10-K 1 d280938d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

  þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the fiscal year ended December 31, 2011

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: 001-32453

Metalico, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware     52-2169780
(State or other jurisdiction of     (I.R.S. Employer
incorporation or organization)     Identification No.)

186 North Avenue East

Cranford, NJ

 

07016

(Zip Code)

 

(908) 497-9610

(Registrant’s Telephone Number)

(Address of Principal Executive Offices)    

Securities registered under Section 12(b) of the Exchange Act:

 

Title of each Class

 

Name of each Exchange on which registered

None   None

Securities registered under Section 12(g) of the Exchange Act:

Common stock, $.001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨      NO  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨      NO  þ

Indicate by check mark 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  þ      NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  þ      NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨    Accelerated filer  þ    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ¨      NO  þ

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter was $238,888,733.

Number of shares of Common stock, par value $.001, outstanding as of March 10, 2012: 47,543,613

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for the 2012 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 hereof.


Table of Contents

METALICO, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2011

TABLE OF CONTENTS

 

         Page  
PART I   

Item 1.

 

Business

     2   

Item 1A.

 

Risk factors

     13   

Item 1B.

 

Unresolved Staff Comments

     24   

Item 2.

 

Properties

     24   

Item 3.

 

Legal Proceedings

     28   

Item 4.

 

Mine Safety Disclosures

     28   
PART II   

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     29   

Item 6.

 

Selected Financial Data

     31   

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     49   

Item 8.

 

Financial Statements and Supplementary Data

     50   

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     50   

Item 9A.

 

Controls and Procedures

     50   

Item 9B.

 

Other Information

     53   
PART III   

Item 10.

 

Directors, Executive Officers and Corporate Governance

     54   

Item 11.

 

Executive Compensation

     54   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     54   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     54   

Item 14.

 

Principal Accounting Fees and Services

     54   
PART IV   

Item 15.

 

Exhibits, Financial Statement Schedules

     54   

Signatures

     58   

Exhibit Index

     E-1   

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance, and are identified by words such as “may,” “will,” “should,” “expect,” “scheduled,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “potential,” or “continue” or the negative of such terms or other similar words. You should read these statements carefully because they discuss our future expectations, and we believe that it is important to communicate these expectations to our investors. However, these statements are only anticipations. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the factors discussed under “Risk Factors.” These factors may cause our actual results to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, we do not assume any responsibility for the accuracy and completeness of such statements in the future. Subject to applicable law, we do not plan to update any of the forward-looking statements after the date of this report to conform such statements to actual results.

 

1


Table of Contents

PART I

 

 

Item 1.    Business

Metalico, Inc. (referred to in this 10-K Report as “the Company,” “Metalico,” “we,” “us,” “our,” and similar terms) operates in three distinct business segments: (a) ferrous and non-ferrous scrap metal recycling (“Scrap Metal Recycling”), (b) platinum group and minor metals recycling (“PGM and Minor Metals Recycling”), and (c) lead metal product fabricating (“Lead Fabricating”). The Company’s operating facilities as of December 31, 2011 include twenty scrap metal recycling facilities, including a combined aluminum de-oxidizing plant, six PGM and Minor Metal Recycling facilities and four lead product manufacturing and fabricating plants. The Company markets a majority of its products on a national basis but maintains several international customers.

Metalico, Inc. was originally organized as a Delaware corporation in 1997. In 1999, the original Metalico was merged into a Colorado corporation. Later that year, the surviving Colorado corporation was merged into a newly organized Delaware corporation named Metalico, Inc., which continues today as our holding company. Our common stock began trading on the American Stock Exchange (now known as NYSE Amex) on March 15, 2005 under the symbol “MEA.”

We have historically maintained a small corporate team that sets our strategic goals and overall strategy. We manage our operations on a decentralized basis, allowing each subsidiary autonomy for its purchasing and sales. Recent additions to corporate management have been made in order to centralize selling capabilities in our scrap metal recycling segment to make better use of our economies of scale. The corporate team approves all acquisitions and operating budgets, allocates capital to the business units based upon expected returns and risk levels, establishes succession plans, ensures operations maintain a consistent level of quality, evaluates risk and holds the management of each business unit accountable for the performance of its respective business unit.

SUMMARY OF BUSINESS

Scrap Metal Recycling

We have concentrated on acquiring and successfully consolidating scrap operations by initially acquiring companies to serve as platforms into which subsequent acquisitions would be integrated. We believe that through the integration of our acquired businesses, we have enhanced our competitive position and profitability of our operations because of the elimination of redundant functions, greater utilization of operating assets, improved managerial and financial resources and broader distribution channels.

We continue to be one of the largest full-service metal recyclers in Central and Western New York, with eleven recycling facilities located in that regional market. During 2011, we continued the expansion of our regional markets. In February 2011, we purchased a 44-acre parcel of land, including a 177,500-square-foot building, in suburban Buffalo to house an indoor scrap metal shredder. The shredder installation includes a new state-of-the-art downstream separation system to maximize the recovery of valuable non-ferrous products. The shredder became operational in December 2011 and we expect full production at the facility in the first quarter of 2012. In February 2012 we acquired a small auto dismantler in Buffalo as an additional source of feedstock for the shredder. In January 2011, we acquired Goodman Services, Inc., a full service scrap metal recycler based in Bradford, Pennsylvania with additional operations in Jamestown, New York and Canton, Ohio. In December 2009, we purchased scrap processing facilities in Youngstown and Warren, Ohio. These acquisitions complement our platforms in Pittsburgh, Pennsylvania, Akron, Ohio and Buffalo and Rochester, New York.

Our operations primarily involve the collection and processing of ferrous and non-ferrous metals. We collect industrial and obsolete scrap metal, process it into reusable forms and supply the recycled metals to our ultimate consumers, including electric arc furnace mills, integrated steel mills, foundries, secondary smelters, aluminum recyclers and metal brokers. We acquire unprocessed scrap metals primarily in our local and regional markets and sell to consumers nationally and in Canada as well as to exporters and international brokers. We are

 

2


Table of Contents

also able to supply quantities of scrap aluminum to our aluminum recycling facility, catalytic converters to our PGM recycling subsidiaries and scrap lead to our lead fabricating subsidiaries. We believe that we provide comprehensive product offerings of both ferrous and non-ferrous scrap metals.

Our platform scrap facilities in New York, Ohio and Western Pennsylvania have ready access to highway and rail transportation, a critical factor in our business. In the Pittsburgh market, we have waterfront access with barge loading and unloading capabilities. In addition to buying, processing and selling ferrous and non-ferrous scrap metals, we manufacture de-oxidizing aluminum (“de-ox”), a form of alloyed aluminum, for the steel industry. In May 2008, we acquired Neville Metals, Assad Iron and Metals, Inc., Neville Recycling LLC and Platt Properties, LLC, an affiliated group of scrap metal recycling operations headquartered in Western Pennsylvania with a satellite yard in Colliers, West Virginia. These acquisitions expanded our strategy of diversifying our metal mix, which we believe, at times, mitigates our exposure to volatile commodity prices.

Our scrap metal recycling business has collection and processing facilities in the following locations as of the date of this filing:

 

Location

   Number of Facilities  

Buffalo, New York

     3   

Niagara Falls, New York

     1   

Lackawanna, New York (Hamburg)

     1   

Rochester, New York

     3   

Syracuse, New York

     1   

Jamestown, New York

     1   

Ithaca, New York (50% joint venture)

     1   

Akron, Ohio

     1   

Youngstown, Ohio

     1   

Warren, Ohio

     1   

Pittsburgh/Western Pennsylvania

     5   

Bradford, Pennsylvania

     1   

Colliers, West Virginia

     1   

Ferrous Scrap Industry.    Our ferrous (iron-based) products primarily include sheared, bundled and shredded scrap metal and other scrap metal, such as plate and structural, turnings, busheling and broken cast iron. We, and others in our industry, anticipate that in the long-term, the demand for recycled ferrous metals will increase due to the continuing transformation of the world’s steel producers from virgin iron ore-based blast furnaces to newer, technologically advanced electric arc furnace mini-mills. The electric arc furnace process, which primarily uses recycled metal compared with the traditional steel-making process that uses significantly less recycled metal, is more environmentally sound and energy efficient. By recycling steel, scarce natural resources are preserved and the need to disrupt the environment with the mining of virgin iron ore is reduced. Further, when recycled metal is used instead of iron ore for new steel production, air and water pollution generated by the production process decreases and energy demand is reduced.

Non-Ferrous Scrap Industry.    We also sort, process and package non-ferrous metals, which include aluminum, copper, stainless steel, brass, nickel-based alloys and high-temperature alloys, using similar techniques and through application of our technologies. The geographic markets for purchasing non-ferrous scrap tend to be larger than those for ferrous scrap due to the higher unit value of non-ferrous metals, which justify the cost of shipping over greater distances. Non-ferrous scrap is sold under multi-load commitments or on a single-load spot basis, either mill-direct or through brokers, to intermediate or end-users which include smelters, foundries and aluminum sheet and ingot manufacturers. Secondary smelters, utilizing processed non-ferrous scrap as raw material, can produce non-ferrous metals at a lower cost than primary smelters producing such metals from ore. This is due to the significant savings in energy consumption, environmental compliance and labor costs enjoyed by the secondary smelters. These cost advantages, and the long lead-time necessary to construct new non-ferrous primary smelting facilities, have generally resulted in sustained demand and strong prices for processed non-ferrous scrap during periods of high demand for finished non-ferrous metal products.

 

3


Table of Contents

PGM and Minor Metals Recycling

We recycle the platinum group metals (“PGMs”), platinum, palladium, and rhodium, from the substrate material retrieved from catalytic converters. The scrap catalytic device collection market is highly fragmented and characterized by a large number of suppliers dealing with a wide range of volumes. Converters for recycling are obtained from networks of auto dismantlers, scrap yards, parts dealers and manufacturers. The supply chain network has tended to develop regionally because the economics of collecting and distributing scrap converters to recyclers requires transportation from local scrap yards, often in small batches. Effective procurement is a key competitive strength and a significant barrier to entry as it requires significant knowledge and experience about the PGM loadings in different types of catalytic devices. The purchase price for converters is determined on the basis of PGM market prices and internal estimates of the amount of PGMs in each converter purchased. Once purchased, the converters are sorted and cut and the substrate material is removed and shipped to third-party processors which remove the PGMs from the substrate material by means of chemical and mechanical processes. We use forward sales contracts with these substrate processors to hedge against the possibility of extremely volatile metal prices. The Company also sells whole unprocessed converters

Minor Metals recycling includes such metals as molybdenum, tungsten, tantalum, niobium, rhenium and chrome. Specialized uses for these elements combined with a lack of abundance relative to traditional base metals results in higher pricing for these recyclable materials.

Our expansion into PGM and Minor Metals processing began in May 2007 when we acquired Tranzact Corporation, a recycler of molybdenum, tantalum and tungsten scrap located in Quarryville, Pennsylvania. In July 2007, we acquired a majority interest in Totalcat Group, Inc., a recycler and manufacturer of catalytic devices from whom we obtain platinum, palladium and rhodium, headquartered in Newark, New Jersey. In January 2008, we acquired the assets of American CatCon, another recycler of catalytic devices, with locations in Buda and Dallas, Texas, and Gulfport, Mississippi. Effective January 1, 2011, the Company identified PGM and Minor Metals Recycling as a new operating segment (after previously being grouped in the Scrap Metal Recycling segment). Management feels the separation provides clarity on the Company’s traditional scrap metal recycling operations and the operations of its specialized PGM and higher value Minor metals recycling.

Our PGM and Minor Metal recycling segment has facilities in these locations:

Newark, New Jersey

Quarryville, Pennsylvania

West Chester, Pennsylvania

Buda, Texas

Dallas, Texas

Gulfport, Mississippi

Lead Fabricating

Through four physical operations located in three states, we consume approximately 40 to 45 million pounds of lead metal per year that are utilized in more than one hundred different base products. Our products are sold nationally into diverse industries such as roofing, plumbing, radiation shielding for pharmaceutical and power generation, electronic solders, ammunition, automotive, Department of Defense contractors, and others.

Our Lead Fabricating segment has facilities in the following locations:

Birmingham, Alabama

Granite City, Illinois

 

4


Table of Contents

Healdsburg, California

Ontario, California

Our sales are concentrated within five main product lines: sheet lead, shot, extruded strip lead, machined lead parts and cast lead. Sheet lead is produced in a number of sizes, thicknesses, and alloys based upon customer requirements. Sheets are rolled to various thicknesses, cut to customer specifications and shipped to roof flashing manufacturers, fabricators of radiation shielding, sound attenuation and roofing contractors, and other users. Shot is produced and sold nationwide primarily to the recreational re-load market under the Lawrence and West Coast Shot brands. We also sell shot to cartridge manufacturers and industrial consumers. Shot is produced in several lead alloys and sizes. Strip lead is produced in rolls of various widths and lengths. Strip lead is used primarily in the construction industry. Cast lead is typically sold in pig, ingot, brick cylinder and rectangular form. Extruded wire and bar are used in plumbing applications, stained glass production, the electronics industry and the radiation shielding industry. Extruded pipe is used in the plumbing and roofing industries. Extruded products are available in flats, rounds, stars, pipe and custom designed configurations. Other lead products include roof flashings, lead wool, anodes and babbitt. Machined lead parts are sold to a diverse variety of industries and consumers.

Business Strategies

Our core business strategy is to grow our scrap metal recycling business through greenfield or brownfield projects and through acquisitions in existing, contiguous and new markets, and enhance our position as a high quality producer of recycled metal products through investments in state-of-the-art equipment and to improve operational density. Scrap metal recycling of ferrous and non-ferrous metals represented approximately 58.8% and 53.7% of our revenues for the years ended December 31, 2011 and 2010, respectively. Our ferrous and non-ferrous scrap metal recycling operations are the leading processors in their local markets. We intend to continue focusing on increasing our position as one of the largest recycled metals processors in our existing regional markets and exploring growth opportunities in contiguous and new geographic markets.

In July 2007, we diversified our commodity base by entering the platinum group metals recycling business through the acquisition of the Totalcat Group with further expansion in January 2008 with the acquisition of American CatCon. In this highly fragmented and competitive segment of the scrap industry, we will look to increase our presence in PGM recycling through internal growth.

In May 2008, we acquired the assets of a group of full service metals recycling companies in the Pittsburgh, Pennsylvania area comprised of two platform facilities and four feeder yards. Most notable to this acquisition was the addition of a state of the art automobile shredder providing Metalico with a strong platform to expand the volume and profitability of the ferrous component of our business. We obtained a second shredder in December 2009 when we acquired the assets of a group of recycling companies in northeastern Ohio. With the completion of our state of the art indoor shredder in western New York, we now have three shredding facilities, each with access to an extensive feeder yard network to source material.

Metalico has grown its lead fabricating business to be the largest non-battery lead fabricator in the U.S. This business does not typically require significant capital expenditures. We work to maximize cash flows and expand our market share in this business primarily by continued focus on operating efficiencies. We continually seek to reduce our largest operating expense, which is our raw material cost, by increasing the number of our suppliers of scrap and refined lead and reduce operating costs through further automation where appropriate. We carefully manage our other operating and administrative costs through continued integration and automation of the work flow process at our Alabama and Illinois facilities. In addition, we intend to grow this business through increased sales and marketing efforts and with the development of new products.

 

5


Table of Contents

Some of our specific business strategies are:

Improve operating density.    We intend to continue to improve operating density within our existing geographic market. We look to expand our customer base by marketing our range of services to existing and potential customers and consumers as well as by supplementing the activities in our existing platforms with complementary tuck-in acquisitions, or greenfield/brownfield feeder facilities where and as they may become available.

Expand scrap metal recycling.    In February 2011, we purchased a 44 acre site in the Buffalo, New York area and announced plans to construct an indoor, heavy-duty metal shredder capable of processing 100 to 120 tons of shredded scrap per hour. We anticipate full production to begin in the first quarter of 2012. In February 2012 we acquired a small auto dismantler in Buffalo as an additional source of feedstock for the shredder. Through our acquisition of assets in Youngstown, Ohio, in December 2009, we obtained our second automobile shredder, increasing our scrap processing capacity. We plan to continue leveraging our owned facilities through strategic tuck-in acquisitions. We continue to pursue further development to our auto-shredding capabilities, either through an acquisition or internal development, in order to better compete in that segment of the scrap metal recycling industry. In addition, we intend to grow through expanding the feeder network and explore select joint ventures with metal processors and suppliers.

Complete value-creating acquisitions.    Our strategy is to target acquisition candidates we believe will earn after-tax returns in excess of our cost of capital. In new markets, we seek to identify and acquire platform businesses that can provide market growth and consolidation opportunities. We have had success finding realistically valued acquisition opportunities in markets we target for expansion. However, we often face competition for these targets and we may be dependent on tight capital markets that could make these target acquisitions difficult.

Capture benefits of integration.    We have historically sought to capture the benefits of business integration whenever possible. For example, with the completion of our indoor shredder in the Buffalo area, a portion of feedstock previously shipped to a company-owned facility in Pittsburgh will be kept local, reducing transportation costs and decreasing the time to process material. Our current scrap yard network in western New York can now feed the Buffalo shredder operations. The locations of Goodman Services’ operations complement our existing facilities in the Great Lakes corridor: Bradford is 160 miles from our Pittsburgh operations and has become a feed source for the Pittsburgh shredder; Jamestown is 75 miles from our Buffalo yards; and Canton, Ohio is in close proximity to our operations in Akron, Ohio. The Youngstown, Ohio operations complement our Akron scrap operations only 50 miles west of Youngstown and our Pittsburgh regional scrap operations are headquartered only 70 miles east of our Youngstown facilities. Youngstown draws on our extensive network of scrap suppliers and capital resources to greatly increase operating capacity and utilization at the shredder and elsewhere in its operations. Our aluminum smelting and recovery facility in Syracuse, New York consumes many of the grades of aluminum scrap that our other scrap yards process. These relationships allows our subsidiaries to take advantage of transportation efficiencies, avoid some of the processing costs associated with preparing scrap for sale to third parties, internalize pricing mark-ups and expand service to consumers. In addition, we believe we enjoy a competitive advantage over non-vertically integrated lead fabrication companies as a result of our refining capabilities within our lead fabrication operations. Our Granite City, Illinois plant has the ability to process and refine various forms of scrap lead. Typically scrap lead can be purchased, processed and refined for less cost than refined lead can be purchased from existing suppliers. Our Granite City plant has the capacity to supply Mayco with one-half of its refined lead needs on a monthly basis, subject to cost and availability of scrap lead. We also sell batteries to lead smelting operations which in turn supply lead to Mayco through tolling arrangements.

Maximize operating efficiencies.    Our goal is to continue improving operating efficiency in all business segments in order to maximize operating margins in our business. We have made significant investments in property, plant and equipment designed to make us a more efficient processor, helping us to achieve economies

 

6


Table of Contents

of scale. In July 2011, we acquired 102 used rail cars at scrap value that are being refurbished and put back in service providing us with our own transportation fleet. At December 31, 2011, 48 of the cars were complete and in service. The lead rolling mill and upgraded plant facilities in Birmingham, Alabama, our primary lead production facility, have significantly increased the plant’s overall efficiency, both in terms of manufacturing costs and utility costs. On a Company wide basis, we continue to invest in new equipment and make improvements to enhance productivity and to protect the environment, such as upgrading non-ferrous separation systems and installing oil water collectors/separators in our scrap yards.

Mitigate commodity price risk.    We strive to maintain an appropriate sales mix of ferrous and non-ferrous metal products to reduce commodity price risk. We believe that in most economic environments, a diversified scrap metal operation minimizes our exposure to fluctuations in any single metal market. We sometimes enter into forward sales contracts with PGM substrate processors to limit exposure to rapid and significant fluctuations in platinum prices. Ferrous, Non-ferrous, PGM and Minor metals recycling represented approximately 39.8%, 25.4%, 25.7% and 8.2%, respectively, of our scrap metal recycling revenue for the year ended December 31, 2011 as compared to approximately 33.6%, 26.7, 32.7% and 6.3%, respectively, for the year ended December 31, 2010. Our non-ferrous sales are spread over five primary metals groups: aluminum, stainless steel, red metals, lead and high-temp alloys.

Rapidly turn inventory in order to minimize exposure to commodity price risk and avoid speculation.    We consistently turn inventory in order to minimize exposure to commodity price swings and maintain consistent cash flows.

SCRAP METAL RECYCLING

Our recycling operations encompass buying, processing and selling scrap metals. The principal forms in which scrap metals are generated include industrial scrap and obsolete scrap. Industrial scrap results as a by-product generated from residual materials from metal product manufacturing processes. Obsolete scrap consists primarily of residual metals from old or obsolete consumer and industrial products such as doors and window frames, appliances, plumbing fixtures, electrical supply components, automobiles and demolition of structures.

Ferrous Operations

Ferrous Scrap Purchasing.    We purchase ferrous scrap from two primary sources: (i) manufacturers who generate steel and iron, known as prompt or industrial scrap; and (ii) scrap dealers, peddlers, auto wreckers, demolition firms, railroads and others who generate steel and iron scrap, known as obsolete scrap. We collect ferrous scrap from sources other than those that are delivered directly to our processing facilities by placing retrieval boxes at these sources. In addition to these sources, we purchase, at auction or through competitive bidding, obsolete steel and iron from large industrial accounts. The primary factors that determine prices are market demand, competitive bidding, and the composition, quality, size, and quantity of the materials.

Ferrous Scrap Processing.    We prepare ferrous scrap metal for resale through a variety of methods including sorting, torching, shearing, cutting, baling, breaking and shredding. We produce a number of differently sized and shaped products depending upon consumer specifications and market demand.

 

   

Sorting.    After purchasing ferrous scrap metal, we inspect the material to determine how it can most efficiently be processed to maximize profitability. In some instances, scrap may be sorted and sold without further processing. We separate scrap for further processing according to its size and metallurgical composition by using conveyor systems, crane-mounted electromagnets and/or grapples.

 

   

Torching, Shearing or Cutting.    Pieces of oversized ferrous scrap, such as obsolete steel girders and used drill pipes, which are too large for other processing, are cut with hand-held acetylene torches, crane-mounted alligator shears or stationary guillotine shears. After being reduced to specific lengths or sizes, the scrap is then sold and shipped to those consumers who can accommodate larger materials in their furnaces, such as mini-mills.

 

7


Table of Contents
   

Block Breaking.    Obsolete automotive engine blocks are broken into several reusable metal byproducts with specialized machinery that eliminates a labor-intensive process with capability to efficiently and profitably process large volumes. The system also includes two oil/water separation systems that partially recover waste by-product into a re-usable energy source.

 

   

Baling.    We process light-gauge ferrous metals such as clips and sheet iron, and by-products from industrial manufacturing processes, such as stampings, clippings and excess trimmings, by baling these materials into large, dense, uniform blocks. We use cranes, front-end loaders and conveyors to feed the metal into hydraulic presses, which compress the materials into cubes at high pressure to achieve higher density for transportation and handling efficiency.

