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IDSA > SEC Filings for IDSA > Form 10-Q on 19-Aug-2013All Recent SEC Filings

Show all filings for INDUSTRIAL SERVICES OF AMERICA INC /FL

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


19-Aug-2013

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, 2012, as filed with the Securities and Exchange Commission. General
On April 1, 2013, we entered into a management services agreement (the "Management Agreement") with Louisville-based Blue Equity, LLC ("Blue Equity"). For a 12-month term beginning April 1, 2013, Blue Equity was to provide management services to us, including working with our existing management team to review operations and identify opportunities for growth and profitability. Also on April 1, 2013, we issued 125.0 thousand shares of our Common Stock to Blue Equity in a private placement at a per share purchase price of $4.00 and granted options to purchase 1.5 million shares of our Common Stock to Blue Equity at a per share price of $5.00, subject to shareholder approval. At the annual meeting of shareholders of the Company on July 16, 2013, shareholders voted against approval of the options to purchase 1.5 million shares of our Common Stock, and the options terminated. Following the failure of the Company's shareholders to approve the option grant, Blue Equity delivered a letter to the Company stating that it was terminating the Management Agreement, effective July 31, 2013. See Note 2 - "Management Services Agreement with Blue Equity, LLC" in the Notes to Condensed Consolidated Financial Statements for additional details relating to this agreement and its termination.

On June 11, 2013, Brian G. Donaghy notified the Company that, effective immediately, he was resigning his position as the Company's President and Chief Operating Officer and all other positions he held with the Company, including principal executive officer.

On June 17, 2013, the Company and Mr. Donaghy entered into a Termination and Consulting Agreement (the "Consulting Agreement") pursuant to which Mr. Donaghy will provide consulting services to the Company with respect to the scrap metals industry with compensation at a monthly rate of $12.5 thousand. The Consulting Agreement terminated Mr. Donaghy's Amended and Restated Employment Agreement with the Company dated as of April 1, 2010. See Note 3 - "Termination and Consulting Agreement with Brian Donaghy" in the Notes to Condensed Consolidated Financial Statements for additional details relating to this agreement. 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 pursue a growth strategy in our waste services business segment, which includes management services and waste and recycling equipment sales, service and leasing.
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 over 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 and Seymour and New Albany, Indiana. We do not have operating locations outside the United States.


Liquidity and Capital Resources

As of June 30, 2013, 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 June 30, 2013, the balance in this account was $190.7 thousand. Other than this balance, our cash accounts are available to us without restriction.

As discussed in Note 5 - "Long Term Debt and Notes Payable to Bank," all of the Company's debt is with Fifth Third Bank (the "Bank") and virtually all is scheduled to mature in April 2014, which requires current classification in the accompanying condensed consolidated balance sheet at June 30, 2013. Further, the Company is not in compliance with all of the debt covenants of this indebtedness as measured at June 30, 2013. This condition allows the Bank, if it chooses, to call the debt due immediately. In prior reporting periods, where relevant, the Company has obtained from the Bank a waiver of non-compliance with applicable loan covenants. For the June 30, 2013 measurement period, a waiver of non-compliance was not obtained as the Company has been in the active process of restructuring its debt. This debt restructuring process has included the Company's existing bank as well as other banks. Management expects any restructuring with the Bank would include extending the maturity of the Company's revolving line of credit beyond 2014 and embody a waiver of any past non-compliance with loan covenants.

It is management's plan to complete this debt restructuring as soon as practicable. However, there can be no assurance this debt restructuring can be completed to management's satisfaction, timely or at all. The inability to complete this debt restructuring in a satisfactory manner could have a material, adverse impact on the Company. Further, if the Bank were to call the debt due immediately, it would have a material, adverse impact on the Company.

