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IDSA > SEC Filings for IDSA > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for INDUSTRIAL SERVICES OF AMERICA INC /FL

Form 10-Q for INDUSTRIAL SERVICES OF AMERICA INC /FL


14-Nov-2012

Quarterly Report


ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this report.
The following discussion and analysis contains certain financial predictions, forecasts and projections which constitute "forward-looking statements" within the meaning of the federal securities laws. Actual results could differ materially from those financial predictions, forecasts and projections and there can be no assurance that we will achieve such financial predictions, forecasts and projections. Factors that could affect financial predictions, forecasts and projections include the fluctuations in the commodity price index and any conditions internal to our major customers, including loss of their accounts and other factors as listed in our Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission. General
We are primarily focusing our attention now and in the future towards our recycling business. We sell processed ferrous and non-ferrous scrap material to end-users such as steel mini-mills, integrated steel makers, foundries and refineries. We deliver all scrap ourselves or through third parties via truck, rail car, and/or barge. Some customers choose to send their own delivery trucks, which are weighed and loaded at one of our sites based on the sales order. We purchase ferrous and non-ferrous scrap material primarily from industrial and commercial generators of steel, iron, aluminum, copper, stainless steel and other metals as well as from other scrap dealers who deliver these materials directly to our facilities. We process these materials by shredding, sorting, cutting and/or baling. We will also continue to focus on initiating growth in our waste services business segment, which includes management services and waste and recycling equipment sales, service and leasing.
On July 2, 2012, we opened the ISA Pick.Pull.Save used automobile yard, which is considered a new product line within the recycling segment. We purchase automobiles for the yard through auctions, automobile purchase programs with various suppliers, and general scrap purchases. Retail customers locate and remove used parts for purchase from automobiles within the yard. Fuel, Freon, tires and certain core automobile parts are also sold to various vendors for additional revenue. All automobiles are shredded and sold as scrap metal after a specified time period in the yard.
We continue to pursue a growth strategy in the waste management services arena by adding new locations of existing customers as well as marketing our services to potential customers. Currently, we service approximately 900 customer locations throughout the United States and we utilize an active database of over 7,000 vendors to provide timely, thorough and cost-effective service to our customers. Along with positioning ourselves to efficiently service our customers, our management services division methods of competition include offering our clients competitive pricing, superior customer service and industry expertise.
Although our focus is on the recycling industry, our goal is to remain dedicated to the management services and equipment industries as well, while sustaining steady growth at an acceptable profit, adding to our net worth, and providing positive returns for stockholders. We intend to increase efficiencies and productivity in our core business while remaining alert for possible acquisitions, strategic partnerships, mergers and joint-ventures that would enhance our profitability.
We have operating locations in Louisville, Kentucky, Seymour and New Albany, Indiana. We do not have operating locations outside the United States. Liquidity and Capital Resources
As of September 30, 2012 we held cash and cash equivalents of $1.5 million. Included in the $1.5 million is a cash account on deposit with BB&T which serves as collateral for our swap agreements. As of September 30, 2012, the balance in this account was $359.0 thousand. Other than this balance, our cash accounts are available to us without restriction.