 

   

Breaking of Furnace Iron.    We process cast iron which includes blast cast iron, steel pit scrap, steel skulls and beach iron. Large pieces of iron are broken down by the impact of forged steel balls dropped from cranes. The fragments are then sorted and screened according to size and iron content.

 

   

Shredding.    We process discarded consumer products such as vehicles and large household appliances through our shredders to separate ferrous and non-ferrous metals from waste materials. Magnets extract shredded steel and other ferrous materials while a conveyor system carries the remaining non-ferrous metals and non-metallic waste for additional sorting and grading. Shredded ferrous scrap is primarily sold to steel mills seeking a higher consistency of yield and production flexibility that standard ferrous scrap does not offer.

Ferrous Scrap Sales.    We sell processed ferrous scrap to end-users such as steel mini-mills, integrated steel makers and foundries, and brokers who aggregate materials for large consumers. Most of our consumers purchase processed ferrous scrap according to a negotiated spot sales contract that establishes the price and quantity purchased for the month. The price at which we sell our ferrous scrap depends upon market demand and competitive pricing, as well as quality and grade of the scrap. In many cases, our selling price also includes the cost of rail, barge or truck transportation to the buyer. Ferrous scrap is shipped via truck, barge and rail transportation. Ferrous scrap transported via truck is sold predominately to mills usually located in Pennsylvania, New York and metropolitan Toronto within eight hours of our recycling facilities. Ferrous scrap transported via rail can be shipped anywhere in the continental United States. By barge, ferrous scrap is shipped to mills on the Mississippi River and exporters located in the Gulf region. Our recycling facilities ship primarily via rail to consumers in Pennsylvania, Ohio, Illinois, and Indiana and export yards to the east coast. Ferrous scrap metal sales accounted for approximately 35.4% and 29.6% of total revenue for the years ended December 31, 2011 and 2010, respectively. We believe our profitability may be enhanced by our offering a broad product line to a diversified group of scrap metal consumers. Our ferrous scrap sales are accomplished through a calendar month sales program managed centrally.

Non-Ferrous Operations

Non-Ferrous Scrap Purchasing.    We purchase non-ferrous scrap from three primary sources: (i) manufacturers and other non-ferrous scrap sources who generate waste aluminum, copper, stainless steel, brass, nickel-based alloys, high-temperature alloys and other metals; (ii) producers of electricity, telecommunication service providers, aerospace, defense, and recycling companies that generate obsolete scrap consisting primarily of copper wire, titanium and high-temperature alloys and used aluminum beverage cans; and (iii) peddlers who deliver directly to our facilities material which they collect from a variety of sources. We also collect non-ferrous scrap from sources other than those that are delivered directly to our processing facilities by placing re-usable retrieval boxes at the sources. The boxes are subsequently transported to our processing facilities usually by company owned trucks.

A number of factors can influence the continued availability of non-ferrous scrap such as the level of manufacturing activity and the quality of our supplier relationships. Consistent with industry practice, we have certain long-standing supply relationships which generally are not the subject of written agreements.

 

8


Table of Contents

Non-Ferrous Scrap Processing.    We prepare non-ferrous scrap metals, principally aluminum, stainless steel, copper and brass for resale by sorting, shearing, wire stripping, cutting, chopping, melting or baling.

 

   

Sorting.    Our sorting operations separate non-ferrous scrap manually and are aided by conveyor systems and front-end loaders. In addition, many non-ferrous metals are identified and sorted by using grinders and spectrometers and by torching. Our ability to identify metallurgical composition is critical to maximizing margins and profitability. Due to the high value of many non-ferrous metals, we can afford to utilize more labor-intensive sorting techniques than are employed in our ferrous operations. We sort non-ferrous scrap for further processing and upgrading according to type, grade, size and chemical composition. Throughout the sorting process, we determine whether the material can be cost effectively processed further and upgraded before being sold.

 

   

Copper and Brass.    Copper and brass scrap may be processed in several ways. We sort copper predominantly by hand according to grade, composition and size. We package copper and brass scrap by baling, boxing and other repacking methods to meet consumer specifications.

 

   

Aluminum and Stainless Steel.    We process aluminum and stainless steel based on type of alloy and, where necessary, size the pieces to consumer specifications. Large pieces of aluminum or stainless steel are cut using crane-mounted alligator shears and stationary guillotine shears and may be baled individually along with small stampings to produce large bales of aluminum or stainless steel. We also recover aluminum from consumer products such as vehicles and large household appliances through our shredding operations. Smaller pieces of aluminum and stainless steel are boxed individually and repackaged to meet consumer specifications.

 

   

Thermal Technology.    The aluminum smelting and recovery facility in Syracuse, New York uses a reverberatory furnace for melting various forms of aluminum scrap providing higher throughput, expanded feedstock and greater recovery efficiencies.

 

   

Other Non-Ferrous Materials.    We process other non-ferrous metals using similar cutting, baling and repacking techniques as are used to process copper and brass. Other significant non-ferrous metals we process come from such sources as titanium and high-temperature nickel-based alloys which are often hand sorted to achieve maximum value.

Non-Ferrous Scrap Sales.    We sell processed non-ferrous scrap to end-users such as specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, and brass and bronze ingot manufacturers. Prices for non-ferrous scrap are driven by demand for finished non-ferrous metal goods and by the general level of national and international economic activity, with prices generally linked to quotations for primary metal on the London Metal Exchange or COMEX Division of the New York Mercantile Exchange. Suppliers and consumers of non-ferrous metals also use these exchanges to hedge against metal price fluctuations by buying or selling futures contracts. Most of our consumers purchase processed non-ferrous scrap according to a negotiated spot sales contract that establishes the price and quantity. Non-ferrous scrap is shipped predominately via third-party truck to consumers generally located east of the Mississippi River. Non-ferrous metal sales accounted for approximately 22.6% and 23.5% of our total revenue for the years ended December 31, 2011 and 2010, respectively. We do not use futures contracts to hedge prices for our non-ferrous products.

PGM and Minor Metals Operations

Platinum Group Metal Purchasing.    We generally purchase catalytic converters from wholesale sources that include local and regional core buyers and collectors. Purchasing from wholesale sources provides the volume necessary to produce enough substrate material to garner competitive advantages. These wholesalers purchase converters from auto dismantlers, service station and repair shops, auto shredders and towing operators. The purchase price for converters is determined on the basis of PGM market prices and internal estimates of the amount of PGMs contained in each converter purchased. The expansion of the recycling market has led to a series of increasingly sophisticated players forming the catalytic device recycling supply chain. The PGM recycling business has tended to develop regionally as the economics of collecting and distributing scrap devices

 

9


Table of Contents

involves transportation from local scrap yards, often in small batches. We also occasionally buy converters directly from primary sources when economically feasible or when available. We also sell whole unprocessed converters.

Platinum Group Metal Scrap Processing.    We recover PGMs from scrap ceramic substrate automobile catalytic converters, scrap metal substrate automotive catalysts as well as from catalysts used in stationary and other industrial applications. The converter substrate is removed from the stainless steel shell of used catalytic converters through the use of hydraulic shears or other mechanical means. Once de-canned, the converter substrate material is aggregated and shipped to several third-party processors which recover the PGMs from the substrate material by means of chemical and mechanical processes.

Platinum Group Metal Scrap Sales.    PGM sales are based on the volume and price of PGMs recovered from processing catalytic converters and account for the majority of revenue. The value in PGM is significant enough that it is even profitable to recover minute particles of precious metal from the dust that ends up in the recycling plant’s air handling system. Scrap steel from the tail pipes of the exhaust sections as well as the metal casing of the catalytic converters is sold as ferrous scrap and generates revenues based on the market prices of stainless steel. The Company uses forward sales contacts with its material processing vendors to hedge against price fluctuations for the majority of its PGM contained material. PGM sales accounted for approximately 22.8% and 28.9% of our total revenue for the years ended December 31, 2011 and 2010, respectively.

Minor Metal Purchasing.    Minor Metals include metals such as molybdenum, tungsten, tantalum, niobium, rhenium and chrome. Specialized uses for these metals combined with a lack of abundance relative to traditional base metals results in higher pricing for these recyclable materials. Material is sourced domestically and internationally and is purchased primarily as waste produced from varying manufacturing processes directly from manufacturers as well as from wholesale material brokers.

Minor Metal Scrap Processing.    Minor metal processing uses some production techniques similar to traditional non-ferrous material recycling such as cutting and shearing. However, certain processed materials may require third-party processing and refining to separate the desired higher value minor metal from other elements. While the third-party processing adds costs to the product, it often produces a much higher grade of raw material for sale.

Minor Metal Scrap Sales.    Our Minor Metals recycling facility has been a critical player in the recycling of refractory metals and has become a trusted supplier to foundries, steel mills, and manufacturers around the world by returning these recovered high-value metals back into the manufacturing process. Minor Metal sales accounted for approximately 7.3% and 5.6% of our total revenue for the years ended December 31, 2011 and 2010, respectively.

Competition

The markets for scrap metals are highly competitive, both in the purchase of raw scrap and the sale of processed scrap. We compete to purchase raw scrap with numerous independent recyclers and large public scrap processors as well as larger and smaller scrap companies engaged only in collecting industrial scrap. Many of these recycling operations have substantially greater financial, marketing and other resources. Successful procurement of materials is determined primarily by the price and promptness of payment for the raw scrap and the proximity of the processing facility to the source of the unprocessed scrap. We compete in a global market with regard to the sale of processed scrap. Competition for sales of processed scrap is based primarily on the price, quantity and quality of the scrap metals, as well as the level of service provided in terms of consistency of quality, reliability and timing of delivery. Our competitive advantage derives from our ability to source and process substantial volumes, deliver a broad, reliable, high quality product line to consumers, transport the materials efficiently, and sell scrap in regional, national and international markets and to provide other value-added services to our suppliers and consumers.

 

10


Table of Contents

We occasionally face competition for purchases of unprocessed scrap from producers of steel products, such as integrated steel mills and mini-mills that have vertically integrated their current operations by entering the scrap metal recycling business. Many of these producers have substantially greater financial, marketing and other resources. Scrap metals processors also face competition from substitutes for prepared ferrous scrap, such as pre-reduced iron pellets, hot briquetted iron, pig iron, iron carbide and other forms of processed iron. The availability and cost of substitutes for ferrous scrap could result in a decreased demand for processed ferrous scrap, which could result in lower prices for such products.

LEAD FABRICATION

Products

We manufacture a wide variety of lead-based products through our sheet lead, machined lead, shot, strip lead, and cast lead product lines. Our products are sold nationally into diverse industries such as roofing, plumbing, radiation shielding, healthcare, ammunition, automotive, Department of Defense contractors, and others.

Manufacturing Process

Lead Shot:    Ingot or bulk lead is melted at the top levels of shot towers and poured into steel sizing pans. The molten lead drops several stories through the tower, forming a sphere and hardening while in air and ultimately landing in a water tank. After additional processing, lead shot that meets specifications is sorted by size, polished, weighed and packaged as finished product.

Sheet Lead:    Ingot or bulk lead is melted and alloying elements are added. After impurities are removed from the surface, the molten lead is then poured into heated molds to form various sized slabs. The slabs are rolled down into lead sheet, anodes, rolls and plates of desired thickness and cut to size.

Extruded Product:    Lead ingots in alloyed form are melted and forced through a precast die providing final shape. The cool, hardened product is then cut to the desired length and its thickness is measured to ensure the product meets specifications.

Cast Product:    Lead ingots in alloyed forms are melted and poured into precast molds. The cool hardened lead product is trimmed or machined for final use.

Machined parts:    Lead plate, sheet lead and extrusions are cut and formed using a variety of techniques.

Suppliers

We obtain refined lead through multi-month contracts and on occasion on a spot market basis. Principal sources of refined lead are domestic secondary lead smelters, imported primary lead marketed by brokers and, to a lesser extent, domestic primary lead smelters. We also generate refined lead by purchasing an extensive variety of scrap lead and refining it in our processing facilities. Changing lead markets may impact the Company’s ability to secure the volume of raw materials needed at pricing considered sustainable before driving consumers to consider substitute products. We also refine various forms of scrap lead by melting the scrap in kettles and removing impurities. We have the capacity to satisfy up to 50% of our refined lead needs through our in-house recovery capabilities.

Sales, Markets and Customers Served

We sell our lead fabrications nationally. Products are sold to distributors, wholesalers, the plumbing and building trades, equipment manufacturers and other consumers. We have stable, long-standing relationships with many of our customers. We sell substantial volumes of lead products used in home construction, such as lead flashings, sheet and strip, in many parts of the nation.

 

11


Table of Contents

Our sales and marketing department consists of internal salespeople who, in addition to sourcing leads for new business, function in a customer service role, working with existing customers. We also use independent sales representatives and product marketing organizations throughout the country.

Competition

Our lead fabrication facilities compete against two fabricators of similar but limited products based in the Southwest who distribute nationally and several smaller regional producers of similar products. To a lesser extent, we also compete against products imported from South America, Canada, Europe and Asia.

Seasonality and other conditions

Both the Scrap Metal Recycling and Lead Fabricating segments of our business generally experience seasonal slowness in the month of July and winter months, as customers tend to reduce production and inventories and winter weather impacts construction and demolition activity. In addition, periodic maintenance shutdowns or labor disruptions at our larger customers may have an adverse impact on our operations. Our operations can be adversely affected as well by protracted periods of inclement weather or reduced levels of industrial production, which may reduce the volume of material processed at our facilities. PGM operations are affected by the strength of the automobile manufacturing industry and the effects that production has on the price of platinum and related metals used in catalytic devices.

Employees

At March 1, 2012, we had 768 employees. Twenty-nine employees located at our Lead Fabricating facility in Granite City, Illinois were represented by the United Steelworkers of America and twenty-one employees located at our scrap processing facility in Akron, Ohio were represented by the Chicago and Midwest Regional Joint Board. On May 9, 2011, the Company ratified a new three-year agreement with the United Steelworkers of America which will expire on March 15, 2014. On July 8, 2011, the Company ratified a new three-year agreement with the Regional Joint Board which will expire on June 25, 2014.

A strike or work stoppage could impact our ability to operate the Granite City facility or the Akron facility. Our profitability could be adversely affected if increased costs associated with any future labor contracts are not recoverable through productivity improvements, price increases or cost reductions. We believe that we have good relations with our employees. However, there can be no guarantee that future contract negotiations will be successful or completed without a work stoppage.

Segment reporting

See Note 18 to the Company’s audited financial statements for the year ended December 31, 2011, located elsewhere in this report.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy these documents at the SEC’s Public Reference Room, which is located at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the SEC’s Public Reference Room. In addition, the SEC maintains an Internet website at www.sec.gov which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

12


Table of Contents

We make available at no cost on our website, www.metalico.com, our reports to the SEC and any amendments to those reports as soon as reasonably practicable after we electronically file or furnish such reports to the SEC. Interested parties should refer to the Investors link on the home page of our website located at www.metalico.com. Information contained on our website is not incorporated into this report. In addition, our Code of Business Conduct and Ethics and Insider Trading Policy, the charters for the Board of Directors’ Audit Committee and Compensation Committee, and the Board’s Statement of Nominating Principles and Procedures, all of which were adopted by our Board of Directors, can be found on the Company’s website through the Corporate Governance link on the Investors page. We will provide these governance documents in print to any stockholder who requests them. Any amendment to, or waiver of, any provision of the Code of Ethics and any waiver of the Code of Business Conduct and Ethics for directors or executive officers will be disclosed on our website under the Corporate Governance link.

Item 1A.    Risk Factors

Set forth below are risks that we believe are material to our business operations. Additional risks and uncertainties not known to us or that we currently deem immaterial may also impair our business operations.

Risks Relating To Our Business

Prices of commodities we own are volatile, which may adversely affect our operating results and financial condition.

Although we seek to turn over our inventory of raw or processed scrap metals as rapidly as markets dictate, we are exposed to commodity price risk during the period that we have title to products that are held in inventory for processing and/or resale. Prices of commodities, including scrap metals, have been extremely volatile and we expect this volatility to continue. Such volatility can be due to numerous factors beyond our control, including:

 

   

general domestic and global economic conditions, including metal market conditions;

 

   

competition;

 

   

the financial condition of our major suppliers and consumers;

 

   

the availability of imported finished metal products;

 

   

international demand for U.S. scrap;

 

   

the availability and relative pricing of scrap metal substitutes;

 

   

import duties and tariffs;

 

   

currency exchange rates;

 

   

demand for exchange traded funds; and

 

   

domestic and international labor costs.

Although we have historically attempted to raise the selling prices of our lead fabricating and scrap recycling products in response to an increasing price environment, competitive conditions may limit our ability to pass on price increases to our consumers. In a decreasing price environment, we may not have the ability to fully recoup the cost of raw materials used in fabrication and raw scrap we process and sell to our consumers.

The volatile nature of metal commodity prices makes it difficult for us to predict future revenue trends as shifting international and domestic demand can significantly impact the prices of our products, supply and demand for our products and affect anticipated future results. Most of our consumers purchase processed non-ferrous scrap according to a negotiated spot sales contract that establishes the price and quantity purchased for the month. We use forward sales contracts with PGM substrate processors to hedge against extremely volatile

 

13


Table of Contents

PGM metal prices. In the event our hedging strategy is not successful, our operating margins and operating results can be materially and adversely affected. In addition, the volatility of commodity prices and variability of yields, and the resulting unpredictability of revenues and costs, can adversely and materially affect our operating margins and other results of operations.

The profitability of our traditional scrap and PGM and Minor Metals recycling operations depends, in part, on the availability of an adequate source of supply.

We depend on scrap for our operations and acquire our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metals to us. In periods of low industry prices, suppliers may elect to hold scrap waiting for higher prices. If an adequate supply of scrap metal is not available to us, we would be unable to process metals at desired volumes and our results of operations and financial condition would be materially and adversely affected.

The cyclicality of our industry could negatively affect our sales volume and revenues.

The operating results of the metal recycling industry in general, and our operations specifically, are highly cyclical in nature. They tend to reflect and be amplified by general economic conditions, both domestically and internationally. Historically, in periods of national recession or periods of slowing economic growth, the operating results of metal recycling companies have been materially and adversely affected. For example, during recessions or periods of slowing economic growth, the automobile and the construction industries typically experience major cutbacks in production, resulting in decreased demand for steel, copper and aluminum. Cutbacks in the automotive and construction industries can cause significant fluctuations in supply, demand and pricing for our products, which can materially and adversely affect our results of operations and financial condition. Our ability to withstand significant economic downturns that we may encounter in the future will depend in part on our levels of debt and equity capital, operating flexibility and access to liquidity.

The volatility of the import and export markets may adversely affect our operating results and financial condition.

Our business may be adversely affected by increases in steel imports into the United States which will generally have an adverse impact on domestic steel production and a corresponding adverse impact on the demand for scrap metals domestically. Our operating results could also be negatively affected by strengthening or weakening in the US dollar. US dollar weakness provides some support to prices of commodities that are denominated in US dollars but with large non-US consumption and cost bases. For example, appreciation in the Chinese and Indian currencies have increased marginal costs of aluminum and iron ore production, thereby increasing the underlying cost basis for prices. Export markets, including Asia and in particular China, are important to the scrap metal recycling industry. Weakness in economic conditions in Asia and in particular slowing growth in China, could negatively affect us further.

The volatility of lead pricing may impact our ability to sell product.

Our lead fabricating facilities may be adversely impacted by increases or decreases in lead pricing. Changing lead markets may impact our ability to secure the volume of raw materials needed at pricing considered sustainable before driving consumers to substitute products. Disruptions in domestic or foreign lead refining capacity could impact our ability to secure enough raw materials to meet production requirements. Increases in the cost of lead could reduce the demand for lead products by making nonlead-bearing alternatives more cost attractive. Continued economic weakness in the U.S. and abroad will continue to negatively impact demand for our products.

 

14


Table of Contents

An impairment in the carrying value of goodwill or other acquired intangibles could negatively affect our operating results and net worth.

The carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of other intangibles represents the fair value of supplier lists, trademarks, trade names and other acquired intangibles. Goodwill and other acquired intangibles expected to contribute indefinitely to our cash flows are not amortized, but must be evaluated by our management at least annually for impairment. Events and conditions that could result in impairment include changes in the industries in which we operate, as well as competition, a significant product liability or environmental claim, or other factors leading to reduction in forecasted sales or profitability. At December 31, 2008, our market capitalization did not exceed total shareholders’ equity, which is one of many factors that are considered when determining goodwill impairment. These factors required us to incur a significant charge for impairment. As such, we recorded an impairment charge of $36.3 million to goodwill and $22.8 million to other intangibles for the year ended December 31, 2008. We had no impairments during the years ended December 31, 2011 and 2010. Going forward, if, upon performance of an impairment assessment, it is determined that such assets are impaired, additional impairment charges may be recognized by reducing the carrying amount and recording a charge against earnings. Should current economic and equity market conditions deteriorate, it is possible that we could have additional material impairment charges against earnings in a future period.

Our significant indebtedness may adversely affect our ability to obtain additional funds and may increase our vulnerability to economic or business downturns.

As of December 31, 2011, the total outstanding principal amount of debt outstanding was $129.8 million, before debt discount of $1.0 million related to our 7% convertible notes and the application of cash of $5.9 million available for repayment of such indebtedness. Subject to certain restrictions, exceptions and financial tests set forth in certain of our debt instruments, we will incur additional indebtedness in the future. We anticipate our debt service payment obligations during the next twelve months, to be approximately $20.3 million, comprised of principal coming due within the next twelve months of $12.6 million plus interest of $7.7 million on our total debt outstanding. As of December 31, 2011, approximately $33.1 million of our debt accrued interest at variable rates. We may experience material increases in our interest expense as a result of increases in general interest rate levels. Based on actual amounts outstanding as of December 31, 2011, if the interest rate on our variable rate debt were to increase by 1%, our annual debt service payment obligations would increase by $331,000. The degree to which we are leveraged could have important negative consequences to the holders of our securities, including the following:

 

   

general domestic and global economic conditions, including metal market conditions;

 

   

a substantial portion of our cash flow from operations will be needed to pay debt service and will not be available to fund future operations;

 

   

we have increased vulnerability to adverse general economic and metal recycling industry conditions; and

 

   

we may be vulnerable to higher interest rates because interest expense on borrowings under our loan agreement is based on margins over a variable base rate.

We continue to rely on borrowings under our credit facility and from other lenders to acquire other businesses and to operate our business. However, many financial institutions have been adversely impacted by the current financial crisis and, as a result, have ceased or reduced the amount of lending they have made available to their customers. As a result, we may have insufficient availability under our existing credit facility or the ability to borrow from other lenders to acquire additional businesses and to operate our business.

 

15


Table of Contents

Our indebtedness contains covenants that restrict our ability to engage in certain transactions and failure to comply with the terms of such indebtedness could result in a default that could have material adverse consequences for us.