The condensed consolidated financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The Company's continuation as a going concern is dependent upon its ability to satisfactorily restructure its debt. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of the carrying amounts of assets or the amount and classification of liabilities that might result if the Company is unable to continue as a going concern.
On April 1, 2013, Industrial Services of America, Inc. and its subsidiary (the "Companies") entered into a Sixth Amendment to Credit Agreement (the "Sixth 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 "First Amendment"), the Second Amendment to Credit Agreement dated as of November 16, 2011 (the "Second Amendment"), the Third Amendment to Credit Agreement dated as of March 2, 2012 (the "Third Amendment"), the Fourth Amendment to Credit Agreement dated as of August 13, 2012 (the "Fourth Amendment"), and the Fifth Amendment to Credit Agreement dated as of November 14, 2012 (the "Fifth Amendment"), as follows. The Sixth Amendment extended the maturity date of both the revolving credit facility and the term loan from October 31, 2013 to April 30, 2014. The Sixth Amendment also provided a waiver of the ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") for the preceding twelve months (the "Senior Leverage Ratio") and the ratio of adjusted EBITDA for the preceding twelve months to aggregate cash payments of interest expense and scheduled payment of principal in the preceding twelve months (the "Fixed Charge Coverage Ratio") covenant defaults for the quarter ended December 31, 2012. The Sixth Amendment eliminated the Senior Leverage Ratio for the remaining term of the loan. The Sixth Amendment reduced our covenant to maintain the Fixed Charge Coverage Ratio to 0.6 to 1.0 for the quarter ended March 31, 2013. This ratio was calculated using a trailing 3-month basis for that quarter. Beginning with the quarter ended June 30, 2013, the Fixed Charge Coverage Ratio requirement returned to 1.20 to 1.0 and will be tested on a trailing 12-month basis as of each quarter end date. The Sixth Amendment increased our interest rate on both the revolving credit facility and term loan by 1.75% and 1.50%, respectively, to equal the one month LIBOR plus five hundred basis points (5.00%) per annum, adjusted monthly on the first day of each month. For the quarter ended March 31, 2013, the Sixth Amendment required that the sum of the Companies' cash balances plus the amount of unused revolving line of credit availability under the borrowing base equal or exceed $3.0 million in the aggregate ("Minimum Liquidity Covenant"). The Sixth Amendment decreased the eligible inventory available for calculating the borrowing base effective April 1, 2013 to 57.5% of eligible inventory up to $12.5 million, and then to 55.0% of eligible inventory up to $12.5 million effective June 18, 2013 upon the delivery of the May 31, 2013 borrowing base certificate. In addition, the Companies agreed to perform other customary commitments and paid a fee of $40.0 thousand to the Bank. All other terms of the Credit Agreement and previous amendments remain in effect. In our original Credit Agreement with the Bank, we agreed to certain covenants, including (i) maintenance of the Senior Leverage Ratio 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 the Fixed Charge Coverage Ratio 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 ended March 31, 2012. The Senior Leverage Ratio decreased to 3.50 to 1 for the period ended June 30, 2012. Pursuant to the Fourth Amendment, the Senior Leverage Ratio increased to 4.75 to 1 for the period ended September 30, 2012 and decreased to 3.25 to 1 for the period ended


December 31, 2012. The Senior Leverage Ratio was eliminated after December 31, 2013 by the Sixth Amendment. In 2012, the Senior Leverage Ratio was, in each quarter, calculated using a measurement period beginning January 1, 2012 and ending at the end of the quarterly measurement period. The Sixth Amendment reduced the Fixed Charge Coverage Ratio requirements and added the Minimum Liquidity Covenant for the first quarter of 2013, as noted above. The limitation on capital expenditures remains the same. As of June 30, 2013, we were not in compliance with the Fixed Charge Coverage ratio covenant for the quarter. As of June 30, 2013, our ratio of adjusted EBITDA to aggregate cash payments of interest expense and scheduled principal payments was 0.07 and our capital expenditures totaled $435.0 thousand, plus $136.5 thousand in deposits on equipment. As of June 30, 2013, we had $2.6 million available under our existing credit facilities.
We have long term debt, including current maturities thereof, comprised of the following:

                            June 30,       December 31,
                              2013             2012
                          (Unaudited)
                                  (in thousands)
Revolving line of credit $      17,234    $       18,450
Notes payable                    5,266             6,606
                         $      22,500    $       25,056

Pursuant to the Fifth Amendment, our revolving credit facility was reduced to $25.0 million. This revolving credit facility expires and the $4.6 million term loan becomes due and payable in full on April 30, 2014. We intend to restructure these credit arrangements to extend the maturity date beyond a one-year period prior to September 30, 2013, as noted above.
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. However, due to the maturity of the revolving credit facility and term loan on April 30, 2014, the Company is unable to determine whether it will have sufficient funds to meet its obligations for at least the next twelve months. The Company's future depends on its ability to satisfactorily resolve the restructuring of the aforementioned debt and there is no assurance it will be able to do so. If the Company fails for any reason, it would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the US Bankruptcy Code.
See also "Financial condition at June 30, 2013 compared to December 31, 2012" section for additional discussion and details relating to cash flow from operating, investing, and financing activities. As of June 30, 2013, we do not have any material commitments for capital expenditures. On September 30, 2013, we will be required to redeem for cash 125.0 thousand shares of our common stock from Blue Equity at $4.00 per share, the price at which Blue Equity purchased those shares. See Note 2 - "Management Services Agreement with Blue Equity, LLC" in the Notes to Condensed Consolidated Financial Statements.

Results of Operations
The following table presents, for the periods indicated, the percentage
relationship that certain captioned items in our Consolidated Statements of
Operations bear to total revenues:
                                               Six months ended
                                                   June 30,
                                               2013        2012
Statements of Operations Data:
Total Revenue                                 100.0  %   100.0  %
Cost of goods sold                             95.5  %    95.6  %
Selling, general and administrative expenses    6.9  %     5.1  %

Income (loss) before other expenses (2.4 )% (0.7 )%


Although selling, general and administrative expenses ("SG&A") expenses decreased by $0.6 million, or 10.5%, in the first six months of 2013 as compared to the same period in 2012, revenue decreased at a higher rate by $36.6 million, or 32.8%, during this period, causing a higher percentage of SG&A expenses to revenue in the first six months of 2013 as compared to the same period in 2012. Six months ended June 30, 2013 compared to six months ended June 30, 2012 Total revenue decreased $36.6 million or 32.8% to $74.9 million in the six month period ended June 30, 2013 as compared to $111.5 million in the same period in 2012. Recycling revenue decreased $36.6 million or 33.9% to $71.5 million in 2013 compared to $108.1 million in 2012. This is primarily due to a decrease of 11.1 million pounds, or 25.8%, in the volume of stainless steel materials shipments. 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 beginning in the second quarter of 2011 and continuing throughout 2012 and the first quarter of 2013. Although sales orders received from this customer increased in the second quarter of 2013, we do not have any assurance this customer will continue to increase its sales orders in the future. The volume of ferrous and nonferrous materials shipments also decreased in the six month period ended June 30, 2013 by 14.5 thousand gross tons, or 17.6%, and 2.3 million pounds, or 13.7%, respectively, as compared to the same period in 2012.
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 six month period ended June 30, 2013, sales to repeat Recycling scrap buyers decreased by approximately $36.5 million, or 33.8%, as compared to the same period in 2012. Within the amount sold to all Recycling scrap buyers, 3.6% of these sales were to new and competitively priced, intermittent scrap buyers in the six month period ended June 30, 2013. In the same period in 2012, 7.8% of sales to Recycling scrap buyers were to new and competitively priced, intermittent scrap buyers. Sales during this period in 2012 to non-recurring Recycling scrap buyers in 2013 totaled 13.8% of 2013 sales to all Recycling scrap buyers. Sales during this period in 2011 to non-recurring Recycling scrap buyers in 2012 totaled 9.2% of 2012 sales to all Recycling scrap buyers. In addition to the reduction in volume, total revenue was affected by the decrease in overall average price for all commodities shipped by $152.72 per gross ton, or 18.6%. Specifically, average nickel prices on the London Metal Exchange decreased $1.04 per pound, or 12.5%, for the six month period ended June 30, 2013 as compared to average nickel prices for the same period in 2012. Nickel is a key commodity used in stainless steel blends.
Waste Services' revenue remained stable at $3.4 million in the six month periods ended June 30, 2013 and 2012. After a decrease in the first quarter due to lower recycling volumes and lower average metal prices for industrial customers, many customers increased their Waste Services spending as their sales increased, which offset the first quarter decrease. In general, the timing of services provided or equipment installed will cause fluctuations in Waste Services' revenue between periods.
Total cost of goods sold decreased $35.2 million or 33.0% to $71.5 million in the six month period ended June 30, 2013 as compared to $106.7 million for the same period in 2012. Recycling cost of goods sold decreased $35.2 million or 33.8% to $69.0 million in the six month period ended June 30, 2013 as compared to $104.2 million for the same period in 2012. This decrease is primarily due to the decrease in the volume of all materials shipments along with a decrease in the volume of stainless steel materials purchases of 18.1 million pounds, or 34.5%, a decrease in the volume of ferrous materials purchases of 31.7 thousand gross tons, or 31.0%, and a decrease in the volume of nonferrous materials purchases of 6.1 million pounds, or 28.8%.