On August 13, 2012, Industrial Services of America, Inc. and ISA Indiana, Inc. (the "Companies") entered into a Fourth Amendment to Credit Agreement (the "Fourth Amendment") with Fifth Third Bank (the "Bank") which amended the July 30, 2010 Credit Agreement (the "Credit Agreement"), including the First Amendment to Credit Agreement dated as of April 14, 2011 (the "April Amendment"), the Second Amendment to Credit Agreement dated as of November 16, 2011 (the "November Amendment"), and the Third Amendment to Credit Agreement dated as of March 2, 2012 (the "Third Amendment") as follows. The Fourth Amendment decreased our maximum revolving commitment by $10.0 million to $30.0 million and extended the maturity date of both the revolving credit facility and the term loan from July 31, 2013 to October 31, 2013. The Fourth Amendment also provided a waiver of the Senior Leverage Ratio and Fixed Charge Coverage Ratio covenant defaults for the quarter ended June 30, 2012. The Fourth Amendment changed our covenant to maintain a ratio of debt to adjusted EBITDA (the "Senior Leverage Ratio") from 3.50 to 1 in the third quarter of 2012 to 4.75 to 1 in the third quarter of 2012. The ratio in the fourth quarter of 2012 and thereafter remains at 3.25 to 1. The Fourth Amendment also changed our covenant to maintain a ratio of adjusted EBITDA to aggregate cash payments of interest expense and scheduled payment of principal (the "Fixed Charge Coverage Ratio") from not less than 1.2 to 1 to not less than 1.0 to 1 for the third quarter of 2012, and to not less than 1.5 to 1 for the fourth quarter of 2012. For every test period thereafter, it will return to not less than 1.2 to 1. The Fourth Amendment also increased the interest rate for both the revolving credit facility and the term loan by fifty basis points (0.50%) to 3.50% and 3.75%, respectively. The rate was scheduled to decrease by twenty-five basis points (0.25%) if the Companies achieve a Senior Leverage Ratio of 3.50 to 1 or below beginning with the quarter ending September 30, 2012; however, we did not achieve this ratio. Accordingly, the rate remained at the 3.50% and 3.75% rates for the revolving credit facility and the term loan, respectively. In addition, the Companies also agreed to perform other customary commitments and pay a fee of $25.0 thousand to the Bank. All other terms of the Credit Agreement and previous Amendments remain in effect. See also Note 4 - "Long Term Debt and Notes Payable" in the Notes to Consolidated Financial Statements for additional information regarding the Fourth Amendment.
On March 2, 2012, the Companies entered into the Third Amendment with the Bank which amended the Credit Agreement, including the April Amendment and the November Amendment, as follows. The Third Amendment redefined the calculation period for the purpose of measuring compliance with the Senior Leverage Ratio and the Fixed Charge Coverage Ratio of not less than 1.20 to 1 such that each ratio will be calculated quarterly for the period beginning January 1, 2012 through the end of each quarter of 2012. Prior to the Third Amendment, the ratios were calculated on a rolling 12 month basis. The Third Amendment also changed the Senior Leverage Ratio from 3.50 to 1 in the original Credit Agreement to (i) 4.25 to 1 in the first quarter of 2012, (ii) 3.50 to 1 in the second and third quarter of 2012, and (iii) 3.25 to 1 in the fourth quarter of 2012 and thereafter. The Third Amendment also increased the unused line fee by 0.25% to 0.75% and provided a waiver of the Senior Leverage Ratio and Fixed Charge Coverage Ratio covenant defaults for the quarter ending December 31, 2011. In addition, the Companies also agreed to perform other customary commitments and pay a fee of $10.0 thousand to the Bank.

In our original Credit Agreement with the Bank, we agreed to certain covenants, including (i) maintenance of a ratio of debt to adjusted EBITDA for the preceding 12 months of not more than 3.50 to 1 (or, if measured as of December 31 of any fiscal year, 4.0 to 1), (ii) maintenance of a ratio of adjusted EBITDA for the preceding twelve months to aggregate cash payments of interest expense and scheduled payment of principal in the preceding 12 months of not less than 1.20 to 1, and (iii) a limitation on capital expenditures of $4.0 million in any fiscal year. Pursuant to the Third Amendment, the Senior Leverage Ratio increased to 4.25 to 1 for the period ending March 31, 2012. The Senior Leverage Ratio decreased to 3.50 to 1 for the period ending June 30, 2012. Pursuant to the Fourth Amendment, the Senior Leverage Ratio increased to 4.75 to 1 for the period ending September 30, 2012 and will decrease to 3.25 to 1 for the period ending December 31, 2012 and thereafter. The Senior Leverage Ratio will, in each quarter, be calculated using a measurement period beginning January 1, 2012 and ending at the end of the quarterly measurement period. The other covenants will remain the same going forward. As of September 30, 2012, we were not in compliance with the covenants in (i) and (ii) above. As of September 30, 2012, our ratio of debt to adjusted EBITDA was 11.23; our ratio of adjusted EBITDA to aggregate cash payments of interest expense and scheduled principal payments was
(0.19). We received a waiver from the bank for the quarter ended September 30, 2012 for failing to meet the ratio requirements for covenants (i) and (ii) above. In connection with the waiver, our revolving line of credit will be reduced from $30.0 million to $25.0 million and we will be required to engage an outside financial consultant and pay a $25.0 thousand waiver fee. As of September 30, 2012, capital expenditures totaled $1.6 million. As of September 30, 2012, we had $13.9 million available to us under our existing credit facilities.


