UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Amendment No. 1)
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(Mark One) | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES |
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| For the quarterly period ended September 30, 2006 |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES |
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| For the transition period from _________ to_________ |
Commission file number 001-12127
EMPIRE RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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| Delaware |
| 22-3136782 |
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| (State or Other Jurisdiction of |
| (I.R.S. Employer |
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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.
Yesx Noo
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 Filero Accelerated Filero Non-Accelerated Filerx
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
Yeso Nox
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Common Stock, par value $0.01 per share |
| 9,785,184 |
(Class) |
| (Outstanding on November 13, 2006) |
EXPLANATORY NOTE
We are filing this Amendment No. 1 on Form 10-Q/A to make the following corrections to PART I (FINANCIAL INFORMATION) of our Form 10-Q for the quarter ended September 30, 2006, as filed with the Securities and Exchange Commission ("SEC") on November 13, 2006 (the "Form 10-Q"):
1. We are correcting a typographical error under the heading classification "Assets" in our Condensed Consolidated Balance Sheet as of September 30, 2006 (Unaudited) by changing total assets from “154,322” to “154,321”:
2. We are correcting a typographical error in Note 9 (Commitments and Contingencies) under "Notes to Condensed Consolidated Financial Statements (Unaudited)" by changing the word "its" to the word "our" in the sole sentence of that Note.
3. We are correcting Note 11 (Comprehensive Income) under "Notes to Condensed Consolidated Financial Statements (Unaudited)" by changing the following amounts:
(a) "Currency Translation Gain/(Loss)" from "(1)" to "(41)" for the three months ended September 30, 2005, and from "(59)" to "41" and "(15)" to "(23)" for the nine months ended September 30, 2006 and 2005, respectively;
(b) "Change in interest rate swap, net of tax" from “(369)” to (368)” for the three months ended September 30, 2006 and from "200" to "100" and from "0" to "8" for the nine months ended September 30, 2006 and 2005, respectively; and
(c) "Comprehensive Income" from “1,586” to “1,587” and "2,427" to "2,387" for the three months ended September 30, 2006 and 2005 respectively.
To comply with certain technical requirements of the SEC's rules in connection with the filing of this amendment on Form 10-Q/A and for convenience, we are setting forth in this amendment a restatement of the Form 10-Q, as amended hereby, and adding, as exhibits, certain current dated certifications of our principal executive and principal financial officers. Except for the matters described in this Explanatory Note, this amendment does not modify or update disclosures in, or exhibits to, the Form 10-Q originally filed on November 13, 2006. Furthermore, except for the matters described above, this amendment does not change any previously reported financial results, nor does it reflect events occurring after the date of the original Form 10-Q.
EMPIRE RESOURCES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2006
INDEX
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PART I | FINANCIAL INFORMATION |
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Item 1 | Financial Statements |
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| Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005 |
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| 4 | |
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| Unaudited Notes to Condensed Consolidated Financial Statements |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| 14 | ||
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| 15 |
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 nine months ended September 30, 2006 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, 2005.
Condensed Consolidated Balance Sheets
In thousands, except share and per share amounts
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| September 30, |
| December 31, |
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| 2005 |
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ASSETS |
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Current assets: |
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Cash |
| $ | 1,411 |
| $ | 1,560 |
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Restricted cash |
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| 235 |
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| 5,050 |
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Trade accounts receivable (less allowance for doubtful accounts of $191 and $191) |
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| 57,799 |
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| 51,486 |
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Inventories |
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| 84,320 |
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| 90,381 |
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Other current assets |
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| 2,375 |
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| 1,493 |
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Total current assets |
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| 146,140 |
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| 149,970 |
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Property and equipment, net |
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| 7,622 |
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| 6,763 |
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Other Assets |
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| 436 |
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Marketable Securities |
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| 123 |
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| $ | 154,321 |
| $ | 156,733 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Notes payable - banks |
| $ | 91,250 |
| $ | 84,500 |
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Current maturities of long-term debt |
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| 115 |
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| 110 |
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Trade accounts payable |
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| 25,134 |
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| 30,513 |
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Accrued expenses and derivative liabilities |
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| 4,486 |
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| 13,044 |
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Dividends Payable |
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| 489 |
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| 2,046 |
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Total current liabilities |
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| 121,474 |
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| 130,213 |
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Long-term debt, net of current maturities |
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| 2,201 |
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| 2,287 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Common stock $.01 par value, 20,000,000 shares authorized and 11,749,651 shares issued at September 30, 2006 and December 31, 2005 |
| $ | 117 |
| $ | 117 |
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Additional paid-in capital |
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| 11,332 |
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| 10,690 |
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Retained earnings |
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| 21,279 |
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| 15,687 |
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Accumulated other comprehensive income |
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| 210 |
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| 92 |
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Treasury stock (1,964,467 and 2,006,467 shares, respectively) |
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| (2,292 | ) |
| (2,353 | ) |
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Total stockholders’ equity |
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| 30,646 |
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| 24,233 |
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| $ | 154,321 |
| $ | 156,733 |
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See Notes to Condensed Consolidated Financial Statements
2
Condensed Consolidated Statements of Income (Unaudited)
In thousands, except per share amounts
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| Three Months Ended |
