ITEM
2
: MANAGEMENT'S 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.
Cautionary Statement Regarding Forward-Looking Statements
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 availability of liquidity, fluctuations in commodity prices 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, 2018
, as filed with the Securities and Exchange Commission.
General
Industrial Services of America, Inc. (herein “ISA,” the “Company,” “we,” “us,” “our,” or other similar terms) is a Louisville, Kentucky-based company that buys, processes and markets ferrous and non-ferrous metals and other recyclable commodities and buys used autos in order to sell used auto parts. We process and sell ferrous and non-ferrous scrap metal to steel mini-mills, integrated steel makers, foundries, refineries and processors. We purchase ferrous and non-ferrous scrap metal primarily from industrial and commercial generators of steel, aluminum, copper, brass, stainless steel and other metals, as well as from scrap dealers and retail customers who deliver these materials directly to our facilities. We process scrap metal through our sorting, cutting, baling, and shredding operations. Our ferrous scrap recycling operations consist primarily of processing various grades of steel.
Our non-ferrous scrap recycling operations consist primarily of processing various grades of copper, aluminum, stainless steel and brass. Our used automobile operation primarily purchases automobiles so that retail customers can locate and remove used parts for purchase
.
Our core business is focused on the metal recycling industry. We are focused on returning the core business to profitability. The Company intends to do this by increasing efficiencies and productivity. We will also evaluate other various options and remain alert for possible strategic partnerships, joint ventures and mergers/acquisitions. In September 2018, the Company's Board of Directors formed a special committee to evaluate growth and strategic options.
On March 26, 2018, the Board appointed Todd L. Phillips as Chief Executive Officer. See
Note 7 – Share-Based Compensation and Other Compensation Agreements
in the accompanying Notes to Consolidated Financial Statements for additional information. Mr. Phillips has been the Company's Chief Financial Officer since December 31, 2014 and President since September 30, 2016 and will continue to serve in these roles
.
Liquidity and Capital Resources
Cash flows generated from operations and our revolving credit facility are significant sources of ongoing liquidity.
We actively manage our working capital and associated cash requirements and continually seek more effective use of cash. As of
March 31, 2019
, we held cash and cash
equivalents
of $
0.5
million. We
drew a net $
1.5
million
on our revolving credit facility during the
three
month period ended
March 31, 2019
.
We expect operating cash flow and borrowings under our working capital line of credit to be sufficient to meet our ongoing obligations.
Credit facilities and notes payable
See
Note 1 – Summary of Significant Accounting Policies and General
,
Note 3 – Long-Term Debt and Notes Payable to Bank
and
Note 4 – Lease Commitments
in the accompanying Notes to Condensed Consolidated Financial Statements for further details on debt and notes payable, finance and operating leases and related party obligations.
The borrowings under the line of credit are classified as short-term obligations under GAAP as the agreement with the lender contains a subjective acceleration clause and requires the Company to maintain a lockbox arrangement with the lender. However, the contractual maturity date of the line of credit is September 30, 2022.
For discussion of the extension of the maturity date and other recent amendments to the Company's credit arrangements, s
ee also
Note 3 – Long-Term Debt and Notes Payable to Bank
in the accompanying Notes to Consolidated Financial Statements.
Results of Operations
Three
months ended
March 31, 2019
compared to
three
months ended
March 31, 2018
The following table presents, for the periods indicated, the percentage relationship that certain captioned items in our Condensed Consolidated Statements of Operations bear to total revenue:
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Three
months ended
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March 31
,
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|
2019
|
|
2018
|
Statements of Operations Data:
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|
|
Total revenue
|
100.0
|
|
%
|
|
100.0
|
%
|
Total cost of sales
|
95.7
|
|
%
|
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91.7
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%
|
Selling, general and administrative expenses
|
6.5
|
|
%
|
|
6.3
|
%
|
(Loss) income before other expenses
|
(
2.2
|
)
|
%
|
|
2.0
|
%
|
Total revenue
decreased
$
0.3
million or
2.1%
to $
14.3
million in the
first
quarter of
2019
compared to $
14.7
million in the same period in
2018
.
Ferrous revenue
decreased
$
85.0
t
housand or
1.2%
to $
7.0
million in the
first
quarter of
2019
compared to $
7.0
million in the same period in
2018
.
For the
three
months ended
March 31, 2019
compared to
three
months ended
March 31, 2018
, the average selling price ("ASP") of ferrous material
decreased
$
11
per gross ton, or
3.0%
primarily
due to prevailing market prices for the underlying commodities sold
. For the
three
months ended
March 31, 2019
compared to
three
months ended
March 31, 2018
, ferrous material shipments
increased
0.5
thousand tons
, or
2.6%
. Ferrous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues.
Non-f
errous revenue
decreased
$
0.1
million or
1.5%
to $
7.2
million in the
first
quarter of
2019
compared to $
7.3
million in the same period in
2018
.