Under our credit agreement, we are required to satisfy specified financial covenants, including fixed charge coverage ratio and capital expenditure covenants. As of December 31, 2011, we had exceeded our capital expenditure covenant of our credit agreement and our loan covering our new shredder. Both lenders waived non-compliance. We have in the past been in technical default under certain of our prior loan facilities, all of which had been waived. In addition, we have in the past adjusted covenants contained in our prior loan facilities to protect against noncompliance and prepaid some of our outstanding debt. Our ability to comply with these specified financial covenants may be affected by general economic and industry conditions, as well as market fluctuations in metal prices and other events beyond our control. We do not know if we will be able to satisfy all such covenants in the future. Our breach of any of the covenants contained in agreements governing our indebtedness, including our credit agreement, could result in a default under such agreements. In the event of a default, a lender could elect not to make additional loans to us, could require us to repay some of our outstanding debt prior to maturity, and/or to declare all amounts borrowed by us, together with accrued interest, to be due and payable. In the event that this occurs, we would likely be unable to repay all such accelerated indebtedness.

We have pledged substantially all of our assets to secure our borrowings and are subject to covenants that may restrict our ability to operate our business.

Any indebtedness that we incur under our existing credit agreement is secured by substantially all of our assets other than real estate, which is subject to a negative pledge. If we default under the indebtedness secured by our assets, those assets would be available to the secured creditors to satisfy our obligations to the secured creditors.

We may not generate sufficient cash flow to service all of our debt obligations.

Our ability to make payments on our indebtedness and to fund our operations depends on our ability to generate cash in the future. Our future operating performance is subject to market conditions and business factors that are beyond our control. We might not be able to generate sufficient cash flow to pay the principal and interest on our debt. If our cash flows and capital resources are insufficient to allow us to make scheduled payments on our debt, we may have to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our debt. The terms of our debt, including the security interests granted to our lenders, might not allow for these alternative measures, and such measures might not satisfy our scheduled debt service obligations. In addition, in the event that we are required to dispose of material assets or restructure or refinance our debt to meet our debt obligations, we cannot assure you as to the terms of any such transaction or how quickly such transaction could be completed.

We may seek to make acquisitions that may prove unsuccessful or strain or divert our resources.

We continuously evaluate potential acquisitions. We may not be able to complete any acquisitions on favorable terms or at all. Acquisitions present risks that could materially and adversely affect our business and financial performance, including:

 

   

the diversion of our management’s attention from our everyday business activities;

 

   

the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, the acquired business, including managing such acquired businesses either through our senior management team or the management of such acquired business; and

 

   

the need to expand management, administration and operational systems.

 

16


Table of Contents

If we make such acquisitions we cannot predict whether:

 

   

we will be able to successfully integrate the operations and personnel of any new businesses into our business;

 

   

we will realize any anticipated benefits of completed acquisitions;

 

   

economic conditions could deteriorate after closing; or

 

   

there will be substantial unanticipated costs associated with acquisitions, including potential costs associated with environmental liabilities undiscovered at the time of acquisition.

 

   

In addition, future acquisitions by us may result in:

 

   

potentially dilutive issuances of our equity securities;

 

   

the incurrence of additional debt;

 

   

restructuring charges; and

 

   

the recognition of significant charges for depreciation and amortization related to intangible assets.

We may in the future make investments in or acquire companies or commence operations in businesses and industries that are outside of those areas that we have operated historically. We cannot assure that we will be successful in managing any new business. If these investments, acquisitions or arrangements are not successful, our earnings could be materially adversely affected by increased expenses and decreased revenues.

The markets in which we operate are highly competitive. Competitive pressures from existing and new companies could have a material adverse effect on our financial condition and results of operations.

The markets for scrap metal are highly competitive, both in the purchase of raw scrap and the sale of processed scrap. We compete to purchase raw scrap with numerous independent recyclers, large public scrap processors and smaller scrap companies. Successful procurement of materials is determined primarily by the price and promptness of payment for the raw scrap and the proximity of the processing facility to the source of the unprocessed scrap. We occasionally face competition for purchases of unprocessed scrap from producers of steel products, such as integrated steel mills and mini-mills, which have vertically integrated their operations by entering the scrap metal recycling business. Many of these producers have substantially greater financial, marketing and other resources. Our operating costs could increase as a result of competition with these other companies for raw scrap.

We compete in a global market with regard to the sale of processed scrap. Competition for sales of processed scrap is based primarily on the price, quantity and quality of the scrap metals, as well as the level of service provided in terms of consistency of quality, reliability and timing of delivery. To the extent that one or more of our competitors becomes more successful with respect to any key factor, our ability to attract and retain consumers could be materially and adversely affected. Our scrap metal processing operations also face competition from substitutes for prepared ferrous scrap, such as pre-reduced iron pellets, hot briquetted iron, pig iron, iron carbide and other forms of processed iron. The availability of substitutes for ferrous scrap could result in a decreased demand for processed ferrous scrap, which could result in lower prices for such products.

Our lead fabricating operations compete against two fabricators of similar products in the Southwest who distribute nationally, and several smaller regional producers of competing products across much of our product line. To a lesser extent, we also compete against products imported from Central and South America, Canada, Europe and Asia. To the extent that one or more of our competitors becomes more successful with respect to any key factor, or new competition enters our markets, our ability to attract and retain consumers could be materially and adversely affected.

 

17


Table of Contents

Unanticipated disruptions in our operations or slowdowns by our shipping companies could adversely affect our ability to deliver our products, which could materially and adversely affect our revenues and our relationship with our consumers.

Our ability to process and fulfill orders and manage inventory depends on the efficient and uninterrupted operation of our facilities. In addition, our products are usually transported to consumers by third-party truck, rail carriers and barge services. As a result, we rely on the timely and uninterrupted performance of third party shipping companies and dock workers. Any interruption in our operations or interruption or delay in transportation services could cause orders to be canceled, lost or delivered late, goods to be returned or receipt of goods to be refused or result in higher transportation costs. As a result, our relationships with our consumers and our revenues and results of operations and financial condition could be materially and adversely affected.

Our operations consume large amounts of electricity and natural gas, and shortages, supply disruptions or substantial increases in the price of electricity and natural gas could adversely affect our business.

The successful operation of our facilities depends on an uninterrupted supply of electricity. Accordingly, we are at risk in the event of an energy disruption. The electricity industry has been adversely affected by shortages in regions outside of the locations of our facilities. Prolonged black-outs or brown-outs or disruptions caused by natural disasters such as hurricanes or flooding would substantially disrupt our production. Any such disruptions could materially and adversely affect our operating results and financial condition. Electricity prices are volatile and are expect to remain so in the near future. Additional prolonged substantial increases would have an adverse effect on the costs of operating our facilities and would negatively impact our gross margins unless we were able to fully pass through the additional expense to our consumers.

We depend on an uninterrupted supply of natural gas in our de-ox and lead fabricating facilities. Supply for natural gas depends primarily upon the number of producing natural gas wells, wells being drilled, completed and re-worked, the depth and drilling conditions of these wells and access to dependable methods of delivery. The level of these activities is primarily dependent on current and anticipated natural gas prices. Many factors, such as the supply and demand for natural gas, general economic conditions, political instability or armed conflict in worldwide natural gas producing regions and global weather patterns including natural disasters such as hurricanes affect these prices. Natural gas prices in the past have been very volatile. Additional prolonged substantial increases would have an adverse effect on the costs of operating our facilities and would negatively impact our gross margins unless we were able to fully pass through the additional expense to our consumers. We purchase most of our electricity and natural gas requirements in local markets for relatively short periods of time. As a result, fluctuations in energy prices can have a material adverse effect on the costs of operating our facilities and our operating margins and cash flow.

The loss of any member of our senior management team or a significant number of our managers could have a material adverse effect on our ability to manage our business.

Our operations depend heavily on the skills and efforts of our senior management team, including Carlos E. Agüero, our Chairman, President and Chief Executive Officer, Michael J. Drury, our Executive Vice-President and Chief Operating Officer for PGM and Lead Operations, Kenneth P. Mueller, our Senior Vice President and Chief Operating Officer of Ferrous and Nonferrous Scrap Metal Recycling, and the other employees who constitute our executive management team. In addition, we rely substantially on the experience of the management of our subsidiaries with regard to day-to-day operations. We have employment agreements with Messrs. Agüero and Drury and certain other members of our management team that expire in December 2012. Our employment agreement with Mr. Mueller expires in February 2014. However, there can be no assurance that we will be able to retain the services of any of these individuals. We face intense competition for qualified personnel, and many of our competitors have greater resources than we have to hire qualified personnel. The loss of any member of our senior management team or a significant number of managers could have a material adverse effect on our ability to manage our business.

 

18


Table of Contents

The concentration of our consumers and our exposure to credit risk could have a material adverse effect on our results of operations and financial condition.

Sales to our ten largest consumers represented approximately 46.3% of consolidated net sales for the year ended December 31, 2011 and 51.8% of consolidated net sales for the year ended December 31, 2010. Sales to our largest consumer represented approximately 17.3% of consolidated net sales for the year ended December 31, 2011 and 23.6% of consolidated net sales for the year ended December 31, 2010. In connection with the sale of our products, we generally do not require collateral as security for consumer receivables and do not maintain credit insurance. We have significant balances owing from some consumers that operate in cyclical industries and under leveraged conditions that may impair the collectability of those receivables. The loss of a significant consumer or our inability to collect accounts receivable would negatively impact our revenues and profitability and could materially and adversely affect our results of operations and financial condition.

A significant increase in the use of scrap metal alternatives by current consumers of processed scrap metals could reduce demand for our products.

During periods of high demand for scrap metals, tightness can develop in the supply and demand balance for ferrous scrap. The relative scarcity of ferrous scrap, particularly the “cleaner” grades, and its high price during such periods have created opportunities for producers of alternatives to scrap metals, such as pig iron and direct reduced iron pellets, to offer their products to our consumers. Although these alternatives have not been a major factor in the industry to date, the use of alternatives to scrap metals may proliferate in the future if the prices for scrap metals rise or if the levels of available unprepared ferrous scrap decrease. As a result, we may be subject to increased competition which could adversely affect our revenues and materially and adversely affect our operating results and financial condition.

In order to maintain the supply line of catalytic converters for our PGM operations, we make unsecured advances to vendors. A significant downturn in the price of platinum group metals could result in the loss of a significant portion of those unsecured advances.

Vendor advances consist principally of unsecured advances to suppliers for purchase of catalytic converters for recycling. These advances are necessary in order to maintain the supply line of catalytic converters. Management works diligently to monitor such advances. As of December 31, 2011, advances to vendors totaled $1.8 million, and were reduced by an allowance of $317,000 for uncollectible advances. Net advances of $1.5 million were reported in prepaid and other current assets in the consolidated balance sheet as of December 31, 2011. A significant downturn in the price of platinum group metals could result in the loss of a significant portion of these advances and have a negative impact to our operating results.

Our operations are subject to stringent regulations, particularly under applicable environmental laws, which could subject us to increased costs.

The nature of our business and previous operations by others at facilities owned or operated by us make us subject to significant government regulation, including stringent environmental laws and regulations. Among other things, these laws and regulations impose comprehensive statutory and regulatory requirements concerning, among other matters, the treatment, acceptance, identification, storage, handling, transportation and disposal of industrial by-products, hazardous and solid waste materials, waste water, storm water effluent, air emissions, soil contamination, surface and ground water pollution, employee health and safety, operating permit standards, monitoring and spill containment requirements, zoning, and land use, among others. Various laws and regulations set prohibitions or limits on the release of contaminants into the environment. Such laws and regulations also require permits to be obtained and manifests to be completed and delivered in connection with the operations of our businesses, and in connection with any shipment of prescribed materials so that the movement and disposal of such material can be traced and the persons responsible for any mishandling of such material can be identified. This regulatory framework imposes significant actual, day-to-day compliance burdens,

 

19


Table of Contents

costs and risks on us. Violation of such laws and regulations may and do give rise to significant liability, including fines, damages, fees and expenses, and closure of a site. Generally, the governmental authorities are empowered to act to clean up and remediate releases and environmental damage and to charge the costs of such cleanup to one or more of the owners of the property, the person responsible for the release, the generator of the contaminant and certain other parties or to direct the responsible party to take such action. These authorities may also impose a penalty or other liens to secure the parties’ reimbursement obligations.

Environmental legislation, regulation and enforcement continue to evolve and it is possible that we will be subject to even more stringent environmental standards in the future. For these reasons, future capital expenditures for environmental control facilities cannot be predicted with accuracy; however, as environmental control standards become more stringent, our compliance expenditures could increase substantially. Due to the nature of our lead fabricating and scrap metal recycling businesses, it is likely that inquiries or claims based upon environmental laws may be made in the future by governmental bodies or individuals against us and any other scrap metal recycling entities that we may acquire. The location of some of our facilities in urban areas may increase the risk of scrutiny and claims. We cannot predict whether any such future inquiries or claims will in fact arise or the outcome of such matters. Additionally, it is not possible to predict the amounts of all capital expenditures or of any increases in operating costs or other expenses that we may incur to comply with applicable environmental requirements, or whether these costs can be passed on to consumers through product price increases.

Moreover, environmental legislation has been enacted, and may in the future be enacted, to create liability for past actions that were lawful at the time taken but that have been found to affect the environment and to create public rights of action for environmental conditions and activities. As is the case with lead fabricating, scrap metal and PGM and Minor Metals recycling businesses in general, if damage to persons or the environment has been caused, or is in the future caused, by hazardous materials activities of us or our predecessors, we may be fined and held liable for such damage. In addition, we may be required to remedy such conditions and/or change procedures. Thus, liabilities, expenditures, fines and penalties associated with environmental laws and regulations might be imposed on us in the future, and such liabilities, expenditures, fines or penalties might have a material adverse effect on our results of operations and financial condition.

We are subject to potential liability and may also be required from time to time to clean up or take certain remedial action with regard to sites currently or formerly used in connection with our operations. Furthermore, we may be required to pay for all or a portion of the costs to clean up or remediate sites we never owned or on which we never operated if we are found to have arranged for transportation, treatment or disposal of pollutants or hazardous or toxic substances on or to such sites. We are also subject to potential liability for environmental damage that our assets or operations may cause nearby landowners, particularly as a result of any contamination of drinking water sources or soil, including damage resulting from conditions existing prior to the acquisition of such assets or operations. Any substantial liability for environmental damage could materially adversely affect our operating results and financial condition, and could materially adversely affect the marketability and price of our stock.

Certain of our sites are contaminated, and we are responsible for certain off-site contamination as well. Such sites may require investigation, monitoring and remediation. The existence of such contamination may result in federal, local and/or private enforcement or cost recovery actions against us, possibly resulting in disruption of our operations, and/or substantial fines, penalties, damages, costs and expenses being imposed against us. We expect to require future cash outlays as we incur costs relating to the remediation of environmental liabilities and post-remediation compliance. These costs may have a material adverse effect on our results of operations and financial condition.

Environmental impairment liability insurance is prohibitively expensive and limited in the scope of its coverage. Our general liability insurance policies in most cases do not cover environmental damage. If we incur significant liability for environmental damage not covered by insurance; or for which we have not adequately reserved; or for which we are not adequately indemnified by third parties; our results of operations and financial condition could be materially adversely affected.

 

20


Table of Contents

In the past we have upon occasion been found not to be in compliance with certain environmental laws and regulations, and have incurred fines associated with such violations which have not been material in amount. We may in the future incur additional fines associated with similar violations. We have also paid some or all of the costs of certain remediation actions at certain sites. On occasion these costs have been material. Material fines, penalties, damages and expenses resulting from additional compliance issues and liabilities might be imposed on us in the future.

Due diligence reviews in connection with our acquisitions to date and environmental assessments of our operating sites conducted by independent environmental consulting firms have revealed that some soil, surface water and/or groundwater contamination, including various metals, arsenic, petrochemical byproducts, waste oils and volatile organic compounds, is present at certain of our operating sites. Based on our review of these reports, we believe that it is possible that migratory contamination at varying levels may exist at some of our sites, and we anticipate that some of our sites could require investigation, monitoring and remediation in the future. Moreover, the costs of such remediation could be material. The existence of contamination at some of our facilities could adversely affect our ability to sell these properties if we choose to sell such properties, and may generally require us to incur significant costs to take advantage of any future selling opportunities.

We believe that we are currently in material compliance with applicable statutes and regulations governing the protection of human health and the environment, including employee health and safety. We can give no assurance, however, that we will continue to be in compliance or to avoid material fines, penalties and expenses associated with compliance issues in the future.

If more of our employees become members of unions, our operations could be subject to interruptions, which could adversely affect our results of operations and cash flow.

As of December 31, 2011, approximately 6% of our workforce was covered by collective bargaining agreements at two of our operating facilities. Approximately 26 employees located at our Lead Fabricating facility in Granite City, Illinois were represented by the United Steelworkers of America and approximately 23 of our employees located at our scrap processing facility in Akron, Ohio were represented by the Chicago and Midwest Regional Joint Board. On May 9, 2011, we ratified a new three-year agreement with the United Steelworkers of America that will expire on March 15, 2014. On July 8, 2011, we ratified a new three-year agreement with the Regional Joint Board that will expire on June 25, 2014. Although we are not aware at this time of any current attempts to organize other employees of ours, our employees may organize in the future. If we are unable to successfully renegotiate the terms of the contracts governing our employees currently or in the future or if we experience any extended interruption of operations at any of our facilities as a result of strikes or other work stoppages, our results of operations and cash flows could be materially and adversely affected.

Our operations present significant risk of injury or death. We may be subject to claims that are not covered by or exceed our insurance.

Because of the heavy industrial activities conducted at our facilities, there exists a risk of injury or death to our employees or other visitors, notwithstanding the safety precautions we take. Our operations are subject to regulation by federal, state and local agencies responsible for employee health and safety, including the Occupational Safety and Health Administration (“OSHA”), which has from time to time levied fines against us for certain isolated incidents. While we have in place policies to minimize such risks, we may nevertheless be unable to avoid material liabilities for any employee death or injury that may occur in the future. These types of incidents may not be covered by or may exceed our insurance coverage and may have a material adverse effect on our results of operations and financial condition.

 

21


Table of Contents

Our business is seasonal and affected by weather conditions, which could have an adverse effect on our revenues and operating results.

Both of our business segments generally experience seasonal slowness in the months of July and December, as consumers tend to reduce production and inventories. In addition, periodic maintenance shutdowns or labor disruptions at our larger consumers may have an adverse impact on our operations. Our operations can also be adversely affected by periods of inclement weather, particularly during the winter and during the hurricane season in the Southeast region of the United States, which can adversely impact industrial and construction activity as well as transportation and logistics.

We face certain product liability and warranty claims that may harm our business.

Our operations expose us to product liability claims if our products cause injury or are otherwise found to be defective. Regardless of their merit or eventual outcome, product liability claims may be time consuming and costly to defend and may result in decreased demand for a product, injury to our reputation and loss of revenues. Thus, whether or not we are insured, a product liability claim or product recall may result in losses that could be material. In addition, if we fail to meet contractual requirements for a product, we may be subject to product warranty costs and claims. These costs could both have a material adverse effect on our financial condition and results of operations and harm our reputation.

We intend to develop “greenfield” projects which are subject to risks commonly associated with such projects.

We intend to develop “greenfield” projects, either on our own or through joint ventures. There are risks commonly associated with the start-up of such projects which could result in operating difficulties or delays in the start-up period and may cause us not to achieve our planned production, timing, quality, environmental or cost projections, which could have a material adverse effect on our results of operations, financial condition and cash flows. These risks include, without limitation, difficulties in obtaining permits, equipment failures or damage, errors or miscalculations in engineering, design specifications or equipment manufacturing, faulty construction or workmanship, defective equipment or installation, human error, industrial accidents, weather conditions, failure to comply with environmental and other permits, and complex integration of processes and equipment.

Our industry is exposed to certain risks due to the bulk nature of materials that require quantity estimates.

Our operations involve the intake, processing, and transport of bulk materials. Although we make diligent efforts to monitor and confirm exact amounts of inventory at all phases of our operations, inventory counts from time to time may include estimates of material. We believe our estimates to be reasonable and we apply various internal controls (including, among other methods, weighing deliveries and rolling inventory balances using quantities bought and sold) to check their validity.

Risks Relating to Our Common Stock

We do not expect to pay any dividends for the foreseeable future. Our stockholders may never obtain a return on their investment.

We have never declared or paid dividends on our common stock, and we do not expect to pay cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all our earnings, if any, in the foreseeable future will be used to finance the operation and growth of our business. In addition, our ability to pay dividends to holders of our capital stock is limited by our senior secured credit facilities, term notes and our outstanding convertible notes. Any future determination to pay dividends on our common stock is subject to the discretion of our Board of Directors and will depend upon various factors, including, without limitation, our results of operations and financial condition.

 

22


Table of Contents

Our amended and restated certificate of incorporation, our bylaws, Delaware law and certain instruments binding on us contain provisions that could discourage a change in control.

Some provisions of our amended and restated certificate of incorporation and bylaws, as well as Delaware law, may be deemed to have an anti-takeover effect or may delay or make more difficult an acquisition or change in control not approved by our Board of Directors, whether by means of a tender offer, open market purchases, a proxy contest or otherwise. These provisions could have the effect of discouraging third parties from making proposals involving an acquisition or change in control, although such a proposal, if made, might be considered desirable by a majority of our stockholders. These provisions may also have the effect of making it more difficult for third parties to cause the replacement of our current management team without the concurrence of our Board of Directors. In addition, our outstanding convertible notes and certain of our warrants also contain change in control provisions that could discourage a change in control.

We have incurred and will continue to incur significant increased costs in order to assess our internal controls over financial reporting and our internal controls over financial reporting may be found to be deficient.

Section 404 of the Sarbanes-Oxley Act of 2002 requires management to assess its internal controls over financial reporting and requires auditors to attest to that assessment. Current regulations of the Securities and Exchange Commission, or SEC, require us to include this assessment and attestation in our Annual Report on Form 10-K for each of our fiscal years.

We have incurred and will continue to incur significant increased costs in maintaining compliance with existing subsidiaries, implementing and testing controls at recently acquired subsidiaries and responding to the new requirements. In particular, the rules governing the standards that must be met for management to assess its internal controls over financial reporting under Section 404 are complex and require significant documentation, testing and possible remediation. Our process of reviewing, documenting and testing our internal controls over financial reporting may cause a significant strain on our management, information systems and resources. We may have to invest in additional accounting and software systems. We have been and may continue to be required to hire additional personnel and to use outside legal, accounting and advisory services. In addition, we will incur additional fees from our auditors as they perform the additional services necessary for them to provide their attestation. If we are unable to favorably assess the effectiveness of our internal control over financial reporting when we are required to, we may be required to change our internal control over financial reporting to remediate deficiencies. In addition, investors may lose confidence in the reliability of our financial statements causing our stock price to decline.

The market price of our common stock has been volatile over the past twelve months and may continue to be volatile.

The market price of our common stock has been and continues to be volatile. We cannot predict the price at which our common stock will trade in the future and it may decline. The price at which our common stock trades may fluctuate significantly and may be influenced by many factors, including our financial results, developments generally affecting our industries, the performance of each of our business segments, our capital structure (including the amount of our indebtedness), general economic, industry and market conditions, the depth and liquidity of the market for our common stock, fluctuations in metal prices, investor perceptions of our business and us, reports by industry analysts, negative announcements by our customers, competitors or suppliers regarding their own performances, and the impact of other “Risk Factors” discussed in this prospectus.