We have long term debt comprised of the following:

                          September 30,      December 31,
                               2012              2011
                           (Unaudited)
                                   (in thousands)
Revolving line of credit          16,138            20,083
Notes payable                      7,024             8,426
                         $        23,162    $       28,509

Pursuant to the Fourth Amendment, our revolving credit facility was reduced to $30.0 million. This revolving credit facility expires and the $8.8 million term loan becomes due and payable in full on October 31, 2013. We intend to restructure these credit arrangements to extend the maturity date beyond a one-year period prior to December 31, 2012.
We expect that existing cash flow from operations and available credit under our existing credit facilities will be sufficient to meet our cash needs for the next year and beyond, assuming compliance with the covenants in our Credit Agreement or continued waivers thereof and restructuring of the arrangements beyond a one-year period, as mentioned above. As of September 30, 2012, we do not have any material commitments for capital expenditures.

Results of Operations
The following table presents, for the years indicated, the percentage
relationship that certain captioned items in our Consolidated Statements of
Operations bear to total revenues:
                                               Nine months ended
                                                 September 30,
                                                2012        2011
Statements of Operations Data:
Total Revenue                                 100.0  %    100.0  %
Cost of goods sold                             95.3  %     96.3  %
Selling, general and administrative expenses    5.7  %      4.2  %

Income before other expenses (1.0 )% (0.5 )%

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011
Total revenue decreased $69.9 million or 30.8% to $157.3 million in the nine month period ended September 30, 2012 as compared to $227.2 million in the same period in 2011. Recycling revenue decreased $69.5 million or 31.4% to $152.0 million in the nine month period ended September 30, 2012 compared to $221.5 million in the same period in 2011. This is primarily due to a decrease of 21.9 million pounds, or 24.8%, in the volume of stainless steel materials shipments due to a continued decrease in worldwide stainless steel demand beginning in the second quarter of 2011. Substantially all of our stainless steel sales are to one customer. In response to the overall decrease in demand for stainless steel, this customer decreased our sales orders received in both the second and third quarters of 2011. As demand began to recover, this customer increased sales orders in the fourth quarter of 2011 and again in the first quarter of 2012. Demand in the second quarter of 2012 slowed again, causing another decrease in sales orders from this customer during this time period. Although shipments have increased in the third quarter of 2012 as compared to the first two quarters of 2012, it has not been enough to offset the decreases from the first two quarters. The volume of ferrous materials shipments also decreased by 50.8 thousand gross tons, or 30.7%, as compared to the same period in 2011. While some scrap buyers provide consistently competitive pricing from year to year, others may provide competitive pricing one year but not the next. This market-driven competition causes our preferred buyer base to fluctuate from year to year. In the nine month period ended September 30, 2012, sales to repeat Recycling scrap buyers decreased by approximately $68.6 million, or 31.3%, as compared to the same period in 2011. Within the amount sold to all Recycling scrap buyers, 6.3% of these sales were to new and competitively priced, intermittent scrap buyers in the nine month period ended September 30, 2012. In the same period in 2011, 11.8% of sales to Recycling scrap buyers were to new and competitively priced, intermittent scrap buyers. Sales during this period in 2011 to non-recurring Recycling scrap buyers in 2012 totaled 8.0% of 2012 sales to all Recycling scrap buyers. Sales during this period to non-recurring Recycling scrap buyers in 2011 totaled 3.3% of 2011 sales to all Recycling scrap buyers.