Other material decreases in the Recycling segment's cost of goods sold include the following:

A decrease in labor and overtime expenses of $191.7 thousand;

A decrease in hauling, fuel and lubricant expenses of $130.2 thousand; and

A decrease in repair and maintenance expenses of $128.9 thousand.

In addition to the reduction in volume, total cost of goods sold was affected by the decrease in overall average price for all commodities purchased of $109.05 per gross ton, or 14.2%. Capitalized processing costs decreased by $209.5 thousand, or 16.4%, for the six month period ended June 30, 2013 as compared to the same period in 2012.
Waste Services' cost of goods sold remained stable at $2.5 million in the six month periods ended June 30, 2013 and 2012. Increased Waste Services spending due to increased sales in turn increased cost of sales in the second quarter, which offset the first quarter decrease. In general, the timing of third party haulers' services and changes in cardboard prices cause fluctuations in Waste Services' cost of goods sold between periods.


SG&A expenses decreased $0.6 million or 10.5% to $5.1 million in the six month period ended June 30, 2013 compared to $5.7 million in the same period in 2012. As a percentage of revenue, SG&A expenses were 6.9% in 2013 compared to 5.1% in 2012. Although SG&A expenses decreased by $0.6 million, or 10.5%, in the first six months of 2013 as compared to the same period in 2012, revenue decreased at a higher rate by $36.6 million, or 32.8%, during this period, causing a higher percentage of SG&A expenses to revenue in the first six months of 2013 as compared to the same period in 2012. The primary driver of the decrease in SG&A expenses was a decrease in labor and bonus expenses of $671.1 thousand, of which $228.4 thousand related to a provision for termination and severance expenses in the six month period ended June 30, 2012 that did not occur in 2013. Also, several management level employees left the Company after the six month period ended June 30, 2012 and were not replaced. The average number of active employees per week decreased in the six month period ended June 30, 2013 to 156 employees as compared to 174 employees in the same period in 2012, thus decreasing labor expenses in 2013 as compared to 2012. Additional decreases include the following:
A decrease in depreciation and amortization of $136.5 thousand;

A decrease in repair and maintenance expenses of $97.6 thousand;

A decrease in employer taxes and employment fees of $52.9 thousand;

A decrease in insurance expense of $50.9 thousand; and

A decrease in utilities and office expenses of $45.3 thousand.