 

23


Table of Contents

Future sales of our common stock, including sales of our common stock acquired upon the exercise of outstanding options or warrants or upon conversion of our outstanding convertible notes, may cause the market price of our common stock to decline.

We had 47,467,897 shares of common stock outstanding as of December 31, 2011. We also had 334,300 shares granted but unissued to employees under the Long-Term Incentive Plan as of December 31, 2011. In addition, options to purchase an aggregate of 2,177,616 shares of our common stock were outstanding, of which 1,722,940 were vested as of December 31, 2011. All remaining options will vest over various periods ranging up to a three-year period measured from the date of grant. As of December 31, 2011, the weighted-average exercise price of the vested stock options was $8.20 per share. As of December 31, 2011, we also had warrants to purchase an aggregate of 1,419,231 shares of common stock outstanding, at a weighted-average exercise price of $12.89 per share and convertible notes in the principal amount of $76.1 million outstanding, which are convertible at a price of $14.00 per share. The convertible notes contain “weighted average” anti-dilution protection which provides for an adjustment of the conversion price of the notes in the event that we issue shares of our common stock or securities convertible or exercisable for shares of our common stock at a price below the conversion price of the notes. The amount of any such adjustment will depend on the price such securities are sold at and the number of shares issued or issuable in such transaction. We also may issue additional shares of stock in connection with our business, including in connection with acquisitions and financings and may grant additional stock options to our employees, officers, directors and consultants under our stock option plans or warrants to third parties. If a significant portion of these shares were sold in the public market, the market value of our common stock could be adversely affected.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Our facilities are generally comprised of:

 

   

indoor and outdoor processing areas;

 

   

various pieces of production equipment and transportation related equipment;

 

   

warehouses for the storage of repair parts and of unprocessed and processed ferrous and non-ferrous scrap;

 

   

storage yards for unprocessed and processed scrap;

 

   

machine or repair shops for the maintenance and repair of vehicles and equipment;

 

   

scales for weighing scrap;

 

   

loading and unloading facilities;

 

   

administrative offices; and

 

   

garages for transportation equipment.

Our scrap processing facilities have specialized equipment for processing various types and grades of scrap metal, which may include: grapples and magnets and front-end loaders to transport and process both ferrous and non-ferrous scrap, crane-mounted alligator or stationary guillotine shears to process large pieces of scrap, wire stripping and chopping equipment, balers and torch cutting stations. Processing operators transport inbound and outbound scrap on a fleet of rolloff trucks, dump trucks, stake-body trucks and lugger trucks.

A significant portion of our outbound ferrous scrap products are shipped in rail cars generally provided by the railroad company that services seven of our scrap locations.

Fabrication facilities include shot towers, rolling mills of various sizes, extrusion presses, mold casting lines and refining kettles used to process and make a variety of lead-based products.

 

24


Table of Contents

The following table sets forth information regarding our principal properties:

 

Location

  

Operations

   Buildings
Approx.
Square Ft.
     Approx.
Acreage
     Leased/
Owned

Metalico, Inc.

   Corporate Headquarters      6,190         N/A       Leased(1)

186 North Ave. East

           

Cranford, NJ

           

Mayco Industries, Inc.

18 West Oxmoor Rd.

Birmingham, AL

19 West Oxmoor Rd.

Birmingham, AL

1200 16th St.

Granite City, IL

   Office/ Lead Product Fabrication and Manufacturing and Storage      96,183         7.5       Owned
           
           
   Warehouse      75,000         1.7       Leased(2)
           
   Office/ Lead Product Fabrication      180,570         12.5       Owned
           

Metalico Buffalo, Inc.

   Office/Scrap Processor/ Metal Storage      312,966         24       Owned

127 Fillmore Ave.

           

Buffalo, NY

           

2504 South Park Ave

   Office/Buying Center      4,584         1.0       Leased(3)

Lackawanna, NY

           

Buffalo Shredding and Recovery, LLC

  

Office/ Scrap Processor/

Metal Storage

  

 

177,500

  

  

 

44

  

  

Owned(4)

3175 Lake Shore Rd.

           

Hamburg, NY

           

Metalico Rochester, Inc.

   Office/Scrap Processor/ Metal Storage      74,175         12.7       Owned

1515 Scottsville Rd.

           

Rochester, NY

           

50 Portland Ave.

   Office/Scrap Processor/ Metal Storage      27,500         3.2       Owned

Rochester, NY

           

Metalico Transport, Inc.

  

Office/Scrap Handling/ Rail Sittings

for Transshipping/Storage

     28,992         12       Leased(5)

1951 Hamburg Turnpike

           

Lackawanna, NY

           

Metalico Aluminum Recovery, Inc.

6443 Thompson Rd.

Dewitt, NY

  

Office/ Scrap Handling/ Aluminum Melting/ De-Ox

Production/Storage

     108,000         22       Owned
           
           

Metalico Niagara, Inc.

2133 Maple Ave.

Niagara Falls, NY

   Office/Scrap Processor/ Metal Storage      4,050         1       Leased(6)
           
           

Santa Rosa Lead Products, Inc.

   Office/ Lead Product Fabrication and Storage      14,000         1.5       Leased(7)

33 So. University St.

           

Healdsburg, CA

           

3949 Guasti Rd.

   Office/Production/Storage      6,160         N/A       Leased(8)

Ontario, CA

           

Metalico Transfer, Inc.

   Office/ Waste Transfer Station      35,000         5       Owned

150 Lee Road

           

Rochester, NY

           

 

25


Table of Contents

Location

  

Operations

   Buildings
Approx.
Square Ft.
     Approx.
Acreage
     Leased/
Owned

Totalcat Group, Inc.

2-20 E. Peddie Street

Newark, NJ

1075 Andrew Drive.

West Chester, PA

502 York Street

Elizabeth, NJ

   Office/Catalytic Converter Processor/ Material Storage      22,000         N/A       Leased(9)
   Office/ Production/ Material Storage      37,702         N/A       Leased(10)
           
   Office/Catalytic Converter Processor/ Material Storage      75,600         3.0       Leased(11)

Metalico Akron, Inc

888 Hazel Street

Akron, OH

943 Hazel Street

Akron, OH

   Office/Scrap Processor/ Metal Storage      6,660         10.3       Owned
  

Scrap Processor/ Metal Storage

     34,350         19.7       Owned

Tranzact, Inc.

1185 Lancaster Pike

Quarryville, PA

   Office/ Scrap Processor/ Metal Storage      12,000         2.7       Leased(12)

American CatCon, Inc.

17401 Interstate Highway 35

Buda, TX

4577 Mint Way

Dallas, TX

10123 Southpark Drive

Gulfport, MS

   Office/Catalytic Converter Processor/ Material Storage      30,000         10       Leased(13)
   Office/Catalytic Converter Processor/ Material Storage      6,664         N/A       Leased(14)
   Office/Catalytic Converter Processor/ Material Storage      10,000         2.5       Owned

Metalico Pittsburgh, Inc.

3100 Grand Avenue

Neville Township, PA

3400 Grand Avenue

Neville Township, PA

Albany Road

Brownsville, PA

1093 Fredonia Road

Hadley, PA

2024 Harmon Creek Road

Colliers, WV

96 Oliver Road

Uniontown, PA

   Office/ Scrap Processor/ Metal Storage      751,878         17.26       Owned
   Office/ Scrap Processor/ Metal Storage      247,734         5.68       Owned
   Office/ Scrap Processor/ Metal Storage      99,841         12.51       Owned
   Office/ Scrap Processor/ Metal Storage      5,096         4.92       Owned
   Office/ Scrap Processor/ Metal Storage      5,050         3.28       Owned
   Office/ Scrap Processor/ Metal Storage      4,000         18.6       Leased(15)

Metalico Youngstown, Inc.

100 Division Street

Youngstown, OH

1420 Burton Street SE

Warren, OH

3108 DeForest Road

Warren, OH

   Office/ Scrap Processor/ Metal Storage      5,226         16.86       Owned
   Office/ Scrap Processor/ Metal Storage      6,250         2.15       Owned
   Office/ Scrap Processor/ Metal Storage      7,920         4.52       Owned

 

26


Table of Contents

Location

  

Operations

   Buildings
Approx.
Square Ft.
     Approx.
Acreage
     Leased/
Owned

Goodman Services, Inc.

286 High Street

Bradford, PA

5338 Route 474

Ashville, NY

   Office/ Scrap Processor/ Metal Storage      20,000         12       Owned
   Office/ Scrap Processor/ Metal Storage      12,000         12.5       Owned
           

Skyway Auto Parts, Inc.

637 Tifft Street

Buffalo, NY

   Office/ Scrap Processor/ Metal Storage      5,000         24       Owned
           
           

 

(1)

The lease on our corporate headquarters expires June 30, 2012, subject to an automatic renewal clause for two successive three-year periods that is effective unless we give notice at least 180 days prior to the then-effective termination date. The current annual rent is $162,580.

 

(2)

The lease expired January 31, 2012 and continues on a month to month basis at $3,000 per month.

 

(3)

The lease expires August 31, 2013. We have the right to renew for one additional term of two years. The current aggregate monthly rent is $5,125.

 

(4)

We acquired this property February 18, 2011.

 

(5)

This is a month to month lease at $3,500 a month that includes access to 750 feet of railroad.

 

(6)

The lease expires October 31, 2015. We have rights to renew for an additional consecutive term of five additional years. The annual rent is $30,000. We also have an option to purchase the underlying premises for a price to be determined. The option expires upon the expiration of the term of the lease, including any renewal terms.

 

(7)

The lease expires April 30, 2013. The current monthly rent is $8,800 and the annual rent is $105,600.

 

(8)

The lease expires August, 2012. Monthly rent is $4,620.

 

(9)

The lease has expired but continues on a month-to-month basis.

 

(10)

The lease expires December 31, 2020. The annual rent for 2012 including common area maintenance charges and lease incentive is $305,330. The lease contains a right to renew for 5 years upon written notice 12 months prior to expiration of initial term.

 

(11)

The lease expires December 31, 2016. The annual rent is $264,600. Lease contains a right to renew for 60 months upon written notice 120 days prior to expiration of initial term.

 

(12)

The lease expires May 31, 2012 with an option to renew for one five-year period. The annual rent for the initial term is $84,000. Upon expiration of the initial term, the Company anticipates continuing on a month to month basis.

 

(13)

The lease expires January 31, 2013. The annual rent is $366,323. Tenant has the right, with at least ninety days prior written notice to the landlord, to extend the lease for one additional five-year term. Annual rent for each year in the renewal term would increase in accordance with increases in the Consumer Price Index. The Company also holds an option to purchase the premises.

 

(14)

The lease expires October 2013. Monthly rent is $2,149.

 

(15)

The lease expires April 30, 2018. The annual rent is $34,000.

We believe that our facilities are suitable for their present and intended purposes and that we have adequate capacity for our current level of operations.

 

27


Table of Contents

Item 3.    Legal Proceedings

From time to time, we are involved in various litigation matters involving ordinary and routine claims incidental to our business. A significant portion of these matters result from environmental compliance issues and workers compensation-related claims applicable to our operations. We are involved in litigation and environmental proceedings as described below.

Our Gulf Coast Recycling, Inc. subsidiary (“Gulf Coast”), previously located in Tampa, Florida, is a party to four consent orders and two settlement agreements governing remediation and monitoring of various sites in the greater Tampa area. All agreed remediation under those orders and pursuant to those agreements has been completed. The Company and its subsidiaries are at this time in material compliance with all of their obligations under the consent orders and settlement agreements.

We know of no material existing or pending legal proceedings against the Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest. The outcome of open unresolved legal proceedings is presently indeterminable. Any settlement resulting from resolution of these contingencies will be accounted for in the period of settlement. We do not believe the potential outcome from these legal proceedings will significantly impact our financial position, operations or cash flows.

Item 4.    Mine Safety Disclosures

None.

 

28


Table of Contents

PART II

 

 

 

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Trading in our common stock commenced on the American Stock Exchange (now known as NYSE Amex) on March 15, 2005 under the symbol “MEA.” The table below sets forth, on a per share basis for the period indicated, the high and low closing sale prices for our common stock as reported by NYSE Amex.

 

      Price Range  
      High      Low  

Year End December 31, 2011

     

First Quarter

   $ 6.55       $ 5.17   

Second Quarter

   $ 6.34       $ 5.30   

Third Quarter

   $ 6.03       $ 3.60   

Fourth Quarter

   $ 4.68       $ 3.05   

Year End December 31, 2010

     

First Quarter

   $ 6.38       $ 4.55   

Second Quarter

   $ 6.65       $ 3.98   

Third Quarter

   $ 4.40       $ 3.08   

Fourth Quarter

   $ 5.88       $ 3.91   

The closing sale price of our common stock as reported by NYSE Amex on March 6, 2012 was $4.32.

Holders

As of March 6, 2012, there were 326 holders of record of our common stock, 16 holders of warrants to purchase our common stock, and 109 holders of stock options exercisable for shares of our common stock.

Dividends

We have never declared or paid dividends on our common stock, and we do not expect to pay cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all our earnings, if any, in the foreseeable future will be used to finance the operation and growth of our business. In addition, our ability to pay dividends to holders of our capital stock is limited by our senior secured credit facility. Any future determination to pay dividends on our common stock is subject to the discretion of our Board of Directors and will depend upon various factors, including, without limitation, our results of operations and financial condition. In addition, at this time our senior secured credit facility prohibits the payment of dividends. We have no preferred stock outstanding.

EQUITY COMPENSATION PLAN INFORMATION

We have two stockholder approved equity compensation plans, the 1997 Long Term Incentive Plan and the 2006 Long-Term Incentive Plan. Options generally vest in equal monthly installments over three years and may be exercised for up to five years from the date of grant.

 

29


Table of Contents

The following table provides certain information regarding our equity incentive plans as of December 31, 2011.

 

Plan Category

   (a)
Number of  Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and
Rights
     (b)
Weighted-Average  Exercise
Price of Outstanding
Options,

Warrants and
Rights
     (c)
Number of  Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in

Column (a))
 

Equity compensation plans approved by security holders

     1,722,940       $ 8.20         4,746,789   

Equity compensation plans not approved by security holders

                  
  

 

 

       

 

 

 

Total

     1,722,940       $ 8.20         4,746,789   
  

 

 

       

 

 

 

Shareholder Performance

Set forth below is a line graph comparing the cumulative total stockholder return on our common stock against the cumulative total return of the Russell 2000 Index and the Standard & Poor’s Iron and Steel Industry Index Group from January 1, 2007 through December 31, 2011. The graph assumes that $100 was invested in the Company’s Common Stock and each index group on January 1, 2007 and that all dividends were reinvested.

Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate by reference this Form 10-K, in whole or in part, the following Performance Graph shall not be incorporated by reference into any such filings.

 

LOGO

 

     January 1,
2007
     December 31,
2007
     December 31,
2008
     December 31,
2009
     December 31,
2010
     December 31,
2011
 

Metalico, Inc.

     100.00         214.06         30.69         97.43         116.44         65.15   

Russell 2000 Index

     100.00         97.25         63.41         79.40         99.49         94.07   

S&P Steel Index

     100.00         119.17         56.15         70.57         79.12         59.67   

 

30


Table of Contents

Item 6.    Selected Financial Data

SELECTED HISTORICAL FINANCIAL DATA

The selected historical financial data set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. The selected income statement data for the years ended December 31, 2011, 2010 and 2009 and the selected balance sheet data as of December 31, 2011 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this report. The selected income statement data for the years ended December 31, 2008 and 2007 and the selected balance sheet data as of December 31, 2009, 2008 and 2007 have been derived from audited consolidated financial statements that are not included in this Form 10-K. The historical results are not necessarily indicative of the results of operations to be expected in the future.

 

    Year Ended
December 31,
2011
    Year Ended
December 31,
2010
    Year Ended
December 31,
2009
    Year Ended
December 31,
2008
    Year Ended
December 31,
2007
 
    ($ thousands, except share data)  

Selected Income Statement Data:

         

Revenue

  $ 660,907      $ 553,253      $ 291,733      $ 818,195      $ 334,213   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

         

Operating expenses

    584,685        477,066        239,647        756,099        278,256   

Selling, general and administrative expenses

    29,040        26,482        25,994        30,146        20,315   

Depreciation and amortization

    14,610        13,728        13,240        12,864        6,279   

Gain on insurance recovery

           (513                     

Gain on acquisition

                  (866 )              

Impairment charges

                         59,043          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    628,335        516,763        278,015        858,152        304,850   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  $ 32,572      $ 36,490      $ 13,718      $ (39,957   $ 29,363   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to common shareholders:

         

Income (loss) from continuing operations

  $ 17,420      $ 13,471      $ (3,640   $ (42,430   $ 15,671   

(Loss) income from discontinued operations

           (9     195        (1,230     (918
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 17,420      $ 13,462      $ (3,445   $ (43,660   $ 14,753   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share:

         

Basic:

         

Income (loss) from continuing operations

  $ 0.37      $ 0.29      $ (0.08   $ (1.21   $ 0.54   

Discontinued operations, net

                         (0.04     (0.03
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 0.37      $ 0.29      $ (0.08   $ (1.25   $ 0.51   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

         

Income (loss) from continuing operations

  $ 0.37      $ 0.29      $ (0.08   $ (1.21   $ 0.53   

Discontinued operations, net

                         (0.04     (0.03
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 0.37      $ 0.29      $ (0.08   $ (1.25   $ 0.50   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Common Shares Outstanding:

         

Basic

    47,349,376        46,454,177        41,200,895        35,136,316        29,004,254   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    47,376,134        46,454,177        41,200,895        35,136,316        29,338,751   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected Balance Sheet Data:

         

Total Assets

  $ 364,893      $ 328,507      $ 296,701      $ 340,293      $ 269,570   

Total Debt (Including Current Maturities)

  $ 128,754      $ 125,962      $ 116,793      $ 184,709      $ 95,103   

Redeemable Common Stock

  $      $      $      $ 4,000      $   

Metalico, Inc. Stockholders’ Equity

  $ 191,902      $ 167,315      $ 150,257      $ 112,972      $ 124,017   

 

31


Table of Contents

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis includes forward-looking statements. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward-looking statements. Please refer to “Special Note Regarding Forward-Looking Statements” for more information. The results for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.

GENERAL

We operate in three distinct business segments: (a) ferrous and non-ferrous scrap metal recycling (“Scrap Metal Recycling”), (b) platinum group and minor metals recycling (“PGM and Minor Metals Recycling”), and (c) lead metal product fabricating (“Lead Fabricating”). Our operating facilities include twenty scrap metal recycling facilities, including a combined aluminum de-oxidizing plant, six PGM and Minor Metal Recycling facilities and four lead product manufacturing and fabricating plants. The Company markets a majority of its products domestically but maintains several international customers.

The PGM and Minor Metals Recycling segment includes six facilities located in Texas, Mississippi, Pennsylvania and New Jersey.

The Lead Fabricating segment includes four lead fabrication and recycling plants located in Birmingham, Alabama; Healdsburg and Ontario, California and Granite City, Illinois.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Areas that require significant judgments, estimates, and assumptions include accounting for revenues; accounts receivable and allowance for uncollectible accounts receivable; inventory; put warrants liability; derivatives and hedging activities; environmental and litigation matters; the testing of goodwill; stock-based compensation; and income taxes. Management uses historical experience and all available information to make these judgments, estimates, and assumptions, and actual results may differ from those used to prepare the Company’s Consolidated Financial Statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes provide a meaningful and fair perspective of the Company.

The critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements are disclosed in Note 1 to the Consolidated Financial Statements located elsewhere in this filing.

Revenue recognition:    Revenue from product sales is recognized as goods are shipped, which generally is when title transfers and the risks and rewards of ownership have passed to customers, based on free on board (“FOB”) terms. Brokerage sales are recognized upon receipt of materials by the customer and reported net of costs in product sales. Historically, there have been very few sales returns and adjustments in excess of reserves for such instances that would impact the ultimate collection of revenues therefore, no material provisions have been made when a sale is recognized.

 

32


Table of Contents

Accounts Receivable and Allowance for Uncollectible Accounts Receivable:    Accounts receivable consists primarily of amounts due from customers from product sales. The allowance for uncollectible accounts receivable totaled $829,000 and $1.0 million as of December 31, 2011 and 2010, respectively. Our determination of the allowance for uncollectible accounts receivable includes a number of factors, including the age of the accounts, past experience with the accounts, changes in collection patterns and general industry conditions.

Derivatives and Hedging:    We are exposed to certain risks relating to our ongoing business operations. The primary risks currently managed by using derivative instruments are commodity price risk. We use forward sales contracts with PGM substrate processors to protect against volatile commodity prices. This process ensures a fixed selling price for the material we purchase and process. We secure selling prices with PGM processors, in ounces of Platinum, Palladium and Rhodium, in incremental lots for material which we expect to purchase within an average 2 to 3 day time period. However, these forward sales contracts with PGM substrate processors are not subject to any hedge designation as they are considered within the normal sales exemption provided by ASC Topic 815.

We have in the past entered into interest rate swaps to manage interest rate risk associated with our variable-rate borrowings. In connection with the Credit Agreement entered into on March 2, 2010, with JPM Chase Bank, N.A., the Company was required to terminate the $20.0 million interest rate swap contract. As a result, the Company paid $760,000 to terminate the interest rate swap contract. With the termination of the interest rate swap contract, no other interest rate swap agreement is outstanding.

Goodwill:    The carrying amount of goodwill is tested annually as of December 31 and whenever events or circumstances indicate that impairment may have occurred. Judgment is used in assessing whether goodwill should be tested more frequently for impairment than annually. Factors such as unexpected adverse economic conditions, competition and other external events may require more frequent assessments.

The goodwill impairment test follows a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess.

As of December 31, 2011, the Company has identified eight reporting units with recorded goodwill. A list of the Company’s reporting units and the amount of goodwill recorded in each reporting unit as of December 31, 2011, is as follows ($ in thousands):

 

Reporting Unit

   Goodwill Recorded  

Lead Fabricating

   $ 5,369   

New York State Scrap Recycling

     20,836   

Pittsburgh, PA Scrap Recycling

     3,674   

Ohio Scrap Recycling

     15,075   

Bradford, PA Scrap Recycling

     3,943   

Minor Metals Recycling

     3,859   

Texas PGM Recycling

     9,988   

New Jersey PGM Recycling

     10,804   
  

 

 

 

Total

   $ 73,548   
  

 

 

 

In determining the carrying value of each reporting unit, where appropriate, management allocates net deferred taxes and certain corporate maintained liabilities specifically allocable to each reporting unit to the net operating assets of each reporting unit. The carrying amount is further reduced by impairment charges, if any, made to other long-lived assets of a reporting unit.