In addition to the reduction in volume, total revenue was also affected by the decrease in overall average price for all commodities shipped by $76.25 per gross ton, or 8.3%. Specifically, average nickel prices on the London Metal Exchange decreased $3.05 per pound, or 27.7%, for the nine month period ended September 30, 2012 as compared to average nickel prices for the same period in 2011. Nickel is a key commodity used in stainless steel blends. These decreases were partially offset by an increase of 2.9 million pounds, or 13.3%, in the volume of nonferrous materials shipments.
Waste Services revenue decreased $0.4 million or 7.0% to $5.3 million in the nine month period ended September 30, 2012 compared to $5.7 million in the same period in 2011 primarily due to lower average cardboard prices in these time frames, which lowered cardboard recycling revenue by $218.4 thousand. The average cardboard price was $60.0 per ton lower in the nine month period ended September 30, 2012 compared to the same period in 2011. In general, the timing of services provided or equipment installed will cause fluctuations in Waste Services revenue between periods. Also, for industrial customers, recycling volumes and prices for commodities purchased decreased by 1.3 million pounds or 10.3% and $0.04 per pound or 22.8%, respectively, in this period in 2012 as compared to the same period in 2011. The recycling revenue generated for these customers is originally paid to Waste Services from Recycling. This revenue is then passed on to the customer as an off-setting expense for Waste Services cost of sales, which causes a decrease in Waste Services cost of sales when comparing the same periods of 2012 and 2011, as described below.
Total cost of goods sold decreased $69.1 million or 31.6% to $149.8 million in the period ended September 30, 2012 as compared to $218.9 million for the same period in 2011. Recycling cost of goods sold decreased $68.7 million or 32.0% to $146.0 million in the nine month period ended September 30, 2012 as compared to $214.7 million for the same period in 2011. This decrease is primarily due to the decrease in the volume of stainless steel and ferrous materials shipments along with a decrease in the volume of stainless steel materials purchases of 4.3 million pounds, or 5.7%, a decrease in the volume of ferrous materials purchases of 74.6 thousand gross tons, or 36.4%, and a decrease in the volume of nonferrous materials purchases of 759.2 thousand pounds, or 2.5%. In September 2011, we recorded a $3.4 million write-down of the value of stainless steel inventory to lower of cost or market due to decreases in stainless steel demand and commodity prices at that time. We did not incur a write-down expense in 2012. Direct labor costs also decreased by $887.0 thousand due to two manager level employees leaving the Company in 2011, fewer average employees on weekly payroll in 2012 as compared to 2011, and decreased production due to the continued decline in market demand for stainless steel and other metals. These factors caused decreases in overtime expense of $277.3 thousand, contract labor expense of $205.3 thousand, ferrous labor expense of $189.3 thousand, maintenance labor expense of $163.6 thousand, and other labor expense of $51.6 thousand.

Other decreases in cost of goods sold include the following:

A decrease in repair and maintenance expenses of $376.3 thousand;

A decrease in hauling, fuel and lubricant expenses of $186.2 thousand;

A decrease in utilities of $59.3 thousand; and

A decrease in medical benefits, insurance, and retirement expense of $58.2.

These decreases are partially offset by an increase in overall average price for all commodities purchased of $19.65 per gross ton, or 2.6%. Processing costs increased $247.2 thousand or 13.0% in the period ended September 30, 2012 as compared to the same period in 2011.
Waste Services cost of goods sold decreased $0.4 million or 9.5% to $3.8 million in the nine month period ended September 30, 2012 compared to $4.2 million in the same period in 2011. We often use third party haulers to meet customers' Waste Services needs. We then pay these third party providers and in turn invoice our customers for these amounts. The decrease above was primarily due to the timing of these third party haulers' services provided and their invoices received, the decrease in industrial customers' recycling volumes and prices mentioned above, along with the decrease in cardboard prices mentioned above. Selling, general and administrative expenses decreased $0.5 million or 5.3% to $9.0 million in the period ended September 30, 2012 compared to $9.5 million in the same period in 2011. As a percentage of revenue, selling, general and administrative expenses were 5.7% in 2012 compared to 4.2% in 2011. The primary driver of the decrease in selling, general and administrative expenses was a decrease in management fees, directors' fees, and consulting fees of $367.4 thousand.


