is included in derivative liabilities with a corresponding debit in accumulated other comprehensive income in the accompanying balance sheet. At December 31, 2006 the fair value of the interest rate swaps amounted to $340,000 and was included in other current assets with a corresponding credit in accumulated other comprehensive income in the 2006 balance sheet.
11. Comprehensive Income
(In thousands)
Three months ended | ||||
March 31, | ||||
2007 | 2006 | |||
Net Income | $2,411 | $2,420 | ||
Foreign currency translation (loss) | (2) | (111) | ||
Change in fair value of marketable securities, | 5 | |||
net of tax | ||||
Change in interest rate swap, net of tax | (605) | 371 | ||
Comprehensive Income | $1,809 | $2,680 |
12. Recent Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in
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accordance with FASB Statement No.109, “Accounting for Income Taxes.” This Interpretation prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Our adoption of FIN 48 did not have a material impact on its consolidated financial statements. We file income tax returns in the U.S. federal jurisdiction, and various state, local, and foreign jurisdictions. Generally, our state, local and foreign jurisdiction income tax returns for 2003 – 2006 remain subject to examination by various tax authorities, depending on the specific tax jurisdiction.
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company has not yet determined the impact FAS 157 may have on its consolidated financial statements.
In February, 2007, the FASB issued FASB Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”), which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact FAS 159 may have on its consolidated financial statements.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward Looking Statements
The discussions set forth below and elsewhere herein contain certain statements that may be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our particular risks include those factors listed under “Risk Factors,” beginning on page 8 of our Annual Report on Form 10-K for the year ended December 31, 2006. We are also subject to many other uncertainties, such as changes in general, national or regional economic conditions; an act of war or terrorism that disrupts international shipping; changes in laws, regulations and tariffs; the imposition of anti-dumping duties on the products imported, including those produced by Hulett Aluminium Ltd.; failure to successfully integrate manufacturing and the sales of extrusions in the business of the Company; changes in the size and nature of the Company’s competition; changes in interest rates, foreign currencies or spot prices of aluminum; loss of one or more foreign suppliers or key executives; loss of one or more significant customers; increased credit risk from customers; failure of the Company to grow internally or by acquisition and to integrate acquired businesses; and failure to improve operating margins and efficiencies. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
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Overview
The following MD&A is intended to help you understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to them.
We are engaged principally in the purchase, sale and distribution of semi-finished aluminum products to a diverse customer base located throughout the United States and Canada, Europe, Australia and New Zealand. We sell our products through our own marketing and sales personnel and our independent sales agents who are located in North America and Europe and who receive commissions on sales. We purchase our products from suppliers located throughout the world. One supplier, Hulett Aluminium Ltd., furnished approximately 51% of our products in the first three months of 2007. We do not typically purchase inventory for stock. In general, we place orders with our suppliers based upon orders that we have received from our customers.
The industry in which we operate is the sale and distribution of semi-finished aluminum products. These products are manufactured worldwide by rolling and extrusion facilities, many of which are owned by large integrated companies and others by independent producers. The products we purchase are in turn sold to varied metal working industries including automotive, housing, packaging, as well as distributors.
Our long-term growth will continue to depend upon understanding our customers’ particular requirements and delivering a high-level of service and quality products that meet those requirements consistently. Our growth will also depend upon our ability to continue building our market knowledge and in particular our understanding of the production capabilities of our suppliers. We will also need to maintain, strengthen and expand our supplier relationships. Finally, we will need to succeed in identifying and executing on opportunities to provide our customers additional value added offerings.
Application of Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. Certain accounting policies have a significant impact on amounts reported in the financial statements. A summary of those significant accounting policies can be found in Note B to our financial statements included in our 2006 Annual Report on Form 10-K. Except for the adoption of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), we have not adopted any significant new accounting policies during the three month period ended March 31, 2007.
We report accounts receivable, net of an allowance for doubtful accounts, to represent our estimate of the amount that ultimately will be realized in cash. We review the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical collection trends, aging of receivables, as well as review of specific accounts, and we make adjustments in the allowance as we believe to be necessary. We maintain a credit insurance policy on the majority of our customers. This policy has a co-insurance provision and specific limits on each customer’s receivables. The co-pay may be increased in selected instances, and we sometimes elect to exceed these specific credit limits. Changes in economic conditions could have an impact on our collection of existing receivable balances or future allowance considerations.
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Results of Operations for the Three Months Ended March 31, 2007 (in thousands)
During the first quarter of 2007, net sales increased by $40,272 from $99,569 to $139,841, or a 40% increase from the first quarter of 2006. During this time period, prices for aluminum ingot grew by approximately 11%; the balance is due to increased shipments and product mix distribution to our customers. Gross profit increased by $491 to $8,418 during this period, or a 6% increase, from $7,927 in the first quarter of 2006. The gross profit margin has been impacted this quarter by a number of factors. Despite the sustained rise in aluminum pricing, the Company is experiencing continued price pressures from increased competition from both domestic and overseas mills. Second, we have not yet achieved full production at our manufacturing facility and this has had a negative impact on our extrusion conversion costs. Finally, we experienced a higher level of claims from one customer, including one particular claim for which we reached an agreement in principle, resulting in a non-recurring charge to earnings.