F
or the
three
months ended
March 31, 2019
compared to
three
months ended
March 31, 2018
, the ASP of non-ferrous material
decreased
$
0.20
per pound, or
16.9%
due to prevailing market prices for the underlying commodities sold. Non-ferrous
material shipments
increased
by
1.2
million pounds, or
19.2%
. Non-ferrous revenue includes non-commodity revenue such as service fees, transportation and returns and allowances; the ASP calculation excludes these non-commodity revenues.
Total cost of sales
increased
$
0.3
million or
2.1%
to $
13.7
million in the
three
month period ended
March 31, 2019
compared to $
13.4
million for the same period in
2018
. The increase was a primarily a result of increases in
labor costs of $113.8 thousand, inventory processing costs of $78.7 thousand and repairs and maintenance of $79.4 thousand, all of which resulted from increased ferrous and non-ferrous volumes.
Total cost of sales as a percent of revenue increased during the
three
month period ended
March 31, 2019
as compared to the same period in
2018
. This increase was also a result of increased ferrous and non-ferrous volumes.
SG&A expenses remained consistent at $
0.9
million in the
three
month period ended
March 31, 2019
compared to $
0.9
million in the same period in
2018
.
Other income (expense) was expense of $
122
.0 thousand for the
three
month period ended
March 31, 2019
compared to expense of $
242
.0 thousand for the
three
month period ended
March 31, 2018
. This $
120.0
thousand change is a result of
(i)
an $
82.0
thousand
decrease
in interest expense, which is a result of
a decrease in the interest rate on the line of credit and
a decrease in loan fees amortization expense offset by
an increased outstanding debt balance,
and
(ii) a $
38.0
thousand
increase
in insurance gain
.
The income tax provision
decreased
$
6.0
thousand in the three month period ended
March 31, 2018
to a provision of $
2.0
thousand in the
three
month period ended
March 31, 2019
compared to a provision of $
8.0
thousand in the same period in
2018
. The effective tax rates in
2019
and
2018
were
0.5
% and
18.2
%
, respectively, based on federal and state statutory rates.
Due
to recurring operating losses being incurred, at December 31, 2013, we recorded nearly a full valuation allowance, which is continuing through
March 31, 2019
. We also have several state and franchise taxes payable based on gross receipts.
Net loss for the
first
quarter of
2019
was $
441.0
thousand compared to a net income of $
36.0
thousand for the same period of
2018
. Although we incurred lower interest costs, these savings were more than offset by lower margins resulting from market conditions that were less favorable during the first quarter of 2019 compared to the same period of 2018 as evidenced by the lower ASP for both ferrous and non-ferrous. These unfavorable market conditions caused by, among other items, mill outages, weaker mill order books and softer export activity, are ongoing to date in the second quarter of 2019, which will likely adversely affect second quarter 2019 financial results. For example, ferrous market prices have decreased approximately $55 per ton since the end of the first quarter 2019 to the date of this filing.
Financial condition at
March 31, 2019
compared to
December 31, 2018
Cash and cash equivalents
decreased
$
575.0
thousand to $
469.0
thousand as of
March 31, 2019
from $
1.0
million as of
December 31, 2018
.
Net cash used in operating activities was $
1.7
million for the
three
month period ended
March 31, 2019
.
The net cash used in operating activities is primarily
due
to net loss of $
441.0
thousand,
an increase
in receivables of $
2.0
million,
an increase
in other assets of $
160.0
thousand
,
a decrease
in accounts payable of $
152.0
thousand, and
a decrease
in other current liabilities of $
202.0
thousand.
These cash uses in operating activities were
partially offset by
a decrease
in inventories of $
0.7
million and
depreciation of $
0.5
million,
amortization of loan fees of $
27.0
thousand
, and share based compensation expense of $
41.0
thousand.
Net cash from investing activities was $
141.0
thousand for the
three
month period ended
March 31, 2019
. In the
three
month period ended
March 31, 2019
, we recorded a gain from insurance proceeds of $
38.0
thousand. The C
ompany
had
$
179.0
thousand
of unfinanced
capital
expenditures in
2019
.
Net cash from financing activities was $
1.3
million for the
three
month period ended
March 31, 2019
. In the
three
month period ended
March 31, 2019
, we received net proceeds from debt of $
1.5
million less capitalized loan fees in the amount of $
22.0
thousand, made principal payments on debt of $
94.0
thousand, made principal payments to a related party of $
516.0
thousand, and made payments on capital lease obligations of $
85.0
thousand. Additionally, we had checks outstanding in excess of our bank balances of $
469.0
thousand at March 31, 2019.
Accounts receivable trade after allowances for doubtful accounts
increased
$
2.0
million or
45.2%
to $
6.3
million as of
March 31, 2019
compared to $
4.4
million as of
December 31, 2018
. In general, the accounts receivable balance fluctuates
due
to the quantity and timing of shipments, commodity prices and receipt of customer payments.
Inventories consist principally of ferrous and non-ferrous scrap materials. We value inventory at the lower of cost or net realizable value. Inventory
decreased
$
0.7
million, or
10.4%
, to $
6.2
million as of
March 31, 2019
compared to $
6.9
million as of
December 31, 2018
. This decrease is primarily driven by decreased volumes during the
first
quarter of
2019
compared to the fourth quarter of
2018
.