Additional decreases include the following:
A decrease in legal expenses of $224.1 thousand;

A decrease in operating supplies, fuel, lubricant, and hauling expenses of $296.6 thousand;

A decrease in repair and maintenance expenses of $100.8 thousand;

A decrease in property taxes, license taxes and fees of $114.8 thousand;

A decrease in lease and rental expense of $60.0 thousand;

A decrease in medical benefits, insurance and retirement expenses of $45.6 thousand; and

A decrease in advertising, marketing and entertainment of $39.9 thousand.

These decreases were partially offset by an increase in labor expenses of $380.2 thousand, of which $228.4 thousand relates to a provision for termination and severance expenses in the nine month period ended September 30, 2012. Additional increases include the following:
An increase in stock bonus and options expense of $278.2 thousand;

An increase in insurance expense of $50.7 thousand; and

An increase in employment taxes of $24.4 thousand.

Other expense decreased $1.1 million to $1.4 million in the period ending September 30, 2012 as compared to other expense of $2.5 million in the same period in 2011. This was primarily due to a decrease in interest expense of $0.5 million due to lower debt levels in 2012. Other expense also decreased by $0.5 million due to purchase contract termination fees paid in 2011 that were not paid in 2012. Additionally, an accrual for a legal settlement of $175.0 thousand paid in 2011 was not necessary in 2012. These decreases were partially offset by a decrease in the gain on sale of assets of $76.4 thousand.
The income tax benefit decreased $0.8 million to a benefit of $0.8 million in the period ended September 30, 2012 compared to a benefit of $1.6 million in the same period in 2011 due to the decreased net loss reported in 2012 as compared to 2011. The effective tax rates in 2012 and 2011 were 27.5% and 43.8%, respectively, based on federal and state statutory rates. In 2012, the tax benefit received was lowered by a tax adjustment recorded in the third quarter that relates to a prior year. The tax benefit in 2012 was also reduced by an accrual for state taxes based on gross receipts and a decrease in the state recycle credit expected made in conjunction with filing the 2011 state tax return. Beginning in the first quarter of 2011, we were able to take advantage of the Domestic Production Activities Deduction available to US-based manufacturing companies; however, these credits were offset by an adjustment made relating to the bonus depreciation taken in 2009 for certain additions to shredding equipment which were determined to be disqualified for bonus depreciation by an IRS audit, the preliminary results of which were received and accrued for in the third quarter of 2011. The final report proposed changes amounting to approximately $735.0 thousand of additional taxes due, which was netted against the refund due from our net loss in 2011. Three months ended September 30, 2012 compared to three months ended September 30, 2011
Total revenue decreased $10.1 million or 18.1% to $45.7 million in the third quarter of 2012 compared to $55.8 million in the same period in 2011. Recycling revenue decreased $10.0 million or 18.6% to $43.9 million in 2012 compared to $53.9 million in 2011. This is primarily due to a decrease of 23.0 thousand gross tons, or 41.5%, in the volume of ferrous materials shipments. While some scrap buyers provide consistently competitive pricing from year to year, others may provide competitive pricing one year but not the next. This market-driven competition causes our preferred buyer base to fluctuate from year to year. In the three month period ended September 30, 2012, sales to repeat Recycling scrap buyers decreased by approximately $9.6 million, or 18.6%, compared to the same period in 2011. Within the amount sold to all Recycling scrap buyers, 7.3% of these sales were to new and competitively priced, intermittent scrap buyers in the third quarter of 2012. In the same period in 2011, 22.2% of sales to Recycling scrap buyers were to new and competitively priced, intermittent scrap buyers. Sales during this period in 2011 to non-recurring Recycling scrap buyers in 2012 totaled 13.3% of 2012 sales to all Recycling scrap buyers. Sales during this period to non-recurring Recycling scrap buyers in 2011 totaled 15.3% of 2011 sales to all Recycling scrap buyers. These decreases were partially offset by an increase of 10.4 million pounds, or 79.1%, in the volume of stainless steel materials shipments due to increased sales orders in the third quarter of 2012 as compared to the same period in 2011. Substantially all of our stainless steel sales are to one customer. In response to an overall decrease in demand for stainless steel beginning in the second quarter of 2011, this customer decreased our sales orders received in both the second and third quarters of 2011. As demand


