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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
METALLURG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2967577
(State of organization) (I.R.S. Employer Identification No.)
Building 400 (610) 293-0838
435 Devon Park Drive (Registrant's telephone number,
Wayne, Pennsylvania 19087 including area code)
(Address of principal executive offices)
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 [_] No [X]*
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [_] No [X]
There are no common equity securities of the registrant outstanding. At
June 16, 2004, the outstanding capital of Metallurg Holdings, Inc. was comprised
of 5,202.335 shares of Series A Voting Convertible Preferred Stock and 4,524
shares of Series B Non-Voting Convertible Preferred Stock, $.01 par value.
*The registrant is not subject to the filing requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934. The registrant is a voluntary
filer.
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION:
Item 1 - Financial Statements (Unaudited)
Condensed Statements of Consolidated Operations for the Quarters Ended
March 31, 2004 and 2003............................................... 2
Condensed Consolidated Balance Sheets at March 31, 2004 and
December 31, 2003..................................................... 3
Condensed Statements of Consolidated Cash Flows for the Quarters Ended
March 31, 2004 and 2003............................................... 4
Notes to Condensed Unaudited Consolidated Financial Statements........... 5-13
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 14-20
Item 3 - Quantitative and Qualitative Disclosure of Market Risk................... 21
Item 4 - Controls and Procedures.................................................. 21
Part II. OTHER INFORMATION:
Item 6 - Exhibits and Reports on Form 8-K......................................... 21
Signature Page.................................................................... 22
1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(In thousands)
Quarters Ended
March 31,
-----------------
2004 2003
------- -------
Sales ............................................................. $75,419 $69,991
Commission income ................................................. 131 154
------- -------
Total revenue .................................................. 75,550 70,145
------- -------
Operating costs and expenses:
Cost of sales .................................................. 68,234 62,640
Selling, general and administrative expenses ................... 6,967 7,588
Restructuring charges .......................................... 97 --
------- -------
Total operating costs and expenses ............................. 75,298 70,228
------- -------
Operating income (loss) ..................................... 252 (83)
Other income (expense):
Other income, net .............................................. 48 30
Interest expense, net .......................................... (4,236) (4,502)
------- -------
Loss before income tax provision, minority interest
and discontinued operations .............................. (3,936) (4,555)
Income tax provision .............................................. 96 205
------- -------
Loss before minority interest and discontinued operations ... (4,032) (4,760)
Minority interest ................................................. 39 (24)
------- -------
Loss before discontinued operations ......................... (3,993) (4,784)
------- -------
Income from discontinued operations, net of tax of $171 and $282 338 487
Loss on sale of discontinued operations, net of tax of $0 ......... (1,162) --
------- -------
Discontinued operations - net of tax ........................ (824) 487
------- -------
Net loss .................................................... (4,817) (4,297)
Other comprehensive income (loss):
Foreign currency translation adjustment......................... 3,113 (29)
Deferred gain (loss) on derivatives, net........................ 867 (27)
------- -------
Comprehensive loss .......................................... $ (837) $(4,353)
======= =======
See notes to condensed unaudited consolidated financial statements.
2
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2004 2003
----------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents .............................. $ 13,291 $ 18,557
Restricted cash ........................................ 7,000 --
Accounts receivable, net ............................... 44,648 37,771
Inventories ............................................ 56,285 44,457
Prepaid expenses and other current assets .............. 9,648 8,107
Discontinued operations - current assets ............... -- 14,738
-------- --------
Total current assets ................................ 130,872 123,630
Property, plant and equipment, net ........................ 53,366 54,324
Other assets .............................................. 21,871 20,333
Discontinued operations - non-current assets .............. -- 1,948
-------- --------
Total ............................................... $206,109 $200,235
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Short-term debt and current portion of long-term debt .. $ 17,300 $ 8,315
Accounts payable........................................ 31,469 25,808
Accrued expenses ....................................... 13,453 12,946
Other current liabilities .............................. 4,050 3,340
Discontinued operations - current liabilities .......... -- 9,843
-------- --------
Total current liabilities ........................... 66,272 60,252
-------- --------
Long-term Liabilities:
Long-term debt ......................................... 161,290 160,357
Accrued pension liabilities ............................ 30,895 29,543
Environmental liabilities, net ......................... 21,131 22,678
Other liabilities ...................................... 1,011 1,000
Discontinued operations - non-current liabilities ...... -- 218
-------- --------
Total long-term liabilities ......................... 214,327 213,796
-------- --------
Total liabilities ................................... 280,599 274,048
-------- --------
Minority Interest ......................................... 416 256
-------- --------
Shareholders' Deficit:
Additional paid-in capital ............................. 59,911 59,911
Accumulated other comprehensive loss ................... (21,264) (25,244)
Retained deficit ....................................... (113,553) (108,736)
-------- --------
Total shareholders' deficit ......................... (74,906) (74,069)
-------- --------
Total ............................................... $206,109 $200,235
======== ========
See notes to condensed unaudited consolidated financial statements.
