EMPIRE RESOURCES, INC. TEL: 201/944-2200
ONE PARKER PLAZA FAX: 201/944-2226
FORT LEE, NEW JERSEY SKAHN@EMPIRERESOURCES.COM
07024-2937
VIA EDGAR AND OVERNIGHT COURIER March 6, 2008
Mr. Joseph Foti
Senior Assistant Chief Accountant
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E. - Mail Stop 3561
Washington, DC 20549
Re: Empire Resources, Inc.
Form 10-K for Fiscal Year Ended December 31, 2006
File No. 001-12127
Dear Mr. Foti:
This letter is submitted by Empire Resources, Inc. (the "Company") in response
to the comments of the staff of the Division of Corporation Finance (the
"Staff") of the Securities and Exchange Commission raised in your letter of
February 8, 2008 to Sandra Kahn, Chief Financial Officer of the Company (the
"Comment Letter"). For reference purposes, the text of the Comment Letter has
been reproduced herein with responses below each numbered comment.
Form 10-K: For the Fiscal Year ended December 31, 2006
- ------------------------------------------------------
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations, page 17
1. We have reviewed your response to our prior comment number 1, and we
note that you have expanded your discussion regarding a) the market
risk associated with fluctuations in foreign currency exchange rates
and/or the purchase price of aluminum and b) the manner in which you
attempt to manage such risk. However, it appears that you have not
fully addressed the concerns raised in our prior comment. In this
regard, your expanded disclosure does not discuss i) the impact of your
derivative activity on your results of operations for the periods
presented in your financial statements or ii) the underlying factors
that have resulted in the recognition of material realized and
unrealized losses related to your derivative instruments. Please expand
your disclosure accordingly. For example, in future filings, please
discuss information including, but not limited to:
o Any known or expected trends regarding the price of aluminum
and/or changes in foreign exchange rates, including how such
trends have impacted the fair value of your hedge instruments.
o The extent to which your fair value derivative instruments
have not been fully effective and the resulting impact to your
results of operations, if any.
o The extent to which known trends with regard to aluminum
pricing and/or foreign currency exchange rates are expected to
impact your hedging strategy and your ability to manage your
exposure to associated market risk.
As part of your response, please provide a sample of your proposed
expanded disclosure.
RESPONSE TO COMMENT 1:
- ---------------------
It is our understanding that Comment 1 raises two issues on which you wish us to
provide more clarity: (i) the impact of our derivative activity on our results
of operations and (ii) the underlying factors that have resulted in the
recognition of material realized and unrealized losses related to our derivative
instruments.
As an aluminum distributor, we use hedges for no purpose other than to avoid
exposure to changes in aluminum prices and foreign currency rates between when
we buy a shipment of aluminum from a supplier and when we deliver it to a
customer.
In particular, we use derivative financial instruments designated as fair value
hedges to manage our exposure to commodity price risk and foreign currency
exchange risk inherent in our sales and purchases in the distribution of our
semi finished aluminum products. It is our policy to hedge all of these 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 to our suppliers and customers.
We also enter into foreign exchange forward contracts to hedge our exposure
related to commitments to sell non-ferrous metals when they are denominated in
international currencies.
In response to your specific questions, we would respectfully submit that our
derivative activity is an integral part of our operations and that the impact of
our derivative activity would simply be what our result of operations would have
been if we had not entered into such activity, which is not possible to
determine.
Indeed, we use our hedging strategy precisely to protect ourselves from material
losses due to the volatility of aluminum prices that affect the pricing of the
physical product which we ultimately deliver to our customers. Of course, the
hedging activity we engage in also precludes us from deriving any benefit from
positive movements in the aluminum market were we not to hedge. In essence, we
earn our gross profit margin on the underlying physical product and not on the
movement of aluminum prices, nor on the movement of foreign exchange rates.
Accordingly, and in response to your second point, we do not speculate in
derivatives and therefore we have not incurred any material losses related to
our derivative instruments.
Our hedges are entered into on an ongoing basis as new contracts are created.
For example, we might have purchased 100 metric tons of our semi finished
aluminum product at a fixed price from one of our suppliers. If we were to sell
this material to our customer for an industry standard delivery three months
later, based on aluminum prices at time of delivery plus our gross profit margin
we would hedge by selling the underlying 100 metric tons on the LME to ensure
2
that we are matching the aluminum pricing for the month of delivery. By doing
so, we protect ourselves should the metal value decline in the time between when
the contract was entered into with our customers and the time of delivery. If at
any time our hedges are not fully effective, the gain or loss would be reflected
in our income statement.
As shown in the example above, we are not looking to take a view on either
aluminum prices or foreign exchange rates; indeed we try to avoid it. We hedge
daily on an order by order basis, because while we are skilled in the
distribution of semi finished aluminum products, we are not expert at
forecasting aluminum prices or foreign exchange rates. We are concerned that a
discussion of the impact of trends in aluminum pricing and foreign exchange
rates on the value of our hedge instruments and strategies may result in
investor confusion or be misleading concerning the nature of the risk. Our
hedging activities and customer contracts combine to neutralize these factors so
that they do not impact our results.
We believe the real risk in our business is not price or rate movements but
rather customer and counterparty credit risk. Accordingly, we have consistently
disclosed this risk in our periodic reports and will continue to do so. We will
also provide additional disclosure in our 2007 10-KSB to elaborate on the non
speculative nature of our hedges.
2. We note from your response to our prior comment number 4 that your
pre-tax income from foreign operations is less than five percent of
your total income before taxes. However, we note from Note O to your
financial statements that revenue generated from sales to foreign
customers was approximately 18%, 16%, ands 17% of total revenue for
fiscal years 2006, 2005, and 2004, respectively. As such, it appears
that your company's domestic operations may generate significantly
greater profit margins than your company's foreign operations. In this
regard, it appears that it may be appropriate for you to expand your
disclosure in MD&A to separately discuss your domestic and foreign
results of operations. Please revise your disclosure in future filings
accordingly, or tell us why you believe such revisions are unnecessary.
RESPONSE TO COMMENT 2:
- ---------------------
In response to the Staff's comment, we will our revise our disclosure
accordingly in future filings.
* * * * *
As requested in the Comment Letter, the Company acknowledges that:
o The Company is responsible for the adequacy and accuracy of
the disclosure in the filing;
o Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any
action with respect to the filing; and
3
o The Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
If you should have any questions concerning the enclosed matters, please contact
the undersigned at (201) 944-2200 x134.
Very truly yours,
/s/ Sandra Kahn
Sandra Kahn
4