began to recover, this customer increased sales orders in the fourth quarter of 2011 and the first quarter of 2012. Demand in the second quarter of 2012 slowed again, causing another decrease in sales orders from this customer during this time period. In the third quarter of 2012, demand increased again. The volume of nonferrous materials shipments also increased by 510.3 thousand pounds, or 6.9%, as compared to the same period in 2011. In addition to the increase in these volumes, total revenue was also affected by an increase in overall average price for all commodities shipped by $125.93 per gross ton, or 16.4%. Nickel prices remained low, however, as average nickel prices on the London Metal Exchange decreased $2.60 per pound, or 26.0%, in the third quarter of 2012 as compared to average nickel prices for the same period of 2011. Nickel is a key commodity used in stainless steel blends.
Waste Services revenue decreased $31.0 thousand or 1.6% to $1,856.0 thousand in the third quarter of 2012 compared to $1,887.0 thousand in the same period in 2011 primarily due to lower cardboard prices in the three month period ended September 30, 2012 as compared to the same period in 2011, which lowered cardboard recycling revenue by $31.8 thousand. In general, the timing of services provided or equipment installed will cause fluctuations in Waste Services revenue between periods. Also, for industrial customers, recycling volumes and prices for commodities purchased decreased by 1.4 million pounds or 36.5% and $0.06 per pound or 37.3%, respectively, in this period in 2012 as compared to the same period in 2011. The recycling revenue generated for these customers is originally paid to Waste Services from Recycling. This revenue is then passed on to the customer as an off-setting expense for Waste Services cost of sales, which causes a decrease in Waste Services cost of sales when comparing the same periods of 2012 and 2011, as described below.
Total cost of goods sold decreased $16.5 million or 27.5% to $43.6 million in the third quarter of 2012 compared to $60.1 million for the same period in 2011. Recycling cost of goods sold decreased $13.0 million or 23.6% to $42.2 million in 2012 compared to $55.2 million for the same period in 2011. This decrease is primarily due to the decrease in the volume of ferrous materials shipments along with a decrease in the volume of ferrous and nonferrous materials purchases of 40.5 thousand gross tons, or 58.9%, and 2.8 million pounds, or 24.5%, respectively. In September 2011, we recorded a $3.4 million write-down of the value of stainless steel inventory to lower of cost or market due to decreases in stainless steel demand and commodity prices at that time. We did not incur a write-down expense in the third quarter of 2012.

Additional decreases were as follows:

A decrease in direct labor costs of $243.0 thousand;

A decrease in lease and rental expense of $360.6 thousand;

A decrease in hauling, fuel and lubricant expense of $44.1 thousand;

A decrease in repair and maintenance expenses of $42.5 thousand; and

A decrease in employment taxes of $40.3 thousand.

These decreases are partially offset by the increase in stainless steel materials purchases of 13.3 million pounds, or 184.2%, due to the need for increased purchases to fill the increased sales orders. Also, in 2012, the Company broadened its customer base, began brokered sales, and began building blends for specialty mills. Inventory levels in the beginning of the third quarter in 2012 were lower than the 2011 levels during the same period; however, . . .

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