| Nine Months Ended |
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Net sales |
| $ | 106,261 |
| $ | 90,777 |
| $ | 316,168 |
| $ | 260,237 |
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Cost of goods sold |
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| 98,839 |
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| 83,494 |
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| 292,256 |
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| 239,492 |
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Gross profit |
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| 7,422 |
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| 7,283 |
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| 23,912 |
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| 20,745 |
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Selling, general and administrative expenses |
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| 2,717 |
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| 2,247 |
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| 8,102 |
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| 6,692 |
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Operating income |
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| 4,705 |
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| 5,036 |
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| 15,810 |
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| 14,053 |
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Interest expense |
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| 1,557 |
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| 1,202 |
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| 4,509 |
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| 2,638 |
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Income before income taxes |
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| 3,148 |
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| 3,834 |
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| 11,301 |
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| 11,415 |
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Income taxes |
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| 1,180 |
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| 1,446 |
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| 4,240 |
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| 4,281 |
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Net income |
| $ | 1,968 |
| $ | 2,388 |
| $ | 7,061 |
| $ | 7,134 |
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Weighted average shares outstanding: |
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Basic |
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| 9,785 |
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| 9,743 |
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| 9,771 |
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| 9,654 |
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Diluted |
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| 10,058 |
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| 10,045 |
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| 10,069 |
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| 9,932 |
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Earnings per share: |
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Basic |
| $ | 0.20 |
| $ | 0.25 |
| $ | 0.72 |
| $ | 0.74 |
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Diluted |
| $ | 0.20 |
| $ | 0.24 |
| $ | 0.70 |
| $ | 0.72 |
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See Notes to Condensed Consolidated Financial Statements
3
Condensed Consolidated Statements of Cash Flows (Unaudited)
In thousands
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| Nine Months Ended |
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Cash flows from operating activities: |
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Net income |
| $ | 7,061 |
| $ | 7,134 |
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Adjustments to reconcile net income to net cash (used in) operating activities: |
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Depreciation and amortization |
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| 195 |
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| 62 |
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Dividend Income |
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| (6 | ) |
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Other |
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| (59 | ) |
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Changes in: |
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Restricted Cash |
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| 4,815 |
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Trade accounts receivable |
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| (6,313 | ) |
| (21,344 | ) |
Inventories |
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| 6,061 |
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| (27,537 | ) |
Other current assets |
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| (882 | ) |
| (1,500 | ) |
Trade accounts payable |
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| (5,379 | ) |
| 9,067 |
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Accrued expenses and derivative liabilities |
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| (8,358 | ) |
| (1,527 | ) |
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Net cash (used in) operating activities |
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| (2,865 | ) |
| (35,645 | ) |
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Cash flows used in investing activities: |
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Additions to fixed assets |
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| (1,054 | ) |
| (1,838 | ) |
Investment in marketable securities |
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| (140 | ) |
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Net cash (used in) investing activities |
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| (1,194 | ) |
| (1,838 | ) |
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Cash flows from financing activities: |
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Net proceeds from notes payable – banks |
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| 6,750 |
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| 39,623 |
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Principle payment of long term debt |
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| (81 | ) |
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Deferred financing costs |
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| (436 | ) |
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Proceeds from options exercised |
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| 68 |
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| 67 |
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Excess tax benefit from options exercised |
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| 635 |
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| — |
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Dividends paid |
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| (3,026 | ) |
| (1,832 | ) |
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Net cash provided by financing activities |
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| 3,910 |
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| 37,858 |
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Net (decrease) increase in cash |
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| (149 | ) |
| 375 |
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Cash at beginning of period |
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| 1,560 |
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| 287 |
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Cash at end of period |
| $ | 1,411 |
| $ | 662 |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest |
| $ | 4,732 |
| $ | 2,538 |
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Income taxes |
| $ | 4,091 |
| $ | 4,799 |
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Non Cash Financing Activities: |
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Dividend declared but not yet paid |
| $ | 489 |
| $ | 487 |
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See Notes to Condensed Consolidated Financial Statements
4
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Empire Resources, Inc. |
Notes to Condensed Consolidated Financial Statements (Unaudited) |
1. The Company
Empire Resources, Inc. is 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. Instead, we place orders with our suppliers based upon orders that we receive 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), which commenced regular operation during the third quarter of this year. 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 16% of our consolidated net sales for the nine month period ended September 30, 2006 and 14% for the same period ended September 30, 2005.