 

33


Table of Contents

Since market prices of our reporting units are not readily available, we make various estimates and assumptions in determining the estimated fair values of the reporting units. We use a discounted cash flow (“DCF”) model of a 5-year forecast with terminal values to estimate the current fair value of our reporting units when testing for impairment. The terminal value captures the value of a reporting unit beyond the projection period in a DCF analysis representing growth in perpetuity, and is the present value of all subsequent cash flows.

A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including sales volumes, profit margins, tax rates, capital spending, discount rates, and working capital changes. Forecasts of operating and selling, general and administrative expenses are generally based on historical relationships of previous years. When applying the DCF model, the cash flows expected to be generated are discounted to their present value equivalent using a rate of return that reflects the relative risk of the investment, as well as the time value of money. This return is an overall rate based upon the individual rates of return for invested capital (equity and interest-bearing debt). The return, known as the weighted average cost of capital (“WACC”), is calculated by weighting the required returns on interest-bearing debt and common equity in proportion to their estimated percentages in an expected capital structure. For our 2011 analysis, we arrived at a discount rate of 13.4%. The inputs used in calculating the WACC include (i) average of capital structure ratios of market participants in the industry which Metalico operates of 36% debt and 64% equity, (ii) an estimate of combined federal and state tax rates (iii) the cost of Baa rated debt based on Moody’s Seasoned Corporate Bond Yields of 5.25% as of December 1, 2011, (iv) a 19.2% required return on equity determined using the build-up method under the Modified Capital Asset Pricing (CAPM) model.

Based on our DCF analysis, we determined the computed fair value of each reporting unit exceeded their respective carrying values and no goodwill impairment charges were required. One measure of the sensitivity of the amount of potential future goodwill impairment charges to key assumptions is the amount by which the fair value of each reporting unit exceeded the carrying values. All but one of our reporting units had fair values that exceeded carrying values by more than 20%, an amount that we deem substantial. We further tested this one reporting unit to changes in forecasted cash flows and discount rates. Assuming all input variables remain constant, if expected cash flows were 10% less than forecasted or, if the discount rate (WACC) were increased by 2.0%, the amount by which the carrying value exceeded the computed fair value for this reporting unit, indicating potential impairment, would be as follows:

 

     Potential Future Impairment
Sensitivity
 

Reporting Unit

   If expected cash
flows were 10%
less than forecasted
     If the discount
rate (WACC)
were 15.4%
 

Lead Fabricating

   $ 2,352       $ 3,599   

At December 31, 2011, after considering a control premium of 25%, the Company’s market capitalization exceeded total stockholders’ equity by approximately $3.3 million. The last several months of 2011 reflected weakness in financial and commodity prices due primarily to the sovereign debt crisis in Europe. Management believes domestic economic conditions continue to show improvement and have resulted in forecasts which, when used in our DCF model, support the carrying value of our goodwill in all of our reporting units. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. Future declines in the overall market value of the Company’s equity and debt securities may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.

Intangible Assets and Other Long-Lived Assets:    We test all finite-lived intangible assets (amortizable) and other long-lived assets, such as fixed assets, for impairment only if circumstances indicate that possible impairment exists. To the extent actual useful lives are less than our previously estimated lives, we will increase

 

34


Table of Contents

our amortization expense on a prospective basis. We estimate useful lives of our intangible assets by reference to both contractual arrangements such as non-compete covenants and current, projected, undiscounted cash flows for supplier and customer lists. At December 31, 2011 and 2010, no indicators of impairment were identified and no adjustments were made to the estimated lives of finite-lived assets.

The Company tests indefinite-lived intangibles such as trademarks and trade names for impairment annually by comparing the carrying value of the intangible to its fair value. Fair value of the intangible asset is calculated using the projected discounted cash flows produced from the intangible. If the carrying value exceeds the projected discounted cash flows attributed to the intangible asset, the carrying value is no longer considered recoverable and the Company will record impairment. At December 31, 2011, the computed fair value of our indefinite-lived intangibles was substantially in excess of their respective carrying values.

Stock-based Compensation:    We recognize expense for equity based compensation ratably over the requisite service period based on the grant date fair value. The fair value of deferred stock grants is determined using the average of the high and low trading price for our common stock on the day of grant. For stock option grants, we calculate the fair value of the award on the date of grant using the Black-Scholes method. Determining the fair value of stock options at the grant date requires judgment, including estimates for the average risk-free interest rate, dividend yield, volatility in our stock price, annual forfeiture rates, and exercise behavior. Any assumptions used may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.

Income taxes:    Our provision for income taxes reflects income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

RESULTS OF OPERATIONS

The Company is divided into three reportable segments: Scrap Metal Recycling, which includes three general product categories, — ferrous, non-ferrous and other scrap services; PGM and Minor Metals Recycling, which includes two general product recycling categories, — the Platinum Group Metals (“PGMs”) and Minor Metals, which include molybdenum, tungsten, tantalum and niobium; and Lead Fabricating.

 

35


Table of Contents

The following table sets forth information regarding revenue in each segment ($ and weights in thousands):

 

    Revenues  
    Year Ended
December 31, 2011
    Year Ended
December 31, 2010
    Year Ended
December 31, 2009
 
    ($s, and weights in thousands)  
    Weight     Net
Sales
    %     Weight     Net
Sales
    %     Weight     Net
Sales
    %  

Scrap Metal Recycling

                 

Ferrous metals (tons)

    534.6      $ 233,863        35.4        450.8      $ 163,984        29.6        306.6      $ 74,211        25.4   

Non-ferrous metals (lbs.)

    140,662        149,378        22.6        139,372        130,135        23.5        93,532        67,859        23.3   

Other

           5,826        0.9               3,227        0.6               3,743        1.3   
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Total Scrap Metal Recycling

      389,067        58.9          297,346        53.7          145,813        50.0   
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

PGM and Minor Metals Recycling

                 

Platinum Group Metals
(troy oz.)

    119.8        150,998        22.8        145.6        159,667        28.9        86.5        69,357        23.8   

Minor Metals (lbs.)

    1,929        48,250        7.3        1,816        30,878        5.6        1,028        14,068        4.8   
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Total PGM and Minor Metals Recycling

      199,248        30.1          190,545        34.5          83,425        28.6   

Lead Fabricating (lbs.)

    44,842        72,592        11.0        45,886        65,362        11.8        58,341        62,495        21.4   
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Total Revenue

    $ 660,907        100.0        $ 553,253        100.0        $ 291,733        100.0   
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

The following table sets forth information regarding average Metalico selling prices for the past eight quarters. The fluctuation in pricing is due to many factors, including domestic and export demand and our product mix.

 

For the quarter ended:

   Average
Ferrous
Price per ton
     Average
Non-Ferrous
Price per lb.
     Average
PGM Price
per troy oz.(1)
     Average
Minor Metal
Price per lb.(2)
     Average
Lead
Price per lb.
 

December 31, 2011

   $ 422       $ 0.94       $ 1,056       $ 23.92       $ 1.62   

September 30, 2011

   $ 445       $ 1.07       $ 1,216       $ 25.59       $ 1.64   

June 30, 2011

   $ 433       $ 1.08       $ 1,202       $ 28.10       $ 1.64   

March 31, 2011

   $ 445       $ 1.13       $ 1,229       $ 22.90       $ 1.57   

December 31, 2010

   $ 368       $ 0.95       $ 1,117       $ 18.29       $ 1.51   

September 30, 2010

   $ 355       $ 0.99       $ 986       $ 17.73       $ 1.33   

June 30, 2010

   $ 383       $ 0.91       $ 1,122       $ 17.36       $ 1.42   

March 31, 2010

   $ 353       $ 0.89       $ 966       $ 14.44       $ 1.46   

 

(1)

Average PGM prices are comprised of combined troy ounces of Platinum, Palladium and Rhodium

Scrap and Metal Commodity Markets

Recycled iron and steel scrap is a vital raw material for the production of new steel and cast iron products. The steel and foundry industries in the United States have been structured to recycle scrap, and, as a result, are highly dependent upon scrap. In the United States, the primary source of old steel scrap is the automobile. The recycling rate for automobiles in 2010, the latest year for which statistics were available, was about 113%. This high recycling rate includes the impact of more than a three-quarter-million unit increase of vehicles in operation, as compared with those of 2009. A recycling rate greater than 100% is a result of the steel industry recycling more steel from automobiles than was used in the domestic production of new vehicles. In 2010, the automotive recycling industry recycled more than 13.5 million tons of steel from end-of-life vehicles through more than 300 car shredders, the equivalent of nearly 10.8 million automobiles.

 

36


Table of Contents

Recycling of scrap plays an important role in the conservation of energy because the remelting of scrap requires much less energy than the production of iron or steel products from iron ore. Also, consumption of iron and steel scrap by remelting reduces the burden on landfill disposal facilities and prevents the accumulation of abandoned steel products in the environment. Recycled scrap consists of approximately 58% post-consumer (old, obsolete) scrap, 20% prompt scrap (produced in steel-product manufacturing plants), and 22% home scrap (recirculating scrap from current operations).

Scrap prices fluctuated during the first half of 2011, between about $336 and $412 per ton. Composite prices published by Iron Age Scrap Price Bulletin for No. 1 Heavy Melting steel scrap delivered to purchasers in Chicago, IL, and Philadelphia and Pittsburgh, PA, averaged about $399 per ton during the first 8 months of 2011. As reported by Iron Age Scrap Price Bulletin, the average price for nickel-bearing stainless steel scrap delivered to purchasers in Pittsburgh was about $2,257 per ton during the first 10 months of 2011, which was 3.2% higher than the 2010 average price of $2,187 per ton. The prices fluctuated widely between a low of $1,737 per ton in October 2011 and a high of $2,888 in late February and early March 2011. Exports of ferrous scrap increased in 2011 to an estimated 24 million tons from 21 million tons during 2010, mainly to Turkey, China, Taiwan, the Republic of Korea, and Canada, in descending order of export tonnage. Export scrap value increased from $8.4 billion in 2010 to an estimated $12 billion in 2011. Continuing and growing concern about the European Union sovereign-debt and banking crisis have adversely affected steel consumer confidence; depressed steel demand, production, and prices; and, thus, caused ferrous scrap prices to fluctuate and possibly decrease considerably. Annual world steel consumption increase was expected to slow to 6.5% in 2011 and 5.4% in 2012, following 15% annual growth in 2010, according to the World Steel Association.

Platinum Group Metals ended 2011 on a low note, with platinum trading at its most depressed level for the year. Platinum and palladium alike lost approximately a fifth of their value over the course of the previous twelve months. Rhodium lost 42% of its value throughout 2011, reaching depths not seen since May 2009. The softening of PGM prices in December was partly related to liquidation in the metal markets as hedge funds and other investors covered losses in equities and moved to the perceived safety of the dollar to maintain cash positions as the year-end approached. The subdued close of 2011, symptomatic of a weakening global economic outlook, was in marked contrast to the exuberance seen in the PGM market a year before when PGM prices rallied.

The beginning of 2012 saw a slight lifting of the weak pricing that had engulfed the PGM markets in the latter part of 2011. Positive economic news, including improved manufacturing data from Europe, an expansion of China’s purchasing managers’ index, and higher US jobs numbers led to a risk-on mentality that had mostly been lacking in the fourth quarter 2011. On the demand side, news of higher vehicle output in Germany and the US in 2011 also benefitted platinum and palladium pricing.

The global lead market was in surplus during 2011 owing to the buildup of lead stocks held in London Metal Exchange (LME) and producer warehouses. North American producer prices increased steadily throughout the first 8 months of the year. LME lead prices were more volatile in 2011, starting at $2,601 per metric ton in January, increasing to $2,741 per metric ton in April, and declining to $2,019 per metric ton in December. Global stocks of refined lead held in LME warehouses increased by 79% to 374,125 tons during the first 9 months of 2011. In 2011, about 1.20 million tons of secondary lead was produced, an amount equivalent to 83% of reported domestic lead consumption. Nearly all of it was recovered from old (post-consumer) scrap.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Consolidated net sales increased by $107.6 million, or 19.4%, to $660.9 million in the year ended December 31, 2011, compared to consolidated net sales of $553.3 million in the year ended December 31, 2010. Acquisitions added $21.7 million to consolidated net sales. Excluding acquisitions, the Company reported increases in average metal selling prices representing net sales of $106.0 million offset by a $20.1 million decrease attributable to lower selling volume.

 

37


Table of Contents

Scrap Metal Recycling

Ferrous Sales

Ferrous sales increased by $69.9 million, or 42.6%, to $233.9 million in the year ended December 31, 2011, compared to ferrous sales of $164.0 million in the year ended December 31, 2010 Acquisitions added $12.9 million to ferrous sales in 2011. Excluding acquisitions, ferrous sales increased by $57.0 million. The increase in ferrous sales was attributable to higher average selling prices totaling $37.7 million and higher volume sold of 52,700 tons amounting to $19.3 million. The average selling price for ferrous products was approximately $437 per ton for the year ended December 31, 2011 compared to $364 per ton for the year ended December 31, 2010.

Non-Ferrous Sales

Non-ferrous sales increased by $19.3 million, or 14.8%, to $149.4 million in the year ended December 31, 2011, compared to non-ferrous sales of $130.1 million in the year ended December 31, 2010. Acquisitions added $6.4 million to non-ferrous sales. Excluding acquisitions, non-ferrous sales increased by $12.9 million. The increase in non-ferrous sales was attributable to higher average selling prices amounting to $17.4 million offset by lower sales volume totaling $4.5 million. The average selling price for non-ferrous products was approximately $1.06 per pound for the year ended December 31, 2011 compared to $0.93 per pound for the year ended December 31, 2010.

PGM and Minor Metal Recycling

Platinum Group Metals

Platinum Group Metal (“PGM”) sales include the sale of catalytic converter substrate material which contains platinum, palladium, and rhodium. PGM sales decreased $8.7 million, or 5.4%, to $151.0 million for the year ended December 31, 2011, compared to $159.7 million for the year ended December 31, 2010. The decrease in PGM sales was a result of lower sales volumes totaling $35.1 million but was offset higher average selling prices totaling $26.4 million. The average selling price for PGM material was approximately $1,180 per troy ounce for the year ended December 31, 2011 compared to $1,040 per troy ounce for the year ended December 31, 2010, an increase of approximately 13.5%. Total PGM sales volumes amounted 119,800 troy ounces for the year ended December 31, 2011, compared to 145,600 troy ounces sold for the year ended December 31, 2010.

Minor Metals

Sales of Minor Metals, which primarily include metals such as molybdenum, tungsten and tantalum, increased $17.3 million, or 56.0%, to $48.2 million for the year ended December 31, 2011, compared to $30.9 million for the year ended December 31, 2010. The increase in sales was due to higher selling prices amounting to $15.4 million and higher volumes sold totaling $1.9 million. The average combined selling price for minor metals was approximately $25.02 per pound for the year ended December 31, 2011 compared to $17.01 per pound for the year ended December 31, 2010, an increase of 47.1%.

Lead Fabricating

Lead fabrication sales increased by $7.2 million, or 11.0%, to $72.6 million in the year ended December 31, 2011 compared to lead fabrication sales of $65.4 million in the year ended December 31, 2010. The increase was due to higher average selling prices amounting to $8.9 million but was offset by lower volume sold totaling $1.7 million. The average selling price for lead fabricated products was approximately $1.62 per pound for the year ended December 31, 2011, compared to $1.42 per pound for the year ended December 31, 2010, an increase of approximately 14.1%.

 

38


Table of Contents

Operating Expenses

Operating expenses increased by $107.6 million, or 22.6%, to $584.7 million for the year ended December 31, 2011 compared to operating expenses of $477.1 million for the year ended December 31, 2010. Acquisitions added $26.0 million to operating expenses. Excluding acquisitions, the increase in operating expenses was due to a $73.9 million increase in the cost of purchased metals and a $7.7 million increase in other operating expenses. These operating expense changes include increases in wages and benefits of $2.6 million, freight charges of $2.3 million, vehicle maintenance and repair expenses of $962,000, energy costs of $844,000, production and fabricating supplies of $596,000 and other operating costs of $496,000.

Selling, General and Administrative

Selling, general and administrative expenses increased by $2.5 million, or 4.4% of sales, to $29.0 million for the year ended December 31, 2010, compared to $26.5 million, or 4.8% of sales for the year ended December 31, 2010. Acquisitions added $1.2 million to selling, general, and administrative expenses in 2011. Excluding acquisitions selling, general and administrative costs increased by $1.4 million. Significant changes in component expenses of selling, general and administrative costs include increases in consulting and professional fees of $858,000, insurance costs of $309,000, wages and benefits of $307,000 and an increase in advertising and promotional expenses of $230,000. These expenses were offset by a decrease in other expenses of $326,000.

Depreciation and Amortization

Depreciation and amortization expenses increased by $882,000 to $14.6 million, or 2.2% of sales, for the year ended December 31, 2011, compared to $13.7 million, or 2.5% of sales, for the year ended December 31, 2010. Acquisitions added $1.4 million to depreciation and amortization. Excluding acquisitions, depreciation and amortization expense decreased by $503,000 due to non-compete covenants that fully amortized in 2010.

Operating Income

Operating income for the year ended December 31, 2011 decreased by $3.9 million, or 10.7%, to $32.6 million compared to an operating income of $36.5 million for the year ended December 31, 2010. The decrease in operating income primarily occurred in the Company’s PGM and Minor Metals Recycling segment amounting to $4.0 million. The Company also experienced a decrease in operating income of $592,000 in the Scrap Metal Recycling segment and an increase in the operating loss in the corporate and other segment. These reductions in operating income were offset by the Lead fabricating segment which experienced an increase in operating income of $1.1 million.

Financial and Other Income/(Expense)

Interest expense was $9.4 million for the year ended December 31, 2011 compared to $9.8 million for the year ended December 31, 2010. The $479,000 decrease in interest expense was primarily attributable to lower interest rates on a majority of our outstanding debt.

Other expense for the year ended December 31, 2010 includes $3.0 million in charges related to the refinancing of our senior credit facilities. The items comprising this amount include the write off of $2.1 million of unamortized deferred financing costs related to our prior credit facilities and $939,000 of costs related to the termination of an interest rate swap agreement related to those prior facilities. The Company did not incur these expenses in 2011.

Other (expense)/income for the year ended December 31, 2011, includes income of $3.6 million to adjust financial instruments to their respective fair values as compared to expense of $496,000 for the year ended December 31, 2010.

 

39


Table of Contents

For the year ended December 31, 2011, we recorded a loss of $46,000 compared to income of $28,000 for the year ended December 31, 2010 for our 40% share of income in a manufacturer of radiation shielding solutions for the nuclear medicine community.

For the year ended December 31, 2011 we recorded a gain of $243,000 net of amortized issue costs, for the repurchase of $5.0 million in convertible notes in cash. For the year ended December 31, 2010, we recorded a gain of $101,000 net of amortized issue costs, for the repurchase, in cash, of $500,000 in convertible notes.

Income Taxes

For the year ended December 31, 2011, we recognized income tax expense of $9.7 million on income from continuing operations of $27.1 million. Included in income tax expense is $571,000 related to the recognition of a state income tax audit assessment for previous periods. Excluding this assessment income tax was $9.1 million resulting in an effective tax rate of 34%. For the year ended December 31, 2010, we recognized income tax expense of $9.8 million on income from continuing operations of $23.3 million resulting in an effective tax rate of 42%. Our effective rate may differ from the blended expected statutory income tax rate due to permanent differences between income for tax purposes and income for book purposes. These permanent differences include fair value adjustments to financial instruments, stock based compensation, amortization of certain intangibles and certain non-deductible expenses.

Discontinued Operations

The Company continues to incur environmental monitoring costs of its former secondary lead smelting and refining plant in College Grove, Tennessee and a secondary lead smelting operation based in Tampa, Florida and do not anticipate material expense in the future. For the year ended December 31, 2011, we incurred nominal amounts for site maintenance and monitoring and have included these costs in continuing operations and will do so in future periods. Discontinued operations for the year ended December 31, 2010, resulted in a combined loss of $15,000 ($9,000 net of income taxes) for both former facilities.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Consolidated net sales increased by $261.6 million, or 89.7%, to $553.3 million in the year ended December 31, 2010, compared to consolidated net sales of $291.7 million in the year ended December 31, 2009. Acquisitions added $39.5 million to consolidated net sales. Excluding acquisitions, the Company reported increases in average metal selling prices representing net sales of $148.6 million and a $73.5 million increase attributable to higher selling volume.

Scrap Metal Recycling

Ferrous Sales

Ferrous sales increased by $89.8 million, or 121.0%, to $164.0 million in the year ended December 31, 2010, compared to ferrous sales of $74.2 million in the year ended December 31, 2009. Acquisitions added $27.9 million to ferrous sales in 2010. Excluding acquisitions, ferrous sales increased by $61.9 million. The increase in ferrous sales was attributable to higher average selling prices totaling $45.6 million and higher volume sold of 67,600 tons amounting to $16.3 million. The average selling price for ferrous products was approximately $364 per ton for the year ended December 31, 2010 compared to $242 per ton for the year ended December 31, 2009.

Non-Ferrous Sales

Non-ferrous sales increased by $62.2 million, or 91.6%, to $130.1 million in the year ended December 31, 2010, compared to non-ferrous sales of $67.9 million in the year ended December 31, 2009. Acquisitions added $11.6 million to non-ferrous sales. Excluding acquisitions, non-ferrous sales increased by $50.6 million. The

 

40


Table of Contents

increase in non-ferrous sales was attributable to higher average selling prices amounting to $26.4 million and higher sales volume totaling $24.2 million. The average selling price for non-ferrous products was approximately $0.93 per pound for the year ended December 31, 2010 compared to $0.73 per pound for the year ended December 31, 2009.

PGM and Minor Metal Recycling

Platinum Group Metals

Platinum Group Metal (“PGM”) sales include the sale of catalytic converter substrate material which contains platinum, palladium, and rhodium. PGM sales increased $90.3 million, or 130.1%, to $159.7 million for the year ended December 31, 2010, compared to $69.4 million for the year ended December 31, 2009. The increase in PGM sales was a result of higher sales volumes totaling $54.8 million and higher average selling prices totaling $35.5 million. The average selling price for PGM material was approximately $1,040 per troy ounce for the year ended December 31, 2010 compared to $720 per troy ounce for the year ended December 31, 2009, an increase of approximately 44.4%. Total PGM sales volumes amounted 145,600 troy ounces for the year ended December 31, 2010, compared to 86,500 troy ounces sold for the year ended December 31, 2009.

Minor Metals

Sales of Minor Metals, which primarily include metals such as molybdenum, tungsten and tantalum, increased $16.8 million, or 119.5%, to $30.9 million for the year ended December 31, 2010, compared to $14.1 million for the year ended December 31, 2010. The increase in sales was due to higher selling prices amounting to $6.0 million and higher volumes sold totaling $10.8 million. The average combined selling price for minor metals was approximately $17.01 per pound for the year ended December 31, 2011 compared to $13.69 per pound for the year ended December 31, 2010, an increase of 24.2%.