3
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In thousands)
Quarters Ended
March 31,
------------------
2004 2003
-------- -------
Cash Flows from Operating Activities:
Net loss .................................................................. $ (4,817) $(4,297)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 1,962 2,032
Interest accretion on Senior Discount Notes ............................ -- 1,198
Deferred income taxes .................................................. (222) (334)
Restructuring charges .................................................. 97 --
Loss on sale of discontinued operations ................................ 1,162 --
Change in operating assets and liabilities:
Increase in accounts receivable ..................................... (6,262) (1,810)
Increase in inventories ............................................. (11,472) (1,729)
Increase in other current assets .................................... (1,213) (726)
Increase (decrease) in accounts payable and accrued expenses ........ 8,618 (698)
Environmental payments .............................................. (1,046) (565)
Restructuring payments .............................................. (1,196) (413)
Other assets and liabilities, net ................................... 523 805
Discontinued operations - operating activities ............................ (719) (1,111)
-------- -------
Net cash used in operating activities ............................ (14,585) (7,648)
-------- -------
Cash Flows from Investing Activities:
Additions to property, plant and equipment ................................ (289) (821)
Proceeds from sale of discontinued operation .............................. 8,275 --
Other, net ................................................................ (1,370) 1,015
Discontinued operations - investing activities ............................ 33 (57)
-------- -------
Net cash provided by investing activities ........................ 6,649 137
-------- -------
Cash Flows from Financing Activities:
Repayment of long-term debt, net .......................................... (90) (44)
Borrowings (repayment) of short-term debt, net ............................ 8,441 (1,029)
Restricted cash deposited to collateralize Revolving Credit facility ...... (7,000) --
Discontinued operations - financing activities ............................ 1,139 369
-------- -------
Net cash provided by (used in) financing activities .............. 2,490 (704)
-------- -------
Effects of exchange rate changes on cash and cash equivalents ............. 180 (89)
-------- -------
Net decrease in cash and cash equivalents ................................. (5,266) (8,304)
Cash and cash equivalents - beginning of period ........................... 18,557 24,256
-------- -------
Cash and cash equivalents - end of period ................................. $ 13,291 $15,952
======== =======
See notes to condensed unaudited consolidated financial statements.
4
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Going Concern
The accompanying consolidated financial statements have been prepared
assuming that Metallurg Holdings, Inc. ("Metallurg Holdings") and its
consolidated subsidiaries, (collectively, the "Company") will continue as a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company's financial
performance over the past year, however, has been adversely impacted by
increased competition, lower overall demand from customers and lackluster
economic conditions worldwide, which put significant downward pressure on the
selling price of the Company's products.
Metallurg Holdings currently does not expect to have sufficient cash on
hand to make the interest payments due on $121 million of 12 3/4% Senior
Discount Notes due 2008 (the "Senior Discount Notes"). Metallurg Holdings'
balance sheet is comprised primarily of its equity, the Senior Discount Notes
and its investment in Metallurg, Inc. As all of Metallurg, Inc.'s outstanding
common stock has been pledged as collateral for Metallurg Holdings' obligations
under the Senior Discount Notes, if Metallurg Holdings is unable to make
interest payments when due, it could lead to a foreclosure on its assets,
principally Metallurg, Inc.'s common stock. Such foreclosure would further
create a default under Metallurg, Inc.'s indenture, dated as of November 25,
1997, governing its $100 million aggregate principal amount of 11% Senior Notes
due 2007 (the "Senior Notes") and could result in an accelerated maturity such
Senior Notes.
The Company is highly leveraged. Interest payments of $2.6 million are due
both in July 2004 and January 2005 on the Senior Discount Notes and payments of
$5.5 million are due in both June and December 2004 on the Senior Notes. In
addition, Metallurg, Inc.'s credit facility with certain financial institutions
led by Fleet National Bank as agent (the "Revolving Credit Facility") with an
outstanding amount of $20.8 million at March 31, 2004, consisting of outstanding
letters of credit, is scheduled to expire on October 29, 2004. Metallurg, Inc.
is currently in compliance with the terms of the Revolving Credit Facility, as
amended. In the event the Company does not succeed in its restructuring efforts,
described below, it is likely that liquidity will be inadequate to enable the
Company to continue to make the interest payments required with respect to the
Senior Discount Notes and the Senior Notes and repay the Revolving Credit
Facility.