We purchase aluminum from a limited number of suppliers located throughout the world. One supplier, Hulett Aluminium Ltd., accounted for 54% of total purchases during the nine month period ended September 30, 2006 and three other suppliers accounted for 27% 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
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), utilizing the modified prospective method whereby prior periods will not be restated for comparability. SFAS 123R requires recognition of stock-based compensation expense in the statement of operations over the vesting period based on the fair value of the award at the grant date. Previously, we used the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), as amended
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by related interpretations of the FASB. Under APB 25, no compensation cost was recognized for stock options because the quoted market price of the stock at the grant date was equal to the amount per share the employee had to pay to acquire the stock after fulfilling the vesting period. SFAS 123R supersedes APB 25 as well as Statement of Financial Accounting Standard 123 “Accounting for Stock-Based Compensation,” which permitted pro forma footnote disclosures to report the difference between the fair value method and the intrinsic value method. No such difference existed for the nine months ended September 30, 2006. As of January 1, 2006, we did not have any unvested employee stock options.
We did not grant any stock options or any other stock-based awards during the nine months ended September 30, 2006, and therefore the adoption of this pronouncement did not have any effect on our consolidated results of operations for the nine months ended September 30, 2006. During the nine months ended September 30, 2006, 42,000 options were exercised with a weighted average exercise price of $1.62 and an intrinsic value of $1,693,804.
At September 30, 2006, we had 315,000 options outstanding and exercisable under our 1996 stock option plan with an aggregate weighted average exercise price of $1.65 and a contractual remaining life of 2.82 years. The aggregate intrinsic value of the options outstanding at September 30, 2006 was $2,252,250. Prior to the adoption of FAS No. 123R, we presented cash flows resulting from the tax benefits of deductions from the exercise of stock options as operating cash flows in the Statements of Cash Flows. Since the adoption of FAS No. 123R, cash flows resulting from the tax benefits of the tax deduction in excess of the compensation cost recognized for those options (excess tax benefits) are classified as financing cash flows. During the nine months ended September 30, 2006, we recognized $635,000 in excess tax benefits.
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 and repaid, and re-borrowed, subject to a borrowing base test, until the maturity date of June 30, 2011. As of September 30, 2006 and December 31, 2005, the credit utilized amounted to, respectively, $109,720,000 and $87,677,000 (including approximately $18,470,000 and $3,177,000 of outstanding letters of credit).
Amounts borrowed by the Company bear interest of Eurodollar, money market, or base rates, at the Company’s 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
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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 $50 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 fixed rate of 4.99% plus a spread to the bank, and in return the bank will pay us floating LIBOR rate plus a spread. This floating rate will reset 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 September 30, 2006 and $2.4 million at December 31, 2005, requires monthly payments of approximately $21,000, 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 will 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 will pay us a floating rate, namely, LIBOR, to reset monthly, plus 1.75% on the same notional principal amount.
7. Earnings Per Share
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| Three months ended |
| Nine months ended |
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| 2006 |
| 2005 |
| 2006 |
| 2005 |
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Weighted average shares outstanding-basic |
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| 9,785 |
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| 9,743 |
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| 9,771 |
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| 9,654 |
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Dilutive effect of stock options |
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| 273 |
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| 302 |
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| 298 |
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| 278 |
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Weighted average shares outstanding-diluted |
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| 10,058 |
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| 10,045 |
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| 10,069 |
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| 9,932 |
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Basic Earnings per Share |
| $ | .20 |
| $ | .25 |
| $ | .72 |
| $ | .74 |
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Diluted Earnings per Share |
| $ | .20 |
| $ | .24 |
| $ | .70 |
| $ | .72 |
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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 September 14, 2006, our Board of Directors declared a cash dividend of $0.05 per share to stockholders of record at the close of business on September 29, 2006. The dividend totaling $489,000 is reflected in dividends payable and was paid on October 13, 2006, bringing the total dividends declared year to date to $1,466,000.