Lead Fabricating

Lead fabrication sales increased by $2.9 million, or 4.6%, to $65.4 million in the year ended December 31, 2010 compared to lead fabrication sales of $62.5 million in the year ended December 31, 2009. The increase was due to higher average selling prices amounting to $16.3 million but was offset by lower volume sold totaling $13.4 million. The average selling price for lead fabricated products was approximately $1.42 per pound for the year ended December 31, 2010, compared to $1.07 per pound for the year ended December 31, 2009, an increase of approximately 32.7%.

Operating Expenses

Operating expenses increased by $237.5 million, or 99.1%, to $477.1 million for the year ended December 31, 2010 compared to operating expenses of $239.6 million for the year ended December 31, 2009. Acquisitions added $38.7 million to operating expenses. Excluding acquisitions, the increase in operating expenses was due to a $188.1 million increase in the cost of purchased metals and a $10.7 million increase in other operating expenses. These operating expense changes include increases in wages and benefits of $4.3 million, vehicle maintenance and repair expenses of $2.6 million, freight charges of $2.4 million and other operating costs of $160,000. The prior year period also reflected a $1.2 million benefit from legal settlements which was not present in the current year.

Selling, General and Administrative

Selling, general and administrative expenses increased by $488,000, or 4.8% of sales, to $26.5 million for the year ended December 31, 2010, compared to $26.0 million, or 8.9% of sales for the year ended December 31, 2009. Acquisitions added $882,000 to selling, general, and administrative expenses in 2010. Excluding acquisitions selling, general and administrative costs decreased by $394,000. Significant changes in component

 

41


Table of Contents

expenses of selling, general and administrative costs include increases in wages and benefits of $1.6 million and an increase in advertising and promotional expenses of $222,000. These expenses were offset by a decrease in legal and consulting expense of $2.2 million primarily related to litigation costs incurred in 2009 not incurred in 2010.

Depreciation and Amortization

Depreciation and amortization expenses increased by $488,000 to $13.7 million, or 2.5% of sales, for the year ended December 31, 2010, compared to $13.2 million, or 4.5% of sales, for the year ended December 31, 2009. Acquisitions added $604,000 to depreciation and amortization. Excluding acquisitions depreciation and amortization expense decreased slightly.

Operating Income

Operating income for the year ended December 31, 2010 increased by $22.8 million, or 166.4%, to $36.5 million compared to an operating income of $13.7 million for the year ended December 31, 2009. Acquisitions added $602,000 in operating loss for the year ended December 31, 2010. Excluding acquisitions, operating income increased by $23.4 million. This increase in operating income primarily occurred in the Company’s Scrap metal recycling segment amounting to $23.4 million. The Lead fabricating segment experienced a decrease in operating income of $1.6 million but was offset by a $1.6 million decrease in the operating loss experienced by corporate and other.

Financial and Other Income/(Expense)

Interest expense was $9.8 million for the year ended December 31, 2010 compared to $15.3 million for the year ended December 31, 2009. The $5.5 million decrease in interest expense was primarily attributable to lower interest rates on a majority of our outstanding debt. In March 2010, the Company refinanced a substantial portion of its debt at reduced interest rates. Most notably, we retired $30.6 million of 14.0% term notes with proceeds of the Credit Agreement with JPMorgan Chase Bank, N.A. at average interest rates ranging from 4.5% to 5.25%. In 2009, we retired $70.4 million in debt through repayments and exchanges, and issued $2.5 million in new debt. In April and June 2009, $18.4 million of debt was extinguished by its conversion into equity and in August 2009, the Company used $18.8 million of proceeds from an equity offering to pay down other debt.

Other expense for the year ended December 31, 2010 includes $3.0 million in charges related to the refinancing of our senior credit facilities. The items comprising this amount include the write off of $2.1 million of unamortized deferred financing costs related to our prior credit facilities and $939,000 of costs related to the termination of an interest rate swap agreement related to those prior facilities. The year ended December 31, 2009 include a $542,000 write off of unamortized deferred financing costs resulting from an amendment to the prior credit facility with Wells Fargo Foothill.

Other (expense)/income for the year ended December 31, 2010, includes income of $496,000 to adjust financial instruments to their respective fair values as compared to a $2.0 million loss for the year ended December 31, 2009.

For the year ended December 31, 2010 we recorded income of $28,000 for our 40% share of income in a manufacturer of radiation shielding solutions for the nuclear medicine community. For the year ended December 31, 2009, we recorded a $3.8 million loss related to our investment in Beacon Energy Holdings Inc. Our loss from Beacon for the year ended December 31, 2009 includes a $2.6 million write-down of the carrying value of our investment in Beacon and $1.2 million loss for our share of Beacon Energy’s loss for the year ended December 31, 2009.

 

42


Table of Contents

For the year ended December 31, 2010 we recorded a gain of $101,000 net of amortized issue costs, for the repurchase, in cash, of $500,000 in convertible notes. For the year ended December 31, 2009, the Company recorded an $8.1 million gain on Convertible Note exchanges entered into with certain holders of the Company’s 7% Convertible Notes.

Income Taxes

For the year ended December 31, 2010, we recognized income tax expense of $9.8 million on income from continuing operations of $23.3 million resulting in an effective tax rate of 42%. For the year ended December 31, 2009, we recognized income tax expense of $1.7 million on a loss from continuing operations of $1.9 million resulting in an effective tax rate of negative 91%. Our effective tax rate differences between income for tax purposes and income for book purposes such as fair value adjustments to financial instruments, stock based compensation, amortization of certain intangibles and changes to our valuation reserves on state net operating loss carryforwards and state income tax credits.

Discontinued Operations

The Company continues to incur environmental monitoring costs of its former secondary lead smelting and refining plant in College Grove, Tennessee and a secondary lead smelting operation based in Tampa, Florida. We incurred nominal amounts for environmental remediation costs, site maintenance and monitoring. Discontinued operations for the year ended December 31, 2010, resulted in a combined loss of $15,000 ($9,000 net of income taxes) for both former facilities. Discontinued operations for the year ended December 31, 2009, include $500,000 in proceeds from a former lead supplier of Gulf Coast Recycling in lieu of future potential liability claims and a $322,000 gain on the sale of the former secondary lead smelting and refining plant in College Grove, Tennessee. Offsetting these gains were environmental maintenance and response costs and legal fees for the Jernigan site in Seffner, Florida and certain other offsite remediation in the vicinity of Gulf Coast’s former smelting facility totaling $280,000.

 

43


Table of Contents

QUARTERLY FINANCIAL INFORMATION

(Unaudited)

 

    Quarter
Ended
March  31,

2010
    Quarter
Ended
June  30,

2010
    Quarter
Ended
September  30,

2010
    Quarter
Ended
December  31,

2010
    Quarter
Ended
March  31,

2011
    Quarter
Ended
June  30,

2011
    Quarter
Ended
September  30,

2011
    Quarter
Ended
December  31,

2011
 
    (in thousands, except share and per share data)  

Selected Income Statement Data:

               

Revenue

  $ 134,079      $ 144,575      $ 136,956      $ 137,643      $ 181,967      $ 178,492      $ 168,728      $ 131,720   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

               

Operating expenses

    109,893        128,127        118,161        120,885        153,643        156,497        151,162        123,383   

Selling, general and administrative expenses

    7,181        6,464        6,294        6,543        8,020        6,948        7,222        6,850   

Depreciation and amortization

    3,400        3,236        3,450        3,642        3,320        3,646        3,830        3,814   

Gain on insurance recovery

                  (513                                   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    120,474        137,827        127,392        131,070        164,983        167,091        162,214        134,047   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  $ 13,605      $ 6,748      $ 9,564      $ 6,573      $ 16,984      $ 11,401      $ 6,514      $ (2,327
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 3,514      $ 4,418      $ 4,493      $ 1,037      $ 8,763      $ 6,645      $ 5,084      $ (3,072
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share:

               

Basic

  $ 0.08      $ 0.10      $ 0.10      $ 0.02      $ 0.19      $ 0.14      $ 0.11      $ (0.06
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.08      $ 0.10      $ 0.10      $ 0.02      $ 0.19      $ 0.14      $ 0.11      $ (0.06
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Common Shares Outstanding:

               

Basic

    46,428,260        46,443,348        46,449,302        46,495,116        47,095,914        47,388,308        47,447,823        47,460,439   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    46,439,400        46,463,537        46,449,302        46,495,116        47,219,740        47,541,787        47,453,916        47,460,439   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

The Company has certain contractual obligations and commercial commitments to make future payments. The following table summarizes these future obligations and commitments as of December 31, 2011 ($ in thousands):

 

     Total      Less Than
1 Year
     1-3
Years
     4-5
Years
     After
5 Years
 

Debt Obligations(1)

   $ 121,690       $ 10,357       $ 103,229       $ 3,020       $ 5,084   

Capital Lease Obligations(2)

     7,065         2,293         3,157         1,615           

Operating Lease Obligations

     6,562         1,568         1,634         1,437         1,923   

Letters of Credit

     2,233         2,233                           

Environmental Obligations

     1,463         325         79         84         975   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 139,013       $ 16,776       $ 108,099       $ 6,156       $ 7,982   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1)

Approximately 27% of debt obligations as of December 31, 2011 accrued interest at a variable rate (the lender’s base rate plus a margin and effective rate of 3.92% as of December 31, 2011). The remaining 73% of debt obligations as of December 31, 2011 required accrued interest at fixed rates having a weighted average rate of 6.78%. Interest expense on capital lease obligations for 2011 is estimated to approximate

 

44


Table of Contents
 

$453,000 calculated by multiplying the outstanding principal balance by the obligation’s applicable interest rate in effect at December 31, 2011. Interest expense for 2011 and thereafter will increase or decrease based on the amount of outstanding borrowings and fluctuations in market based interest rates.

 

(2)

Includes capital leases and installment notes for capital equipment.

Cash Flows

For the year ended December 31, 2011, we generated $33.0 million of cash flows from our operating activities compared to using $5.2 million for the year ended December 31, 2010. For the year ended December 31, 2011, net income of $17.4 million and net non-cash items totaling $22.2 million were offset by a $6.6 million change in working capital components. Non-cash items included $15.8 million in depreciation and amortization; $2.2 million in stock-based compensation and $8.1 million of deferred income taxes. The items were offset by $3.6 million in fair value adjustments to financial instruments and a $265,000 gain in the disposal of property and equipment. Changes in working capital items for 2011 include $11.0 million for decreases in inventory, $1.7 million for decreases in prepaid expenses and other items and a $608,000 increase in accounts payable and accrued expenses. These working capital items were offset by $6.7 million in decreased accounts receivable balances. For the year ended December 31, 2010, we used $5.2 million in our operating activities. For the year ending December 31, 2010, net income of $13.5 million and net non-cash items totaling $22.5 million were offset by a $41.1 million change in working capital components. Non-cash items included $14.6 million in depreciation and amortization, $2.8 million in stock-based compensation, $2.7 million in changes to deferred income taxes and $2.1 million of deferred financing costs written off due to debt refinancing and other noncash items of $200,000. Changes for reduction in working capital items include $24.3 million in increased accounts receivable balances $20.9 million for increases in inventory. These working capital items were offset by a $2.5 million in decreases in prepaid and other items and a $1.6 million increase in accounts payable and accrued expenses. For the year ended December 31, 2009, we used $25.7 million of cash in operating activities. A net loss of $3.4 million and changes in working capital components of $38.8 million was offset by net non-cash items totaling $16.5 million. Non-cash items included $14.5 million in depreciation and amortization, $2.5 million in stock-based compensation expense, $2.0 million in fair value adjustments to financial instruments, $3.5 million in changes to deferred income taxes, $3.8 million for our share of Beacon Energy’s loss and other non-cash items totaling $369,000. These positive non-cash items were offset by $8.1 million gain on debt extinguishment, $1.3 million in gain recorded in settlements of litigation and $866,000 gain recorded on business acquisitions. Changes for reduction in working capital items include $20.2 million for increases in inventory, $9.7 million in increased accounts receivable balances and $15.0 million in reductions in accounts payable and accrued expenses. These working capital items were offset by $6.1 million in decreases in prepaid expenses and other items.

For the year ended December 31, 2011, we used $27.9 million in cash for investing activities compared to using net cash of $4.9 million for the year ended December 31, 2010. For the year ended December 31, 2011, we paid $26.2 million to purchase equipment and make capital improvements. We also paid $1.8 million to acquire a business and increases to other assets of $455,000. These items were offset by $578,000 in proceeds from the disposal of property and equipment. For the year ended December 31, 2010, we paid $5.4 million to purchase equipment and capital improvements and invested $350,000 in a manufacturer of radiation shielding solutions for the nuclear medicine community. These items were offset by $646,000 in proceeds from the sale of property and equipment and a $220,000 change in other assets. For the year ended December 31, 2009, we used $5.4 million in cash for investing activities. We paid $2.5 million to acquire businesses, and $3.0 million for purchases of equipment and capital improvements.

For the year ended December 31, 2011, we used $2.6 million in financing activities compared to generating $8.7 million of net cash during the year ended December 31, 2010. For the year ended December 31, 2011, received $13.0 million in proceeds from new borrowings and $542,000 in proceeds from the exercise of common stock options. These amounts were offset by principal payments on debt of $10.5 million, a reduction of $5.4 million in our outstanding revolving credit balance and $196,000 in debt issue costs. For the year ended

 

45


Table of Contents

December 31, 2010, we received $9.5 million in proceeds of new debt, received $4.6 million in net proceeds under our revolving credit facility and received $407,000 in proceeds from the exercise of common stock options. These amounts were offset by debt repayments of $4.5 million and the payment of $1.3 million in debt issue costs. For the year ended December 31, 2009, we used $26.9 million of net cash in financing activities. We repaid $50.3 million of debt, net of new borrowings and paid $1.5 million in debt issue costs on amendments to our loan agreements. These amounts were offset by $24.8 million in proceeds from the sale of our common stock.

Financing and Capitalization

Senior Credit Facilities:

On March 2, 2010, we entered into a Credit Agreement dated as of February 26, 2010 (the “Credit Agreement”) with a syndicate of lenders led by JPMorgan Chase Bank, N.A. and including RBS Business Capital and Capital One Leverage Finance Corp. The three-year facility consisted of senior secured credit facilities in the aggregate amount of $65.0 million, including a $57.0 million revolving line of credit (the “Revolver”) and an $8.0 million machinery and equipment term loan facility (“Initial Term Loan”). The Revolver provides for revolving loans which, in the aggregate, were not to exceed the lesser of $57.0 million or a “Borrowing Base” amount based on specified percentages of eligible accounts receivable and inventory and bears interest at the “Base Rate” (a rate determined by reference to the prime rate) plus 1.25% or, at our election, the current LIBOR rate plus 3.5% (reduced to 3.25% per the Second Amendment described below). The Initial Term Loan bears interest at the Base Rate plus 2% or, at the Company’s election, the current LIBOR rate plus 4.25% (reduced to 3.75% per the Second Amendment described below). Under the Credit Agreement, we are subject to certain operating covenants and are restricted from, among other things, paying cash dividends, repurchasing common stock over certain stated thresholds, and entering into certain transactions without the prior consent of the lenders. In addition, the Credit Agreement contains certain financial covenants, including minimum EBITDA, minimum fixed charge coverage ratios, and maximum capital expenditures covenants. Obligations under the Credit Agreement are secured by substantially all of the Company’s assets other than real property, which is subject to a negative pledge. The proceeds of the Credit Agreement are used for present and future acquisitions, working capital, and general corporate purposes.

Upon the effectiveness of the Credit Agreement described in the preceding paragraph, we terminated an Amended and Restated Loan and Security Agreement with Wells Fargo Foothill, Inc. dated July 3, 2007, as amended (the “Loan Agreement”) and repaid outstanding indebtedness under the Loan Agreement in the aggregate principal amount of approximately $13.5 million. We also terminated a Financing Agreement with Ableco Finance LLC dated July 3, 2007, as amended (the “Financing Agreement”) and repaid outstanding indebtedness under the Financing Agreement in the aggregate principal amount of approximately $30.6 million. Outstanding balances under the Loan Agreement and the Financing Agreement were paid with borrowings under the Credit Agreement and available cash.

On January 27, 2011, we entered into a Second Amendment (the “2011 Amendment”) to the Credit Agreement. The 2011 Amendment provided for an increase in the maximum amount available under the Credit Agreement to $85.0 million, including $70.0 million under the Revolver (up from $57.0 million) and an additional term loan (“Term Loan I”) to be available in multiple draws in the aggregate amount of $9.0 million earmarked for capital expenditures, primarily the shredder project in suburban Buffalo, New York. The original term loan funded at the closing of the Credit Agreement continued to amortize. The 2011 Amendment increased the advance rate for inventory under the Revolver’s borrowing base formula. LIBOR-based interest rates were reduced to the current LIBOR rate plus 3.25% (an effective rate of 3.90% as of December 31, 2011) for revolving loans and the current LIBOR rate plus 3.75% (an effective rate of 4.18% as of December 31, 2011) for term loans. Term Loan I was repaid from the proceeds of the Equipment Financing Agreement described below. The 2011 Amendment also adjusted the definition of Fixed Charges and several covenants, allowing for increases in permitted indebtedness, capital expenditures, and permitted acquisition baskets and extended the Credit Agreement’s maturity date from March 1, 2013 to January 23, 2014. The remaining material terms of the

 

46


Table of Contents

Credit Agreement remained unchanged by the 2011 Amendment. As of December 31, 2011, the Revolver had $38.0 million available for borrowing and $2.2 million utilized for outstanding letters of credit. The outstanding balance under the Credit Agreement at December 31, 2011 and December 31, 2010 was $33.1 million and $41.3 million, respectively.

On February 17, 2012, we entered into a Fifth Amendment (the “2012 Amendment”) to the Credit Agreement. The 2012 Amendment provides for an increase in the maximum amount available under the Credit Agreement to approximately $113.0 million including $110.0 million under the revolving credit facility (up from $70.0 million). LIBOR-based interest rates for revolving loans have been reduced by 0.5% to the current LIBOR rate plus 2.75%. The 2012 Amendment also adjusts the definition of Fixed Charges and several covenants, allowing for increases in permitted indebtedness, capital expenditures, and permitted acquisition baskets. The maturity date has been extended from January 23, 2014 to February 17, 2016, so long as, as of December 31, 2013, the aggregate outstanding principal balance of the Company’s 7% Convertible Notes is not more than $15.0 million and the Company meets certain availability tests. The 2012 Amendment also permits the Company, in its discretion, (i) to spend, subject to certain availability tests, up to $25.0 million in the aggregate to redeem outstanding Convertible Notes, and (ii) to exchange equity for outstanding Convertible Notes. The remaining material terms of the Credit Agreement remain unchanged by the 2012 Amendment. The 2012 Amendment also waived the Capital Expenditure covenant violation for 2011.

On December 12, 2011, we entered into an Equipment Finance Agreement (the “Equipment Finance Agreement”) with First Niagara Leasing, Inc. providing up to $10.4 million in connection with the Buffalo shredder project. As of December 31, 2011, the Company had drawn down a total of $7.9 million of which $6.6 million was used to repay Term Loan I under the Credit Agreement. The equipment loan is secured by the shredder and related equipment. The loan bears interest at a rate of 4.77% per annum, requires monthly payments of $83,000 beginning January 2012, and matures December 2022. The Equipment Financing Agreement contains financial covenants that mirror those of the Credit Agreement with the Company’s primary lender. As of December 31, 2011 the outstanding balance under the loan was $7.9 million and had remaining availability of $2.5 million.

Senior Unsecured Convertible Notes Payable:

On April 23, 2008, we entered into a Securities Purchase Agreement with accredited investors (“Note Holders”) which provided for the sale of $100.0 million of Senior Unsecured Convertible Notes (the “Notes”) convertible into shares of our common stock (“Note Shares”). The initial and current conversion price of the Notes is $14.00 per share. The Notes bear interest at 7% per annum, payable in cash, and will mature in April 2028. In addition, the Notes contain (i) an optional repurchase right exercisable by the Note Holders on the sixth, eighth and twelfth anniversaries of the date of issuance of the Notes, whereby each Note Holder will have the right to require the Company to redeem the Notes at par and (ii) an optional redemption right exercisable by the Company beginning on May 1, 2011, the third anniversary of the date of issuance of the Notes, and ending on the day immediately prior to the sixth anniversary of the date of issuance of the Notes, whereby the Company shall have the option but not the obligation to redeem the Notes at a redemption price equal to 150% of the principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon, limited to 30% of the aggregate principal amount of the Notes as of the issuance date, and from and after the sixth anniversary of the date of issuance of the Notes, the Company shall have the option to redeem any or all of the Notes at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus any accrued and unpaid interest thereon.

As of December 31, 2011, the outstanding balance on the Notes was $75.1 million (net of $1.0 million in unamortized discount related to the original fair value of warrants issued with the Notes).

The Notes also contain (i) certain repurchase requirements upon a change of control, (ii) make-whole provisions upon a change of control, (iii) “weighted average” anti-dilution protection, subject to certain exceptions, (iv) an interest make-whole provision in the event that the Note Purchasers are forced to convert their

 

47


Table of Contents

Notes between the third and sixth anniversaries of the date of issuance of the Notes whereby the Note Purchasers would receive the present value (using a 3.5% discount rate) of the interest they would have earned had their Notes so converted been outstanding from such forced conversion date through the sixth anniversary of the date of issuance of the Notes, and (v) a debt incurrence covenant which limits our ability to incur debt under certain circumstances.

Convertible Note Exchanges

On September 28, 2011, the Company repurchased convertible notes totaling $5.0 million for $4.5 million using proceeds of the Revolver described above, resulting in a gain of $243,000, net of $69,000 in unamortized warrant discount and $226,000 in unamortized deferred financing costs.

On August 26, 2010, the Company repurchased convertible notes totaling $500,000 for $375,000 using proceeds of the Revolver described above resulting in a gain of $101,000 net of unamortized warrant discount.

On April 23, 2009 and June 4, 2009, the Company entered into agreements with certain Note holders and retired an aggregate $18.4 million in debt principal through the issuance of 3,708,906 shares of common stock. The transactions resulted in an aggregate gain on debt extinguishment, net of unamortized discounts and deferred financing costs, of $8.1 million for the year ended December 31, 2009.

All convertible notes surrendered in the repurchase and exchanges were retired and cancelled.

Future Capital Requirements

As of December 31, 2011, we had $5.9 million in cash, availability under the Credit Agreement of $38.0 million and total working capital of $115.2 million. As of December 31, 2011, our current liabilities totaled $38.9 million. We expect to fund our current working capital needs, interest payments and capital expenditures over the next twelve months with cash on hand and cash generated from operations, supplemented by borrowings available under the Credit Agreement and potentially available elsewhere, such as vendor financing, manufacturer financing, operating leases and other equipment lines of credit that are offered to us from time to time. We may also access equity and debt markets for possible acquisitions, working capital and to restructure current debt.

Historically, the Company has entered into negotiations with its lenders when it was reasonably concerned about potential breaches and prior to the occurrences of covenant defaults. A breach of any of the covenants contained in lending agreements could result in default under such agreements. In the event of a default, a lender could refuse to make additional advances under the revolving portion of a credit facility, could require the Company to repay some or all of its outstanding debt prior to maturity, and/or could declare all amounts borrowed by the Company, together with accrued interest, to be due and payable. In the event that this occurs, the Company may be unable to repay all such accelerated indebtedness, which could have a material adverse impact on its financial position and operating performance.