Inventory aging for the period ended
March 31, 2019
(Days Outstanding):
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(in thousands, except days information)
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Description
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1
-
30
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31
-
60
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61
-
90
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Over
90
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Total
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Ferrous and non-ferrous materials and auto parts
|
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$
|
4,815
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$
|
777
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$
|
317
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$
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302
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$
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6,211
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Inventory aging for the period ended
December 31, 2018
(Days Outstanding):
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(in thousands, except days information)
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Description
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1
-
30
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31
-
60
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61
-
90
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Over
90
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Total
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Ferrous and non-ferrous materials and auto parts
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$
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4,471
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$
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810
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$
|
890
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$
|
763
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$
|
6,934
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Inventory in the
60
days or less categories compared to total inventory
increased
to
90.0%
as of
March 31, 2019
compared to
76.2%
as of December 31, 2018. Inventory greater than
60
days compared to total inventory
decreased
to
10.0%
as of
March 31, 2019
compared to
23.8%
as of
December 31, 2018
. The changes in inventory aging is primarily related to (i) a decrease in inventory as of March 31, 2019 compared to December 31, 2018 and (ii) maintenance activity on our shredder and primary shear during the last quarter of 2018.
Accounts payable trade
decreased
$
0.2
million or
6.4%
to $
2.2
million as of
March 31, 2019
compared to $
2.4
million as of
December 31, 2018
. The accounts payable balance fluctuates
due
to timing of purchases from and payments made to our vendors.
Working capital
decreased
$
1.1
million to $
4.3
million as of
March 31, 2019
compared to $
5.4
million as of
December 31, 2018
as a result of the above noted items. Working capital was negatively impacted by ongoing unfavorable market conditions. Working capital during the second quarter of 2019 will likely also be negatively impacted by these ongoing unfavorable market conditions.
Contractual Obligations
The following table
provides information with respect to our known contractual obligations for the quarter ended
March 31, 2019
.
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Payments due by period (in thousands)
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Total
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Less than
1
year
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1
-
2
years
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3
-
4
years
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More than
4
years
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Obligation Description:
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Long-term debt obligations
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$
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8,721
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$
|
402
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$
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777
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$
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7,542
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$
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—
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Operating lease obligations (
1
)
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8,495
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|
553
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1,106
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1,117
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|
5,719
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Finance lease obligations (
1
)
|
963
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|
424
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473
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56
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|
10
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Total
|
$
|
18,179
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$
|
1,379
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$
|
2,356
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$
|
8,715
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$
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5,729
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(
1
)
|
See
Note 4 – Lease Commitments
and
Note 6 – Related Party Transactions
for detailed information related to the Company's operating and capital lease obligations.
|
Recent Accounting Standards
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses
, which provides guidance to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company is evaluating the potential impact of ASU 2016-13 on the Condensed Consolidated Financial Statements.
Recently Adopted Accounting Standards
I
n May 2014, the FASB issued ASU 2014-09
,
Revenue from Contracts with Customers (Topic 606)
. The amendments in ASU 2014-09 affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments were effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.
On January 1, 2018, the Company adopted ASU 2014-09 using the retrospective approach. The Company noted no financial impact on the Condensed Consolidated Financial Statements as a result of the adoption of this amended guidance. In addition, the adoption of this new accounting standard resulted in increased disclosure, including qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. See the Revenue Recognition section of
Note 1 – Summary of Significant Accounting Policies and General
in the accompanying Notes to Consolidated Financial Statements
for additional information
.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, to improve financial reporting about leasing transactions. This ASU will require organizations that lease assets (“lessees”) to recognize a lease liability and a right-of-use asset on its balance sheet for all leases with terms of more than twelve months. A lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset represents the lessee’s right to use, or control use of, a specified asset for the lease term. The amendments in this ASU simplify the accounting for sale and leaseback transactions. This ASU leaves the accounting for the organizations that own the leased assets largely unchanged except for targeted improvements to align it with the lessee accounting model and Topic 606,
Revenue from Contracts with Customers
.
The amendments in ASU 2016-02 were effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods.
On January 1, 2019, the Company adopted ASU 2016-02 using the modified retrospective approach.
As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods.
As of January 1, 2019, the Company
recorded a right-of-use asset and a lease liability of approximately $5.6 million on the Condensed Consolidated Balance Sheet
. The Company noted no
financial impact on the Condensed Consolidated Statement of Operations and the Condensed Consolidated Statement of Cash Flows as a result of the adoption of this amended guidance. In addition, the adoption of this new accounting standard resulted in increased financial statement disclosures to present additional details of its leasing arrangements. The Company used the following practical expedients: (i) the Company has not reassessed whether any expired or existing contracts are, or contain, leases; (ii) the Company has not reassessed the lease classification for any expired or existing leases; and (iii) the Company has not reassessed initial direct costs for any expired or existing leases. See
Note 4 – Lease Commitments
in the accompanying Notes to Consolidated Financial Statements
for additional information.
No other new accounting pronouncements issued or effective during the reporting period had, or are expected to have, a material impact on our Condensed Consolidated Financial Statements.