7
9. Commitments and Contingencies
We have outstanding letters of credit to certain of our suppliers, which at September 30, 2006 amounted to approximately $18,470,000.
10. Derivative Financial Instruments and Risk Management
Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting For Derivative Instruments and Hedging Activities,” issued by the Financial Accounting Standards Board requires the Company to recognize all derivatives in the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending upon the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings (fair value hedge), or recognized in other comprehensive income until the hedged item is recognized in earnings (cash flow hedge). The ineffective portion of a derivative’s change in fair value, if any, is immediately recognized in earnings. When a hedged item in a fair value hedge is sold, the adjustment in the carrying amount of the hedged item is recognized in earnings. At September 30, 2006 and December 31, 2005, approximately $235,000 and $5,050,000, 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 September 30, 2006 and December 31, 2005, net unrealized (losses) and gains on the Company’s open foreign exchange forward contracts amounted to approximately ($28,000) and $192,000 respectively. Net unrealized gains (losses) on aluminum futures contracts at September 30, 2006 and December 31, 2005 amounted to approximately $1,668,000 and ($7,874,000), respectively. These amounts, which represent the fair value of the open derivative contracts, together with realized losses on closed futures contracts designated as fair value hedges of inventory held or open commitments at the balance sheet date, were offset through earnings by like amounts for the changes in the fair value of the inventories and commitments which were hedged. Such amounts are reflected in the accompanying September 30, 2006 balance sheet in inventory ($7,689,000) and derivative asset $1,668,000. At December 31, 2005, such amounts are reflected in inventory ($11,744,000) and derivative liabilities ($7,874,000).
For the nine months ended September 30, 2006 and 2005, hedge ineffectiveness associated with derivatives designated as fair value hedges was insignificant, and no fair value hedges were derecognized.
11. Comprehensive Income
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| Three months |
| Nine months |
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| 2006 |
| 2005 |
| 2006 |
| 2005 |
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Net Income |
| $ | 1,968 |
| $ | 2,388 |
| $ | 7,061 |
| $ | 7,134 |
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Currency Translation (Loss) |
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| (1 | ) |
| (41 | ) |
| 41 |
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| (23 | ) |
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Change in fair value of marketable securities |
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| (12 | ) |
| 0 |
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| (23 | ) |
| 0 |
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Change in interest rate swap, net of tax |
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| (368 | ) |
| 40 |
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| 100 |
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| 8 |
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Comprehensive Income |
| $ | 1,587 |
| $ | 2,387 |
| $ | 7,179 |
| $ | 7,119 |
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12. Recent Accounting Pronouncements
On July 13, 2006, the Financial Accounting Standards Board (“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 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. We are studying how FIN 48 might impact our financial statements. At this point, however, we do not anticipate that the implementation of FIN 48 will have a material impact on our financial position, results of operations and cash flows.
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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 9 of our Annual Report on Form 10-K for the year ended December 31, 2005. 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 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.
9
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 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 and our independent sales agents who are located in North America and who receive commissions on sales. We purchase our products from suppliers located throughout the world. One supplier, Hulett Aluminium Ltd., furnished approximately 54% of our products in the first nine months of 2006. We do not typically purchase inventory for stock. Instead, 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 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. We believe that an example of this latter strategy is the recent addition of our production capability for aluminum extrusions located in our warehouse/distribution facility in Baltimore, Maryland, which has begun operation during the third quarter of this year.
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 2005 Annual Report on Form 10-K. We have not adopted any significant new accounting policies during the nine month period ended September 30, 2006.
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.
10
Results of Operations for the Nine Months Ended September 30, 2006 (in thousands)
During the first nine months of 2006, net sales increased by $55,931 to $316,168, or a 21% increase, from $260,237 in the first nine months of 2005. Unit volume increased approximately 13%, with the balance of the increase due to upward trend in aluminum pricing. Gross profit increased by $3,167 to $23,912 for the period, or a 15% increase, from $20,745 in the first nine months of 2005. The dollar increase in gross profit was due to the increased sales volume, as the gross profit margin declined approximately 0.4% over the ninth month period.