Interest expense during first quarter 2007 grew by $604 to $2,026 from $1,422 during first quarter of 2006. This 42% increase in interest expense resulted from a continued upward trend in interest rates as well as an increase in overall borrowings of $38,200 from March 2006 to March 2007.
Net income decreased from $2,420 to $2,411 due to the overall decline in our gross profit margin.
Liquidity and Capital Resources (in thousands, except per share data)
Our cash flow used in operations during the first three months of 2007 was $7,282 as compared to cash provided by operations of $2,051 in the first three months of 2006. Net cash used in operations was primarily the result of increases in trade accounts receivable of $24,098, and decreases in accrued expenses and derivative liabilities of $4,772 offset by decreases in inventory and increases in trade accounts payable of $4,650. During the first three months of 2007 restricted cash decreased by $277 from $1,046 in December 2006 to $769 in March 2007. This represents reductions in margin deposits at our LME brokers that are related to our unrealized losses on derivative contracts.
Cash flows from financing activities during the first three months of 2007 amounted to $7,366 made up primarily of increased borrowings under our line of credit, less dividends paid during the period.
We currently operate under a $150 million revolving line of credit, including a commitment to issue letters of credit, with five commercial banks. Amounts borrowed bear interest of Eurodollar, money market or base rates, at our option, plus an applicable margin. The applicable margin is determined by our leverage ratios. Our borrowings under this line of credit are secured by substantially all of our assets. The credit agreement contains financial and other covenants including but not limited to, covenants requiring maintenance of minimum tangible net worth and compliance with leverage ratios, as well as an ownership minimum and limitations on other indebtedness, liens, and investments and dispositions of assets. This facility will expire on June 30, 2011.
The credit agreement provides that amounts under the facility may be borrowed and repaid, and re-borrowed, subject to a borrowing base test, until the maturity date of June 30, 2011. As of March 31, 2007 and December 31, 2006, the credit utilized amounted to, respectively, $131,865,000 and $135,486,000 (including approximately $8,165,000 and $21,236,000 of outstanding letters of credit).
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On March 14, 2007, our Board of Directors declared a cash dividend of $0.05 per share to stockholders of record at the close of business on March 29, 2007. The dividend totaling $489,500 is reflected in dividends payable and was paid on April 25, 2007. The Board of Directors will review its dividend policy on a quarterly basis, and a determination by the Board of Directors will be made subject to the profitability and free cash flow and the other requirements of our business.
Management believes that cash from operations, together with funds available under our credit facility, will be sufficient to fund theanticipated cash requirements relating to our existing operations through the expiration of our current credit facility.We may require additional debt financing in connection with any future expansion of our operations.
Commitments and Contingencies
We had outstanding letters of credit totaling $8,165,000 to certain of our suppliers and as of March 31, 2007, the credit utilized under our credit facility amounted to $131,865,000. Except as noted, there have been no material changes to our commitments and contingencies from that disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.
We hedge metal pricing and foreign currency as we deem appropriate for a portion of our purchase and sales contracts. There is a risk of a counterparty default in fulfilling the hedge contract. Should there be a counterparty default, we could be exposed to losses on the original hedged contract.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We use financial instruments designated as fair value hedges to manage our exposure to commodity price risk and foreign currency exchange risk inherent in our operations. It is our policy to hedge such risks, to the extent practicable. We enter into high-grade aluminum futures contracts to limit our gross margin exposure by hedging the metals content element of firmly committed purchase and sales commitments. We also enter into foreign exchange forward contracts to hedge our exposure related to commitments to purchase or sell aluminum denominated in international currencies. We record “mark-to-market” adjustments on these futures and forward positions, and on the underlying firm purchase and sales commitments which they hedge, and reflect the net gains and losses currently in earnings.
Please refer to our Annual Report on Form 10-K for the year ended December 31, 2006 for more detailed disclosure about quantitative and qualitative disclosure of market risk. Quantitative and qualitative disclosure about market risk has not materially changed since December 31, 2006.
ITEM 4. Controls and Procedures
As required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management conducted an evaluation with the participation of our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Exchange Act), as of the end of the fiscal quarter covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange
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Commission’s rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business.
There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We are a party from time to time to certain legal proceedings and claims that arise in the ordinary course of our business. We do not believe that the disposition of any claims that are pending or have been asserted would have a material adverse effect on our results of operation or financial position.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following are included as exhibits to this report:
Exhibit No. | Description |
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934*
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934*
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
- --------------------* | Filed herewith |
** | Furnished herewith |
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
EMPIRE RESOURCES, INC. | ||
Dated: May 15, 2007 | By: /s/ Sandra Kahn | |
Sandra Kahn | ||
Chief Financial Officer | ||
(signing both on behalf of the registrant and in her | ||
capacity as Principal Financial and Principal | ||
Accounting Officer) |
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