If necessary, the Company could use its existing cash balances or attempt to access equity and debt markets or to obtain new financing arrangements with new lenders or investors as alternative funding sources to restructure current debt. Any issuance of new equity could dilute current shareholders. Any new debt financing could be on terms less favorable than those of our existing financing and could subject us to new and additional covenants. Decisions by lenders and investors to enter into such transactions with the Company would depend upon a number of factors, such as the Company’s historical and projected financial performance, compliance with the terms of its current or future credit agreements, industry and market trends, internal policies of prospective lenders and investors, and the availability of capital. No assurance can be had that the Company would be successful in obtaining funds from alternative sources.

 

48


Table of Contents

Off-Balance Sheet Arrangements

Other than operating leases, we do not have any significant off-balance sheet arrangements that are likely to have a current or future effect on our financial condition, result of operations or cash flows.

Acquisitions

As discussed in Note 2 to the financial statements, we acquired 100% of the outstanding capital stock of Goodman Services, Inc., a Bradford, Pennsylvania-based full service recycling company with additional facilities in Jamestown, New York and Canton, Ohio. The acquisition is consistent with our expansion strategy of penetrating geographically contiguous markets and benefiting from intercompany and operating synergies that are available through consolidation. Goodman Services locations complement our existing facilities in the Great Lakes corridor. Bradford is 160 miles from our Pittsburgh operations and will become a feed source for the Pittsburgh shredder. Jamestown is 75 miles from our Buffalo yards. Canton, Ohio is in close proximity to our operations in Akron, Ohio.

Capital Expenditures

For the year ended December 31, 2011, the Company expended $26.2 million for capital improvements and equipment. The most significant expenditure was for the purchase of a 44-acre parcel of land, including a 177,500-square-foot building, in suburban Buffalo and related costs to install an indoor scrap metal shredder at the site. As described above, we entered into a $10.4 million Equipment Finance Agreement to provide for a majority of the construction costs.

Contingencies

We are involved in certain other legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such other proceedings and litigation will not materially affect the Company’s consolidated financial position, results of operations, or cash flows.

The Company does not carry, and does not expect to carry for the foreseeable future, significant insurance coverage for environmental liability because the Company believes that the cost for such insurance is not economical. However, we continue to monitor products offered by various insurers that may prove to be practical. Accordingly, if the Company were to incur liability for environmental damage in excess of accrued environmental remediation liabilities, its consolidated financial position, results of operations, and cash flows could be materially adversely affected. The Company and its subsidiaries are at this time in material compliance with all of their pending remediation obligations.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial risk resulting from fluctuations in interest rates and commodity prices. We seek to minimize these risks through regular operating and financing activities.

Interest rate risk

We are exposed to interest rate risk on our floating rate borrowings. As of December 31, 2011, $33.1 million of our outstanding debt consisted of variable rate borrowings pursuant to the Credit Agreement with JPMorgan Chase Bank, N.A. Borrowings under the Credit Agreement bear interest at either the prime rate of interest plus a margin or LIBOR plus a margin. Increases in either the prime rate or LIBOR may increase interest expense. Assuming our variable borrowings at December 31, 2011 were to equal the average borrowings under our senior secured credit facility during a fiscal year, a hypothetical increase or decrease in interest rates by 1% would increase or decrease interest expense on our variable borrowings by approximately $331,000 per year with a corresponding change in cash flows. We have no open interest rate protection agreements as of December 31, 2011.

 

49


Table of Contents

Commodity price risk

We are exposed to risks associated with fluctuations in the market price for both ferrous, non-ferrous, PGM and lead metals which are at times volatile. See the discussion under the section entitled “Risk Factors — The metals recycling industry is highly cyclical and export markets can be volatile” located in this Annual Report. We attempt to mitigate this risk by seeking to turn our inventories quickly as markets allow instead of holding inventories in anticipation of higher commodity prices. We use forward sales contracts with PGM substrate processors to hedge against the extremely volatile PGM metal prices. The Company estimates that if selling prices decreased by 10% in any of the business units in which it operates, there would not be a material write-down of any reported inventory values.

Foreign currency risk

International sales account for an immaterial amount of our consolidated net sales and all of our international sales are denominated in U.S. dollars. We also purchase a small percentage of our raw materials from international vendors and these purchases are also denominated in local currencies. Consequently, we do not enter into any foreign currency swaps to mitigate our exposure to fluctuations in the currency rates.

Risk from Common Stock market price

We are exposed to risks associated with the market price of our own common stock. In connection with certain financings, we have issued warrants that can be “put” to us upon a change of control. We are required to use the value of our common stock as an input variable to determine the fair value of the liability associated with the put warrant. Fluctuations in the market price of our common stock have an effect on the liability. For example, if the price of our common stock was $1.00 higher as of December 31, 2011, the put warrant liability would increase by $244,000.

Item 8.    Financial Statements and Supplementary Data

The financial statements required by this Item 8 are set forth at the pages indicated at Item 15(a)(1).

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2011 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no material changes in our internal control over financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

50


Table of Contents

The report called for by Item 308(a) of Regulation S-K is included herein as “Management’s Report on Internal Control Over Financial Reporting.”

The attestation report called for by Item 308(b) of Registration S-K is included herein as “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.”

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

The scope of management’s assessment of the effectiveness of internal control over financial reporting includes all of our businesses. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2011.

Our independent registered public accounting firm, J.H. Cohn LLP, audited our internal control over financial reporting as of December 31, 2011. J.H. Cohn’s report dated March 14, 2012 expressed an unqualified opinion on our internal control over financial reporting and is included in this Item 9A.

 

51


Table of Contents

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

To the Board of Directors and Stockholders

Metalico, Inc.

We have audited Metalico, Inc. and Subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows of the Company for each of the three years in the period ended December 31, 2011, and our report dated March 14, 2012 expressed an unqualified opinion thereon.

/s/    J. H. Cohn LLP

Roseland, New Jersey

March 14, 2012

 

52


Table of Contents

Item 9B.    Other Information

None.

 

53


Table of Contents

PART III

 

 

Item 10.    Directors, Executive Officers, and Corporate Governance

Information required under this item is incorporated by reference from sections entitled “Proposal 1 — Election of Directors,” “Directors and Executive Officers,” “Board Committees,” “Compensation Committee Interlocks and Insider Participation,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Ethics” in our definitive proxy statement, which will be filed with the SEC before April 29, 2012.

Item 11.    Executive Compensation

Information required under this item is incorporated by reference from sections entitled “Executive Compensation” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year End,” “Employment Agreements,” “Executive Bonus Plan,” “1997 Long-Term Incentive Plan”, “2006 Long-Term Incentive Plan”, “Compensation Committee Report,” “Director Compensation,” and “Shareholder Performance” in our definitive proxy statement, which will be filed with the SEC before April 29, 2012.

Item 12.    Security Ownership of Certain Beneficial Owners and Management

Information required under this item is incorporated by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement, which will be filed with the SEC before April 29, 2012.

Item 13.    Certain Relationships and Related Party Transactions, and Director Independence

Information required under this item is incorporated by reference from the section entitled “Certain Relationships and Related Party Transactions” in our definitive proxy statement, which will be filed with the SEC before April 29, 2012.

Item 14.    Principal Accounting Fees and Services

Information required under this item is incorporated by reference from the section entitled “Audit and Non-Audit Fees” in our definitive proxy statement, which will be filed with the SEC before April 29, 2012.

Item 15.    Financial Statements and Exhibits

 

(a)

FINANCIAL STATEMENTS

The following financial statements are included as part of this Form 10-K beginning on page F-1:

Index to Financial Statements

 

     Page  

Index to Audited Consolidated Financial Report of Metalico, Inc. and subsidiaries included in this Form 10-K:

  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets as of December 31, 2011 and 2010

     F-3   

Consolidated Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009

     F-4   

Consolidated Statements of Stockholders’ Equity for the Years Ended December  31, 2011, 2010 and 2009

     F-5   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009

     F-6   

Notes to Consolidated Financial Statements

     F-7   

 

54


Table of Contents
(b)

EXHIBITS

The following exhibits are filed as part of this From 10-K:

 

3.1    Fourth Amended and Restated Certificate of Incorporation of Metalico, Inc.; previously filed as Appendix A to Proxy Statement on Schedule 14A for the Company’s 2008 Annual Meeting of Stockholders filed May 15, 2008 and incorporated herein by reference
3.2    Third Amended and Restated Bylaws of Metalico, Inc.; previously filed as Exhibit 3.2 to Current Report on Form 8-K filed November 3, 2005 and incorporated herein by reference
4.1    Specimen Common Stock Certificate; previously filed as Exhibit 4.1 to Form 10 filed December 20, 2004 and incorporated herein by reference
10.3*    Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Carlos E. Agüero; previously filed as Exhibit 10.3 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
10.4*    Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Michael J. Drury; previously filed as Exhibit 10.4 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
10.5*    Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Arnold S. Graber; previously filed as Exhibit 10.5 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
10.6*    Employment Agreement dated as of January 1, 2010 between Metalico, Inc. and Eric W. Finlayson; previously filed as Exhibit 10.6 to Current Report on Form 8-K filed December 21, 2009 and incorporated herein by reference
10.7*    Metalico, Inc. 1997 Long-Term Incentive Plan; previously filed as Exhibit 10.7 to Form 10 filed December 20, 2004 and incorporated herein by reference
10.8*    Metalico, Inc. Executive Bonus Plan; previously filed as Exhibit 10.8 to Form 10 filed December 20, 2004 and incorporated herein by reference
10.9    Credit Agreement, dated as of February 26, 2010 but entered into March 2, 2010, by and among Metalico, Inc. and its subsidiaries signatory thereto as borrowers and guarantors and JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto; previously filed as Exhibit 10.1 to Current Report on Form 8-K filed March 4, 2010 and incorporated herein by reference
10.10    Second Amendment dated January 27, 2011 to Credit Agreement dated as of February 26, 2010 between and among Metalico, Inc. and its subsidiaries signatory thereto as borrowers or guarantors and JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto; previously filed as Exhibit 10.10 to Form 10-K filed March 15, 2010 and incorporated herein by reference
10.11    Fifth Amendment dated February 27, 2012 to Credit Agreement dated as of February 26, 2010 between and among Metalico, Inc. and its subsidiaries signatory thereto as borrowers or guarantors and JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto
10.13    Equipment Financing Agreement dated December 12, 2011 as amended by Amendment No. 1 dated February 17, 2012 between Buffalo Shredding and Recovery, LLC as borrower and First Niagara Leasing, Inc. as lender.
10.14*    Employment Agreement dated as of February 11, 2011 effective February 21, 2011 between Metalico, Inc. and Kenneth P. Mueller; previously filed as Exhibit 10.14 to Current Report on Form 8-K filed February 22, 2011 and incorporated herein by reference

 

55


Table of Contents
10.15*    Form of Employee Incentive Stock Option Agreement under Metalico, Inc. 1997 Long-Term Incentive Plan; previously filed as Exhibit 99.1 to Current Report on Form 8-K filed March 17, 2005 and incorporated herein by reference
10.16*    Form of Employee Deferred Stock Agreement under Metalico, Inc. 2006 Long-Term Incentive Plan; previously filed as Exhibit 10.16 to Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and incorporated herein by reference
10.18*    Metalico 2006 Long-Term Incentive Plan; previously filed as Appendix A to Proxy Statement on Schedule 14A for the Company’s 2006 Annual Meeting of Stockholders filed April 13, 2006 and incorporated herein by reference
10.19*    Form of Employee Incentive Stock Option Agreement under Metalico, Inc. 2006 Long-Term Incentive Plan; previously filed as Exhibit 10.19 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and incorporated herein by reference
10.20*    Form of Employee Restricted Stock Grant Agreement under Metalico, Inc. 2006 Long-Term Incentive Plan; previously filed as Exhibit 10.20 to Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference
10.21    Securities Purchase Agreement dated as of June 21, 2007 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.1 to Current Report on Form 8-K filed June 22, 2007 and incorporated herein by reference
10.22    Registration Rights Agreement dated as of June 21, 2007 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.2 to Current Report on Form 8-K filed June 22, 2007 and incorporated herein by reference
10.23    Form of Amended and Restated Stock Subscription Agreement and Stockholder Agreement dated November 30, 2006 among AgriFuel Co. (“AgriFuel”), the purchasers of AgriFuel stock signatory thereto, and Metalico, Inc.; previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference
10.24    Form of Amendment No. 1 dated August 22, 2007 to Amended and Restated Stock Subscription Agreement and Stockholder Agreement dated November 30, 2006 among AgriFuel Co., nka Beacon Energy Corp. (“Beacon”), the purchasers of Beacon stock signatory thereto, and Metalico, Inc.; previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference
10.25    Form of Series B Stock Subscription Agreement and Stockholder Agreement dated August 22, 2007 among Beacon Energy Corp. (“Beacon”), the purchasers of Beacon stock signatory thereto, and Metalico, Inc.; previously filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference
10.26    Form of Subscription and Investment Agreement (Series C) dated May 15, 2008 among Beacon Energy Corp., the investors identified therein, and Metalico, Inc.; previously filed as Exhibit 10.26 to Quarterly Report on Form 10-Q for quarter ended June 30, 2008 and incorporated herein by reference
10.28    Securities Purchase Agreement dated as of April 23, 2008 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.1 to Current Report on Form 8-K/A filed April 24, 2008 and incorporated herein by reference
10.29    Registration Rights Agreement dated as of April 23, 2008 among Metalico, Inc. and the investors named therein; previously filed as Exhibit 10.2 to Current Report on Form 8-K/A filed April 24, 2008 and incorporated herein by reference
10.30    Form of Senior Unsecured Convertible Note issued to investors party to Agreements identified in Exhibits 10.27 and 10.28 above, previously filed as Exhibit 10.3 to Current Report on Form 8-K filed May 5, 2008 and incorporated herein by reference

 

56


Table of Contents
10.31    Form of Common Stock Purchase Warrant issued to investors party to Agreements identified in Exhibits 10.27 and 10.28 above, previously filed as Exhibit 10.4 to Current Report on Form 8-K/A filed April 24, 2008 and incorporated herein by reference
14.1    Code of Business Conduct and Ethics, available on the Company’s website (www.metalico.com) and incorporated herein by reference.
21.1    List of Subsidiaries of Metalico, Inc.
23.1    Consent of Independent Registered Public Accounting Firm.
31.1    Certification of Chief Executive Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended
31.2    Certification of Chief Financial Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended
32.1    Certification of Chief Executive Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code
32.2    Certification of Chief Financial Officer of Metalico, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code

 

*

Management contract or compensatory plan or arrangement.

 

57


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

METALICO, INC.

(Registrant)

By:   /s/    CARLOS E. AGÜERO        
  Carlos E. Agüero
  Chairman, President and Chief Executive Officer

Date: March 14, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/    CARLOS E. AGÜERO        

Carlos E. Agüero

  

Chairman of the Board of Directors, President, Chief Executive Officer and Director

  March 14, 2012

/s/    ERIC W. FINLAYSON        

Eric W. Finlayson

  

Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

  March 14, 2012

/s/    MICHAEL J. DRURY        

Michael J. Drury

  

Executive Vice President and Chief Operating Officer for PGM and Lead Operations and Director

  March 14, 2012

/s/    BRET R. MAXWELL        

Bret R. Maxwell

  

Director

  March 14, 2012

/s/    WALTER H. BARANDIARAN        

Walter H. Barandiaran

  

Director

  March 14, 2012

/s/    PAUL A. GARRETT        

Paul A. Garrett

  

Director

  March 14, 2012

/s/    SEAN P. DUFFY        

Sean P. Duffy

  

Director

  March 14, 2012

 

58


Table of Contents

INDEX TO FINANCIAL STATEMENTS

The following financial statements are included as part of this Form 10-K beginning on page F-1:

 

     Page  

Consolidated Financial Statements of Metalico, Inc. and Subsidiaries:

  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets as of December 31, 2011 and 2010

     F-3   

Consolidated Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009

     F-4   

Consolidated Statements of Stockholders’ Equity for the Years Ended December  31, 2011, 2010 and 2009

     F-5   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009

     F-6   

Notes to Consolidated Financial Statements

     F-7   

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Metalico, Inc.

We have audited the consolidated balance sheets of Metalico, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Metalico, Inc. and Subsidiaries as of December 31, 2011 and 2010, and their results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14, 2012, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ J.H. Cohn LLP

Roseland, New Jersey

March 14, 2012

 

F-2


Table of Contents

Metalico, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2011 and 2010

 

     2011     2010  
     ($ thousands)  
ASSETS     

Current Assets

    

Cash

   $ 5,932      $ 3,473   

Trade receivables, less allowance for doubtful accounts 2011 — $829; 2010 — $1,027

     50,965        55,112   

Inventories

     85,659        73,454   

Prepaid expenses and other current assets

     5,250        6,276   

Income taxes receivable

     3,938        1,386   

Deferred income taxes

     2,345        4,004   
  

 

 

   

 

 

 

Total current assets

     154,089        143,705   

Property and equipment, net

     91,361        70,215   

Goodwill

     73,548        69,605   

Other intangibles, net

     40,228        38,871   

Other assets, net

     5,667        6,111   
  

 

 

   

 

 

 

Total assets

   $ 364,893      $ 328,507   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current Liabilities

    

Short-term debt

   $ 5,963      $ 7,051   

Current maturities of other long-term debt

     6,687        4,196   

Accounts payable

     22,040        18,386   

Accrued expenses and other current liabilities

     4,160        4,561   
  

 

 

   

 

 

 

Total current liabilities

     38,850        34,194   
  

 

 

   

 

 

 

Long-Term Liabilities

    

Senior unsecured convertible notes payable

     75,074        79,940   

Other long-term debt, less current maturities

     41,030        34,775   

Deferred income taxes

     15,918        6,726   

Accrued expenses and other long-term liabilities

     2,119        5,557   
  

 

 

   

 

 

 

Total long-term liabilities

     134,141        126,998   
  

 

 

   

 

 

 

Total liabilities

     172,991        161,192   
  

 

 

   

 

 

 

Commitments and Contingencies (Notes 15 and 16)

    

Stockholders’ Equity

    

Common stock

     47        46   

Additional paid-in capital

     182,379        175,094   

Retained earnings (accumulated deficit)

     9,910        (7,510

Accumulated other comprehensive loss

     (434     (315
  

 

 

   

 

 

 

Total stockholders’ equity

     191,902        167,315   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 364,893      $ 328,507   
  

 

 

   

 

 

 

 

See Notes to Consolidated Financial Statements.

 

F-3


Table of Contents

Metalico, Inc. and Subsidiaries

Consolidated Statements of Operations

Years Ended December 31, 2011, 2010 and 2009

 

     2011     2010     2009  
     ($ thousands, except share data)  

Revenue

   $ 660,907      $ 553,253      $ 291,733   
  

 

 

   

 

 

   

 

 

 

Costs and expenses

      

Operating expenses

     584,685        477,066        239,647   

Selling, general and administrative expenses

     29,040        26,482        25,994   

Depreciation and amortization

     14,610        13,728        13,240   

Gain on insurance recovery

            (513       

Gain on acquisition

                   (866
  

 

 

   

 

 

   

 

 

 
     628,335        516,763        278,015   
  

 

 

   

 

 

   

 

 

 

Operating income

     32,572        36,490        13,718   
  

 

 

   

 

 

   

 

 

 

Financial and other income (expense)

      

Interest expense

     (9,358     (9,837     (15,315

Accelerated amortization and other costs related to refinancing of senior debt

            (3,046     (542

Financial instruments fair value adjustment

     3,586        (496     (2,035

Equity in income (loss) of unconsolidated investee

     (46     28        (3,839

Gain on debt extinguishment

     243        101        8,072   

Other income (expense)

     142        10        (1,963
  

 

 

   

 

 

   

 

 

 
     (5,433     (13,240     (15,622
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before provision for income taxes

     27,139        23,250        (1,904

Provision for federal and state income taxes

     9,719        9,779        1,736   
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     17,420        13,471        (3,640

Discontinued operations:

      

Income (loss) from operations less applicable (expense) credit for income taxes 2010 $6; 2009 ($162)

            (9     195   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 17,420      $ 13,462      $ (3,445
  

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

      

Basic:

      

Income (loss) from continuing operations

   $ 0.37      $ 0.29      $ (0.08

Income (loss) from discontinued operations

                     
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 0.37      $ 0.29      $ (0.08
  

 

 

   

 

 

   

 

 

 

Diluted:

      

Income (loss) from continuing operations

   $ 0.37      $ 0.29      $ (0.08

Income (loss) from discontinued operations

                     
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 0.37      $ 0.29      $ (0.08
  

 

 

   

 

 

   

 

 

 

 

See Notes to Consolidated Financial Statements.

 

F-4


Table of Contents

Metalico, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2011, 2010 and 2009

 

    Common
Stock
    Additional
Paid-In
Capital
    (Accumulated
Deficit)

Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Comprehensive
Income (Loss)
    Total  
    ($ thousands)  

Balance January 1, 2009

  $ 36      $ 131,248      $ (17,527   $ (785     $ 112,972   

Sale of 6,000,000 shares of common stock, net of offering costs

    6        24,789                             24,795   

Issuance of 159,393 shares of common stock for amendment to make-whole agreements on acquisition

           288                             288   

Termination of redemption option on 500,000 shares of redeemable common stock

           4,000                             4,000   

Issuance of 3,708,906 shares of common stock in exchange for convertible notes

    4        8,996                             9,000   

Issuance of 134,665 shares of common stock in exchange for options exercised

           82                             82   

Stock based compensation expense, net of deferred tax benefit of $37

           2,489                             2,489   

Net loss

                  (3,445            (3,445     (3,445

Other comprehensive income, net of deferred tax expense of $45

                         76        76        76   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

          $ (3,369  
         

 

 

   

Balance December 31, 2009

    46        171,892        (20,972     (709       150,257   

Issuance of 127,820 shares of common stock in exchange for options exercised

           407                             407   

Stock based compensation expense, net of deferred tax benefit of $44

           2,795                             2,795   

Net income

                  13,462               13,462        13,462   

Other comprehensive income, net of deferred tax expense of $212

                         394        394        394   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

          $ 13,856     
         

 

 

   

Balance December 31, 2010

    46        175,094        (7,510     (315       167,315   

Issuance of 782,763 shares of common stock for business acquisition, net of issuance costs

    1        4,628                             4,629   

Issuance of 109,906 shares of common stock in exchange for options exercised

           542                             542   

Stock based compensation expense, net of deferred tax benefit of $58

           2,115                             2,115   

Net income

                  17,420               17,420        17,420   

Other comprehensive loss, net of deferred tax benefit of $63

                         (119     (119     (119
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

          $ 17,301     
         

 

 

   

Balance December 31, 2011

  $ 47      $ 182,379      $ 9,910      $ (434     $ 191,902   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

See Notes to Consolidated Financial Statements.