In March 2004, Metallurg, Inc. retained Compass Advisers, LLP, as financial
advisors, and Paul, Weiss, Rifkind, Wharton & Garrison, LLP, as legal counsel,
to assist the Company in analyzing and evaluating possible transactions for the
principal purpose of restructuring the Company's balance sheet. The Company is
currently engaged in discussions with potential lenders about the refinancing of
its senior indebtedness. The Company neither expresses any opinion nor gives any
assurances whatsoever regarding whether, when, or on what terms it will be able
to refinance its outstanding senior indebtedness or complete any broader
restructuring of its balance sheet. Management believes that the refinancing and
restructuring of the Company's outstanding senior indebtedness and balance sheet
is essential to the long-term viability of the Company. If the Company is not
able to reach agreements that favorably resolve these issues, the Company likely
will not have adequate liquidity to enable it to continue to make the interest
payments required with respect to its Senior Discount Notes, its Senior Notes,
or to repay its revolving credit facility with Fleet National Bank (which
matures on October 29, 2004). In such event, the Company may have to resort to
certain other measures to resolve its liquidity issues, including ultimately
seeking the protection afforded under the United States Bankruptcy Code.
Furthermore, any negotiated refinancing of the Company's senior indebtedness or
negotiated restructuring of the Company's balance sheet may require that the
Company seek the protection afforded under the reorganization provisions of the
United States Bankruptcy Code.
The consolidated financial statements do not include any adjustments, which
could be significant, relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
5
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
2. Basis of Presentation
The accompanying condensed unaudited consolidated financial statements
include the accounts of Metallurg Holdings. These financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information pursuant to Accounting Principles Board Opinion No. 28.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The condensed consolidated balance sheet as of December
31, 2003 was derived from audited financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the interim periods presented are not necessarily indicative of the
results to be expected for a full year. These financial statements should be
read in conjunction with the audited consolidated financial statements included
in the Company's current report on Form 8-K filed on April 14, 2004.
The Company is wholly owned by a group of investors led by and including
Safeguard International Fund, L.P. ("Safeguard International"), an international
private equity fund that invests primarily in equity securities of companies in
process industries.
Metallurg Holdings' balance sheet is comprised primarily of its investment
in Metallurg, Inc. and its Senior Discount Notes.
The Company has restated its financial statements for the prior period to
reflect a new reporting entity that excludes certain subsidiaries sold to
related parties on September 30, 2003.
On March 8, 2004, the Company completed the sale of its South African sales
office to a group of investors, including local management. Accordingly, the
operating results for this entity have been reported as discontinued operations
for all periods presented. See "Note 4. Discontinued Operations".
Earnings per share is not presented since Metallurg Holdings is wholly
owned by a group of private investors led by and including Safeguard
International.
3. Stock-Based Compensation
Metallurg accounts for its stock-based compensation plan using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, no compensation cost is reflected in net income, as all options
granted under this plan had an exercise price at least equal to the estimated
market value of the underlying common stock on the date of grant. The following
table illustrates the effect on net income of the Company if Metallurg had
applied the fair value measurement and recognition methods prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" to record expense for stock option compensation (in
thousands):
Quarters Ended March 31,
------------------------
2004 2003
------- -------
Net loss, as reported............................................... $(4,817) $(4,297)
Less: compensation expense for option awards determined
by the fair value based method, net of related tax effects....... 10 14
------- -------
Pro forma net loss............................................ $(4,827) $(4,311)
======= =======
6
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
4. Discontinued Operation
On March 8, 2004, the Company completed the sale of its South African sales
office to a group of investors, including local management, for a total purchase
price of $9,100,000 and recorded a loss of $1,162,000. In connection with the
sale, the Company accepted a note receivable for $1,370,000 from the buyers, to
be repaid in three equal installments plus interest at LIBOR plus 1% over two
years. The consolidated financial statements have been restated to reflect the
discontinued operation for all periods presented. The following table summarizes
certain financial information related to these discontinued operations prior to
sale (in thousands):
Three months ended
March 31,
----------------------
2004 2003
------------ -------
Results of operations:
Total revenue............................................ $ 9,140 $13,045
Income before income tax provision....................... 509 769
December 31,
2003
------------
Significant assets and liabilities:
Accounts receivable, net................................. $ 7,122
Inventories.............................................. 7,231
Property, plant and equipment, net....................... 1,352
Other assets............................................. 981
-------
Total assets.......................................... 16,686
-------
Short-term debt.......................................... 2,686
Accounts payable......................................... 5,583
Accrued expenses......................................... 1,440
Other liabilities........................................ 352
-------
Total liabilities..................................... 10,061
-------
Net assets............................................ $ 6,625
=======
5. Segments and Related Information
The Company operates in one significant industry segment, the manufacture
and sale of performance-enhancing additives mainly for the metallurgical
industry. The Company is organized around its major production facilities in the
U.K., the U.S. and Brazil. In addition to its own products, the Company
distributes complementary products manufactured by third parties.