These decreases were partially offset by an increase in management fees, directors' fees, and consulting fees of $383.4 thousand, of which $255.0 thousand related to fees paid to Blue Equity under the Management Agreement, and an increase in legal fees of $112.9 thousand, which related to the settlement of a lawsuit in the first quarter of 2013 and the preparation and review of the Management Agreement with Blue Equity in 2013.
Other expense decreased $0.6 million to $0.4 million in the six month period ended June 30, 2013 as compared to other expense of $1.0 million in the same period in 2012. The decrease was primarily due to other income of $0.6 million related to proceeds from a legal settlement in 2013.
The income tax benefit increased $0.2 million to a benefit of $0.8 million in the six month period ended June 30, 2013 compared to a benefit of $0.6 million in the same period in 2012 due to the increased loss reported in 2013 as compared to 2012. The effective tax rates in 2013 and 2012 were 37.2% and 32.4%, respectively, based on federal and state statutory rates. In the second quarter of 2012, we had an additional tax expense of approximately $77.0 thousand primarily due to a prior year correction for state and city returns that lowered the income tax benefit for that time period.
Three months ended June 30, 2013 compared to three months ended June 30, 2012 Total revenue decreased $9.8 million or 19.6% to $40.1 million in the second quarter of 2013 compared to $49.9 million in the same period in 2012. With respect to the Recycling segment, Recycling revenue decreased $10.0 million or 20.7% to $38.2 million in 2013 compared to $48.2 million in 2012. This was primarily due to a decreases in the volume of ferrous and nonferrous materials shipments of 3.2 thousand gross tons, or 8.1%, and 315.3 thousand pounds, or 3.8%, respectively, and a decrease in overall average price for all commodities shipped in the second quarter of 2013 by $120.34 per gross ton, or 15.3%, as compared to the same period in 2012. Although the volume of stainless steel materials shipments increased by 408.5 thousand pounds, or 2.3%, in the second quarter of 2013 as compared to the same period in 2012, nickel prices remained low, and average nickel prices on the London Metal Exchange decreased $0.99 per pound, or 12.7%, in this period as compared to average nickel prices for the same period of 2012. Nickel is a key commodity used in stainless steel blends. Substantially all of our stainless steel sales are to one customer. In response to an overall decrease in demand for stainless steel, this customer decreased our sales orders received beginning in the second quarter of 2011 and continuing throughout 2012 and the first quarter of 2013. The increase in volume of stainless steel materials shipments in the second quarter of 2013 as compared to the second quarter of 2012 could not offset the decrease in commodity prices between the same periods. We do not have any assurance this customer will continue to increase its sales orders in the future.


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 June 30, 2013, sales to repeat Recycling scrap buyers decreased by approximately $10.1 million, or 21.0%, compared to the same period in 2012. Within the amount sold to all Recycling scrap buyers, 6.7% of these sales were to new and competitively priced, intermittent scrap buyers in the second quarter of 2013. In the same period in 2012, 10.6% of sales to Recycling scrap buyers were to new and competitively priced, intermittent scrap buyers. Sales during this period in 2012 to non-recurring Recycling scrap buyers in 2013 totaled 13.5% of 2013 sales to all Recycling scrap buyers. Sales during this period in 2011 to non-recurring Recycling scrap buyers in 2012 totaled 16.0% of 2012 sales to all Recycling scrap buyers.
With respect to the Waste Services segment, Waste Services revenue increased $0.3 million or 18.8% to $1.9 million in the second quarter of 2013 compared to $1.6 million in the same period in 2012 primarily due to an increase in customers' Waste Services spending as customers' sales increased, including increased equipment and container rentals and dumpster and compactor usage charges. In general, the timing of services provided or equipment installed will cause fluctuations in Waste Services revenue between periods.
Total cost of goods sold decreased $9.7 million or 20.0% to $38.8 million in the second quarter of 2013 compared to $48.5 million for the same period in 2012. Recycling cost of goods sold decreased $10.1 million or 21.3% to $37.3 million in 2013 compared to $47.4 million for the same period in 2012. This decrease was primarily due to the decrease in the volume of ferrous and nonferrous materials shipments along with a decrease in the volume of stainless steel, ferrous and nonferrous materials purchases of 5.7 million pounds, or 27.3%, 10.4 thousand gross tons, or 21.5%, and 1.0 million pounds, or 11.3%, respectively. Overall . . .

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