We experienced an increase of approximately 21% in selling, general and administrative costs from that of the first nine months of 2005. These costs are primarily attributable to incremental costs of operating our subsidiaries, payroll costs, and legal expenses.
Interest expense grew during the first nine months of the year by $1,871 to $4,509 from $2,638 during the first nine months of 2005. This 71% increase in interest expense resulted from a continued upward trend in interest rates as well as an increase of $11,250 in borrowings from September 2005 as compared to September 2006. We have entered into interest rate swaps with a total notional amount of $50 million, terminating in 2010. These swaps have been designated as a cash flow hedge. The Company will pay a fixed rate of 4.99% plus a spread to the bank and in return the bank will pay us a floating LIBOR rate plus a spread. This floating rate will reset monthly.
During the first nine months of 2006, net income decreased from $7,134 to $7,061 or a 1% decrease as compared to the first nine months of 2005. The substantial rise in our interest expense offset the 12.5% increase in operating income.
Results of Operations for the Three Months Ended September 30, 2006 (in thousands)
Net sales increased $15,484 or 17% during the third quarter of 2006, from $90,777 in 2005 to $106,261 in 2006. Shipment volumes to our customers increased approximately 3% over the same period in 2005; increased pricing in aluminum accounted for the remainder of the sales growth. Gross profit increased in the current three month period by $139 to $7,422 from $7,283 as compared to the same period in 2005. Our gross profit margin was reduced as result of pricing compression, changes in product mix, and increased logistics costs.
Selling, general and administrative costs for the third quarter of 2006 as compared to the same period in 2005 increased by $470. These costs are primarily attributable to incremental costs of operating our subsidiaries, payroll costs, and legal expenses.
Interest expense increased during the three month period by $355 from $1,202 in September 2005 to $1,557 in September 2006. This 30% increase in interest expense is due to both the growth in loans and the continued upward trend in interest rates.
Net income decreased by $420 from $2,388 to $1,968 for the three months ended September 30, 2006, a decrease of 18%.
11
Liquidity and Capital Resources (in thousands, except per share data)
Our cash flow used in operations during the first nine months of 2006 was $2,865 as compared to cash used in operations of $35,645 in the first nine months of 2005. Net cash used in operations was primarily the result of decreases in trade accounts payable of $5,379, accrued expenses and derivative liabilities of $8,358 and an increase in accounts receivable of $6,313. This was partially offset by decreases in restricted cash and inventories. During the first nine months of 2005, net cash used in operations consisted primarily of increased accounts receivable and increased inventory. During the first nine months of 2006 restricted cash decreased by $4,815 from $5,050 in December 2005 to $235 in September 2006. 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 nine months of 2006 amounted to $3,910 made up primarily of increased borrowings under our line of credit, excess tax benefit from options exercised, 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 September 30, 2006 and December 31, 2005, the credit utilized amounted to, respectively, $109,720 and $87,677 (including approximately $18,470 and $3,177 of outstanding letters of credit).
On September 14, 2006, we announced that our Board of Directors had declared a cash dividend of $.05 per share. This dividend was $489 in the aggregate and was paid on October 13, 2006 to stockholders of record at the close of business on September 29, 2006. The Board of Directors will review its dividend policy on a quarterly basis, and a determination by the Board of Directors will be made subject to the profitability and free cash flow and the other requirements of our business.
Management believes that cash from operations, together with funds available under our credit facility, will be sufficient to fund the anticipated cash requirements relating to our existing operations through the expiration of our current credit facility. We may require additional debt financing in connection with the future expansion of our operations.
Commitments and Contingencies
We had outstanding letters of credit totaling $18,470,000 to certain of our suppliers and as of September 30, 2006, the credit utilized under our credit facility amounted to $109,720,000. 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, 2005.
12
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.
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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, 2005 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, 2005.
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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), 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 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.
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OTHER INFORMATION | |
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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.
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Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
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Defaults Upon Senior Securities. |
None.
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Submission of Matters to a Vote of Security Holders. |
None.
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Other Information. |
None.
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Exhibits. |
The following are included as exhibits to this report:
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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 Certifications 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**
** Furnished herewith
14
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.
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| EMPIRE RESOURCES, INC. | ||
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Dated: November 15, 2006 | By: | /s/ Sandra Kahn | |
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| Sandra Kahn | |
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| Chief Financial Officer | |
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| (signing both on behalf of the registrant and in her capacity as Principal Financial and Principal Accounting Officer) |
15