 

F-5


Table of Contents

Metalico, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2011, 2010 and 2009

 

     2011     2010     2009  
     ($ thousands)  

Cash Flows from Operating Activities

      

Net income (loss)

   $ 17,420      $ 13,462      $ (3,445

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

      

Depreciation

     12,175        11,021        10,318   

Amortization

     3,523        3,500        3,797   

Amortization of note payable and put option discounts

     65        67        343   

Provision (recovery) for doubtful accounts receivable and loss on vendor advances

     237        370        (144

Deferred income tax provision

     8,069        2,732        3,463   

Net gain on sale and disposal of property and equipment

     (265     (537     (29

Gain on acquisition

                   (866

Gain on legal settlement

                   (1,266

Gain on debt extinguishment

     (243     (101     (8,072

Equity in loss (income) of unconsolidated investee

     46        (28     3,839   

Financial instruments fair value adjustment

     (3,586     496        2,035   

Compensation expense on restricted stock and stock options issued

     2,115        2,795        2,489   

Excess tax benefit from stock-based compensation

     59        44        37   

Deferred financing costs expensed

            2,107        542   

Change in assets and liabilities, net of business acquisitions:

      

(Increase) decrease in:

      

Trade receivables

     6,651        (24,320     (9,611

Inventories

     (10,995     (20,873     (20,249

Prepaid expenses and other current assets

     (1,670     2,490        6,098   

Increase (decrease) in:

      

Accounts payable, accrued expenses and income taxes receivable

     (608     1,576        (14,995
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     32,993        (5,199     (25,716
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities

      

Proceeds from insurance recovery and sale of property and equipment

     578        646        333   

Purchase of property and equipment

     (26,196     (5,449     (3,022

(Increase) decrease in other assets

     (455     220        (269

Investment in unconsolidated subsidiary

            (350       

Cash paid for business acquisitions, less cash acquired

     (1,844            (2,453
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (27,917     (4,933     (5,411
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities

      

Net borrowings (payments) under revolving lines-of-credit

     (5,437     4,623          

Proceeds from other borrowings

     13,049        9,452        612   

Principal payments on other borrowings

     (10,516     (4,498     (50,867

Proceeds from issuance of common stock on exercised options

     542        407        82   

Proceeds from other issuance of common stock

                   24,795   

Excess tax benefit from stock-based compensation

     (59     (44     (37

Debt-issuance costs paid

     (196     (1,273     (1,453
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (2,617     8,667        (26,868
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

     2,459        (1,465     (57,995

Cash:

      

Beginning

     3,473        4,938        62,933   
  

 

 

   

 

 

   

 

 

 

Ending

   $ 5,932      $ 3,473      $ 4,938   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

F-6


Table of Contents

Metalico, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

($ thousands, except per share data)

 

 

Note 1.    Nature of Business and Summary of Significant Accounting Policies

Nature of business:    Metalico Inc. and subsidiaries (the “Company”) operates in three distinct business segments: (a) ferrous and non-ferrous scrap metal recycling (“Scrap Metal Recycling”), (b) platinum group and minor metals recycling (“PGM and Minor Metals Recycling”), and (c) lead metal product fabricating (“Lead Fabricating”). Its operating facilities include twenty scrap metal recycling facilities, including a combined aluminum de-oxidizing plant, six PGM and Minor Metal Recycling facilities and four lead product manufacturing and fabricating plants. The Company markets a majority of its products domestically but maintains several international customers.

Reference should be made to Note 17 regarding discontinued operations of the Company.

A summary of the Company’s significant accounting policies follows:

Use of estimates in the preparation of financial statements:    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. The Company uses estimates in determining the reported amounts for reserves for uncollectible accounts receivable and vendor advances, inventory, deferred tax asset and intangible asset valuations, put warrant liability and stock-based compensation. Actual results could differ from those estimates.

Principles of consolidation:    The accompanying financial statements include the accounts of Metalico, Inc. and its consolidated subsidiaries, which are comprised of those entities in which it has an investment equal to or more than 50%, or a controlling financial interest. A controlling financial interest exists when the Company holds an interest of less than 50% in an entity, but possesses (i) control over more than 50% of the voting rights by virtue of indirect ownership by certain officers and shareholders of the Company, (ii) the power to govern the entity’s most significant financial and operating policies by agreement or statute or ability to appoint management, (iii) the right to appoint or remove the majority of the board of directors, or (iv) the power to assemble the majority of voting rights at meetings of the board of directors or other governing body. All significant intercompany accounts and transactions have been eliminated.

Effective January 1, 2011, the Company has identified PGM and Minor Metals Recycling as a new reportable segment previously grouped in the Scrap Metal Recycling segment. Certain balance sheet and operating details about the PGM and Minor Metals Recycling segment have been reported in Note 6 — Goodwill and Other Intangibles and Note 18 — Segment Reporting. As such, previous year’s reported information has been adjusted to reflect comparative data.

Trade receivables:    Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The Company generally does not charge interest on past-due amounts or require collateral on trade receivables.

 

F-7


Table of Contents

Metalico, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

($ thousands, except per share data)

 

 

 

Concentration of credit risk:    Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, money market mutual funds and trade receivables. At times, cash in banks is in excess of the FDIC insurance limit. The Company has not experienced any loss as a result of those deposits.

Inventories:    Inventories are valued at the lower of cost or market determined on a first-in, first-out basis. A portion of operating labor and overhead costs has been allocated to inventory.

Property and equipment:    Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated service lives of the respective classes of property and equipment ranging between 3 and 10 years for office furniture, fixtures and equipment, 3 and 10 years for vehicles, 2 and 20 years for machinery and equipment and 3 and 39 years for buildings and improvements.

Goodwill:    The Company records as goodwill the excess of the purchase price over the fair value of identifiable net assets acquired. Accounting Standards Codification (“ASC”) prescribes a two-step process for impairment testing of goodwill, which is performed annually, as well as when an event triggering impairment may have occurred. The first step tests for impairment by comparing the estimated fair value of each reporting unit to its carrying value. The fair value of the reporting units are estimated by discounted cash flows produced by a 5 year forecast. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. The Company performs its annual analysis as of December 31 of each fiscal year.

Other intangible and other assets:    Covenants not to compete are amortized on a straight-line basis over the terms of the agreements, not exceeding 5 years. Debt issue costs are amortized over the average term of the credit agreement using the effective interest method. Supplier lists are amortized on a straight-line basis not to exceed 20 years and trademarks and know-how have an indefinite life except for a certain trademark of the Company’s lead operation which has been determined to have a 3 year-life.

Impairment of long-lived assets:    The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of definite-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are impaired, the impairment is recognized as the amount by which the carrying amount exceeds the estimated future cash flows. Assets to be sold are reported at the lower of the carrying amount or the fair value less costs to sell. Indefinite-lived assets are tested for impairment annually or when impairment is suspected by a comparison of the carrying amount of the asset to the net present value of future cash flows expected to be generated by the asset.

Equity Method of Accounting:    The Company accounts for its unconsolidated subsidiary using the equity method of accounting. Under the equity method, the investment is carried at cost of acquisition, plus the Company’s equity in undistributed earnings or losses since acquisition, less distributions received since acquisition. Equity in the losses of the unconsolidated subsidiary is recognized according to the Company’s percentage ownership in the unconsolidated subsidiary until the Company contributed capital has been fully depleted. Reserves are provided where management determines that the investment or equity in earnings is not realizable. Changes in equity in undistributed earnings or losses since acquisition are reflected in financial and other income (expense) in the statements of operations.

 

F-8


Table of Contents

Metalico, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

($ thousands, except per share data)

 

 

 

Income taxes:    Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses.

Revenue recognition:    Revenue from product sales is recognized as goods are shipped, which generally is when title transfers and the risks and rewards of ownership have passed to customers, based on free on board (“FOB”) terms. Brokerage sales are recognized upon receipt of materials by the customer and reported net of costs in product sales. Historically, there have been very few sales returns and adjustments in excess of reserves for such instances that would impact the ultimate collection of revenues: therefore, no material provisions have been made when a sale is recognized.

Derivative financial instruments:    All derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings).

Stock-based compensation:    For employee stock options, the Company calculates the fair value of the award on the date of grant using the Black-Scholes method and recognizes that expense over the service period for awards expected to vest. The fair value of restricted stock awards is determined based on the number of shares granted and the average of the high and low quoted price of the Company’s common stock the date of grant. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

Environmental remediation costs:    The Company is subject to comprehensive and frequently changing federal, state and local environmental laws and regulations, and will incur additional capital and operating costs in the future to comply with currently existing laws and regulations, new regulatory requirements arising from recently enacted statutes, and possible new statutory enactments. The Company accrues losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recorded no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.

 

F-9


Table of Contents

Metalico, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

($ thousands, except per share data)

 

 

 

Determining (a) the extent of remedial actions that are or may be required, (b) the type of remedial actions to be used, (c) the allocation of costs among potentially responsible parties (“PRPs”) and (d) the costs of making such determinations, on a site-by-site basis, require a number of judgments and assumptions and are inherently difficult to estimate. The Company utilizes certain experienced consultants responsible for site monitoring, third party environmental specialists, and correspondence and progress reports obtained from the various regulatory agencies responsible for site monitoring to estimate its accrued environmental remediation costs. The Company generally contracts with third parties to fulfill most of its obligations for remedial actions. The time period necessary to remediate a particular site may extend several years, and the laws governing the remediation process and the technology available to complete the remedial action may change before the remedial action is complete. Additionally, the impact of inflation and productivity improvements can change the estimates of costs to be incurred. It is reasonably possible that technological, regulatory or enforcement developments, the results of environmental studies, the nonexistence or inability of other PRPs to contribute to the settlements of such liabilities or other factors could necessitate the recording of additional liabilities which could be material. The majority of the Company’s environmental remediation accrued liabilities are applicable to its now discontinued secondary lead smelting operations.

Earnings (loss) per common share:    Basic earnings (loss) per share (“EPS”) data has been computed on the basis of the weighted-average number of common shares outstanding during each period presented. Diluted EPS data has been computed on the basis of the assumed conversion, exercise or issuance of all potential common stock instruments, unless the effect is to reduce the loss or increase the net income (loss) per common share.

Note 2.    Business Acquisitions

Business acquisition (scrap metal recycling segment):    On January 31, 2011, the Company acquired 100% of the outstanding capital stock of Goodman Services, Inc., a Bradford, Pennsylvania-based full service recycling company with additional operations in Jamestown, New York and Canton, Ohio. The acquisition is consistent with the Company’s expansion strategy of penetrating geographically contiguous markets and benefiting from intercompany and operating synergies that are available through consolidation. The purchase price included cash and Metalico common stock among other items of consideration. Funding for the acquisition included a drawdown under the Company’s Credit Agreement. As part of the purchase price for the acquisition, the Company issued 782,763 shares of its common stock, par value $0.001 per share having an aggregate value to the sellers of $4,391 determined at a price per share of $5.61. The results of operations of the business acquired are included in the Company’s scrap metal recycling segment in the consolidated financial statements from the acquisition date forward. Unaudited pro forma results are not presented as they are not material to the Company’s overall consolidated financial statements.

Business acquisition (scrap metal recycling segment):    On December 8, 2009, the Company’s Metalico Youngstown, Inc., subsidiary (“Youngstown”) closed a purchase of substantially all the assets, of Youngstown Iron & Metal, Inc. (“YIM”) and Atlas Recycling, Inc., (“ARI”) value-added processors of recyclable scrap metal feedstocks of ferrous and non-ferrous metals located principally in Youngstown, Ohio. No goodwill was recorded in the transaction. Included in the allocation of the purchase price is a gain of $866 and is reported as a separate item in income from operations. The $866 gain represents a supplier list valued at $850 which is being amortized on a straight line basis over a 10 year life and $16 representing the fair market value of net assets purchased in excess of the purchase price. The purpose of the acquisition was to expand the Company’s scrap metal recycling business within its geographic region. The results of operations acquired are included in the Company’s scrap metal recycling segment in the consolidated financial statements from the acquisition date forward. Unaudited pro forma results are not presented as they are not material to the Company’s overall consolidated financial statements. On June 30, 2010, the Company completed the acquisition when it closed the transfer of the real property in northeastern Ohio used in YIM’s and ARI’s operations.

 

F-10


Table of Contents

Metalico, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

($ thousands, except per share data)

 

 

 

Note 3.    Major Customer

Revenues for the years ended December 31, 2011, 2010 and 2009, includes net revenues to the following customer together with the trade receivables due from such customer as of December 31, 2011 and 2010. No other customer accounted for more than 10% of total revenues in any year presented.

 

     Net Revenues to
Customer as a
percentage
of Total Revenues

For the year ended
December 31,
    Trade Receivable
Balance as of

December 31,
 
     2011     2010     2009     2011      2010  

Customer A (PGM and Minor Metals Recycling segment)

     17.3     23.6     18.0   $ 2,335       $ 7,994   

Note 4.    Inventories

Inventories as of December 31, 2011 and 2010 were as follows:

 

     2011      2010  

Raw materials

   $ 6,446       $ 8,125   

Work-in-process

     3,406         3,927   

Finished goods

     9,456         6,735   

Ferrous scrap metal

     33,812         24,093   

Non-ferrous scrap metal

     32,539         30,574   
  

 

 

    

 

 

 
   $ 85,659       $ 73,454   
  

 

 

    

 

 

 

Note 5.    Property and Equipment

Property and equipment as of December 31, 2011 and 2010 consisted of the following:

 

     2011      2010  

Land

   $ 10,930       $ 9,274   

Buildings and improvements

     30,196         26,041   

Office furniture, fixtures and equipment

     2,119         1,894   

Vehicles and machinery and equipment

     100,396         77,381   

Construction in progress

     3,743           
  

 

 

    

 

 

 
     147,384         114,590   

Less accumulated depreciation

     56,023         44,375   
  

 

 

    

 

 

 
   $ 91,361       $ 70,215   
  

 

 

    

 

 

 

For the year ended December 31, 2011, the Company capitalized interest expense of $294 related to the construction of its new shredder facility in Western, New York.

 

F-11


Table of Contents

Metalico, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

($ thousands, except per share data)

 

 

 

Note 6.    Goodwill

The Company’s goodwill resides in multiple reporting units. The carrying amount of goodwill is tested annually as of December 31 or whenever events or circumstances indicate that impairment may have occurred. At December 31, 2011, after the consideration of a 25% control premium, the Company’s market capitalization exceeded total stockholders’ equity. Current economic conditions in industries in which the Company purchases and sells material has produced projected cash flow and operating results sufficient enough to support the carrying values of goodwill recorded in its reporting units. No indicators of impairment were identified for the years ended December 31, 2011, 2010 and 2009. For the year ended December 31, 2011, the Company recorded goodwill of $3,943 in connection with the Goodman Services, Inc., acquisition described in Note 2.

Changes in the carrying amount of goodwill for the years ended December 31, 2011 and 2010 were as follows:

 

     2011      2010  

Balance, beginning of year

   $ 69,605       $ 69,301   

Acquired during the year

     3,943         304   
  

 

 

    

 

 

 

Balance, end of year

   $ 73,548       $ 69,605   
  

 

 

    

 

 

 

The aggregate carrying of goodwill by segment as of December 31, 2011 and 2010 was as follows:

 

     Scrap  Metal
Recycling
     PGM and
Minor  Metal

Recycling
     Lead
Fabrication
and Recycling
     Consolidated  

2011

   $ 43,528       $ 24,652       $ 5,368       $ 73,548   

2010

   $ 39,585       $ 24,652       $ 5,368       $ 69,605   

For the year ended December 31, 2008, the profitability of individual reporting units suffered from downturns in customer demand and other factors resulting from the global economic crisis including the precipitous decline in commodity prices. Certain individual reporting units were more impacted by these factors than the Company as a whole due to particular demand characteristics for specific commodities which the Company handles. Specifically, the decline in the automotive industry, which drives a significant portion of the demand for PGMs, resulted in exceptional declines in PGM pricing which impacted the fair value of the goodwill recorded in the Company’s PGM reporting units.

Adverse changes in general economic and market conditions and future volatility in the equity and credit markets could have further impact on the Company’s valuation of its reporting units and may require the Company to assess the carrying value of its remaining goodwill and other intangibles prior to normal annual testing date.

 

F-12


Table of Contents

Metalico, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

($ thousands, except per share data)

 

 

 

Note 7.    Other Intangible Assets

The Company tests all finite-lived intangible assets and other long-lived assets, such as fixed assets, for impairment only if circumstances indicate that possible impairment exists. Estimated useful lives of intangible assets are determined by reference to both contractual arrangements such as non-compete covenants and current and projected cash flows for supplier lists. During 2011 and 2010, no indicators of impairment were identified and no adjustments were made to the estimated lives of finite-lived assets. Indefinite-lived assets are tested for impairment at least annually. Other intangible assets as of December 31, 2011 and 2010 consisted of the following:

 

     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

2011

       

Covenants not-to-compete

   $ 4,105       $ (900   $ 3,205   

Trademarks and tradenames

     6,075         —          6,075   

Supplier relationships

     39,130         (8,579     30,551   

Know how

     397         —          397   

Patents and databases

     94         (94     —     
  

 

 

    

 

 

   

 

 

 
   $ 49,801       $ (9,573   $ 40,228   
  

 

 

    

 

 

   

 

 

 

2010

       

Covenants not-to-compete

   $ 4,310       $ (3,120   $ 1,190   

Trademarks and tradenames

     6,075         —          6,075   

Supplier relationships

     37,500         (6,322     31,178   

Know how

     397         —          397   

Patents and databases

     94         (63     31   
  

 

 

    

 

 

   

 

 

 
   $ 48,376       $ (9,505   $ 38,871   
  

 

 

    

 

 

   

 

 

 

The changes in the net carrying amount of amortized intangible and other assets by classifications for the years ended December 31, 2011 and 2010 were as follows:

 

     Covenants
Not-to-
Compete
    Supplier
Relationships
    Patents and
Databases
 

2011

      

Balance, beginning

   $ 1,190      $ 31,178      $ 31   

Acquisitions/additions

     2,427        1,630          

Amortization

     (412     (2,257     (31
  

 

 

   

 

 

   

 

 

 

Balance, ending

   $ 3,205      $ 30,551      $   
  

 

 

   

 

 

   

 

 

 

2010

      

Balance, beginning

   $ 1,770      $ 33,297      $ 63   

Acquisitions/additions

                     

Amortization

     (580     (2,119     (32
  

 

 

   

 

 

   

 

 

 

Balance, ending

   $ 1,190      $ 31,178      $ 31   
  

 

 

   

 

 

   

 

 

 

 

F-13


Table of Contents

Metalico, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

($ thousands, except per share data)

 

 

 

Amortization expense recognized on all amortizable intangible assets totaled $2,700, $2,731 and $2,951 for the years ended December 31, 2011, 2010 and 2009, respectively. Estimated aggregate amortization expense on amortizable intangible and other assets for each of the next five years and thereafter is as follows:

 

Years Ending December 31:

   Amount  

2012

   $ 2,680   

2013

     2,699   

2014

     2,837   

2015

     2,834   

2016

     2,789   

Thereafter

     19,917   
  

 

 

 
   $ 33,756   
  

 

 

 

Note 8.    Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities as of December 31, 2011 and 2010 consisted of the following:

 

    2011     2010  
    Current     Long-Term     Total     Current     Long-Term     Total  

Environmental remediation costs

  $ 325      $ 1,138      $ 1,463      $ 216      $ 1,348      $ 1,564   

Payroll and employee benefits

    1,294        606        1,900        1,194        424        1,618   

Interest and bank fees

    1,087               1,087        1,134               1,134   

Put warrant liability

           199        199               3,785        3,785   

Other

    1,454        176        1,630        2,017               2,017   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 4,160      $ 2,119      $ 6,279      $ 4,561      $ 5,557      $ 10,118   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 9.    Pledged Assets, Short-Term Debt, Long-Term Debt and Warrants

 

     2011      2010  

Short-term debt as of December 31, 2011 and 2010 consisted of the following:

     

Revolving line-of-credit notes payable under secured credit facility to primary lender, terms as described below

   $ 5,963       $ 7,051   
  

 

 

    

 

 

 

Long-term debt, excluding senior unsecured convertible notes payable, as of December 31, 2011 and 2010 consisted of the following:

     

Senior debt:

     

Revolving line-of-credit payable under secured credit facility with primary lender, terms as described below

   $ 23,852       $ 28,202   

Term loan payable under secured credit facility, with primary lender, due in monthly principal installments of $222 plus interest at the lenders base rate plus a margin (an effective rate of 4.18% at December 31, 2011), maturing March 2013, collateralized by substantially all assets of the Company

     3,333         6,000   

Note payable to bank, due in monthly installments of $83, including interest at 4.77%, maturing December 2022, collateralized by certain equipment

     7,891           

 

F-14


Table of Contents

Metalico, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

($ thousands, except per share data)

 

 

 

     2011      2010  

Note payable to bank, due in monthly installments of $3, including interest at 7.2%, remainder due April 2019, collateralized by a mortgage on real property

     201         219   

Other, primarily equipment notes payable and capitalized leases for related equipment, interest from 0.0% to 12.4%, collateralized by certain equipment with due dates ranging from 2012 to 2016

     7,065         3,094   

Subordinated debt (subordinate to debt with primary lenders):

     

Note payable to selling shareholders in connection with business acquisition, due in monthly installments of approximately $20 plus interest at 5%, due December 2019, unsecured

     1,325         1,456   

Notes payable to selling shareholders in connection with business acquisition, due in quarterly installments of approximately $156 plus interest at 6.5%, due January 2016, unsecured

     2,651           

Non-compete obligations payable to individuals in connection with business acquisition, due in quarterly installments of $100 plus interest at 6.5%, unsecured

     1,399           
  

 

 

    

 

 

 
     47,717         38,971   

Less current maturities

     6,687         4,196   
  

 

 

    

 

 

 

Long-term portion

   $ 41,030       $ 34,775   
  

 

 

    

 

 

 

On March 2, 2010, the Company entered into a Credit Agreement dated as of February 26, 2010 (the “Credit Agreement”) with a syndicate of lenders led by JPMorgan Chase Bank, N.A and including RBS Business Capital and Capital One Leverage Finance Corp. The three-year facility consisted of senior secured credit facilities in the aggregate amount of $65,000, including a $57,000 revolving line of credit (the “Revolver”) and an $8,000 machinery and equipment term loan facility (“Initial Term Loan”). The Revolver provides for revolving loans which, in the aggregate, were not to exceed the lesser of $57,000 or a “Borrowing Base” amount based on specified percentages of eligible accounts receivable and inventory and bears interest at the “Base Rate” (a rate determined by reference to the prime rate) plus 1.25% or, at the Company’s election, the current LIBOR rate plus 3.5% (reduced to 3.25% per the Second Amendment described below). The Initial Term Loan bears interest at the Base Rate plus 2% or, at the Company’s election, the current LIBOR rate plus 4.25% (reduced to 3.75% per the Second Amendment described below). Under the Credit Agreement, the Company is subject to ce