Reportable Segments
London & Scandinavian Metallurgical Co Limited and its subsidiaries
(collectively, "LSM") - This unit is comprised mainly of three production
facilities in the U.K. and another in Norway which manufacture and sell aluminum
alloy grain refiners and alloying tablets for the aluminum industry, chromium
metal and specialty ferroalloys for the steel and superalloy industries and
aluminum powder for various metal powder-consuming industries. As a result of
continuing weakness in operating performance, LSM commenced a restructuring
program in the second half of 2003. LSM discontinued its metal catalyst business
in the fourth quarter of 2003 and announced the closure of its Norwegian
production facility in 2004. See Note 6. "Restructuring and Asset Impairment
Charges".
7
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
5. Segments and Related Information - (Continued)
Shieldalloy Metallurgical Corporation ("SMC") - This unit is comprised of
two production facilities in the U.S. The Ohio plant manufactures and sells
ferrovanadium and vanadium-based chemicals used mostly in the steel and
petrochemical industries. The New Jersey plant manufactures and sells alloying
tablets for the aluminum industry and metal powders for the welding industry.
Companhia Industrial Fluminense ("CIF") - This unit is comprised mainly of
two production facilities in Brazil. The Sao Joao del Rei plant manufactures and
sells aluminum alloy grain refiners and alloying tablets for the aluminum
industry and metal oxides used in the telecommunications, superalloy and
specialty metal industries. The Nazareno mine extracts and concentrates ores
containing tantalum and niobium that are processed, along with other raw
materials, into metal oxides at the Sao Joao del Rei plant.
In addition to their manufacturing operations, LSM and SMC import and
distribute complementary products manufactured by affiliates and third parties.
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands). Each segment records
direct expenses related to its employees and operations. The "Other" column
includes corporate-related items and results of subsidiaries not meeting the
quantitative thresholds as prescribed by applicable accounting rules for
determining reportable segments. The Company does not allocate general corporate
overhead expenses to operating segments. The accounting policies of the segments
are the same as those for the consolidated group. Transactions among segments
are established based on negotiation among the parties.
Intersegment Consolidated
LSM SMC CIF Other Eliminations Totals
------- ------- ------ ------- ------------ ------------
Quarter Ended March 31, 2004
Revenue from external customers ... $35,434 $29,183 $6,938 $ 3,995 $75,550
Intergroup revenue ................ 7,583 1,269 2,902 2,028 $(13,782) --
Income tax provision (benefit) .... 89 402 35 (430 -- 96
Net income (loss) ................. 313 (263) 214 (1,386) (3,695) (4,817)
Intersegment Consolidated
LSM SMC CIF Other Eliminations Totals
------- ------- ------ ------- ------------ ------------
Quarter Ended March 31, 2003
Revenue from external customers ... $38,786 $21,384 $4,169 $ 5,806 $70,145
Intergroup revenue ................ 6,913 569 2,914 351 $(10,747) --
Income tax provision (benefit) .... 117 7 127 (46) -- 205
Net income (loss) ................. 190 (264) 297 (2,253) (2,267) (4,297)
8
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
6. Restructuring and Asset Impairment Charges
In 2003, due to continuing weakness in operating performance, particularly
in its metal catalyst and aluminum businesses, LSM recorded a restructuring
charge of $10,358,000, consisting of (i) $3,652,000 of severance costs for 62
employees, (ii) asset impairment charges of $6,706,000 relating to its metal
catalyst business and its production facilities in Norway. Sixty of those
employees have been terminated through March 31, 2004. In January 2004, LSM
announced a restructuring at its aluminum powder division. Eleven employees were
terminated and $97,000 was recorded as restructuring expense in the first
quarter. In the first quarter of 2004, LSM announced the closure of its aluminum
production facility in Norway. There were no amounts related to this closure
that can be classified as restructuring charges under prescribed accounting
rules through March 31, 2004.
In a continuing effort to improve the Company's competitive position and to
reduce costs, a plan was implemented in the third quarter of 2003 to consolidate
sales and administrative functions performed by the Company's Canadian
operations into the New Jersey operations of SMC. As a result of this plan, the
Company's Canadian subsidiary recognized a restructuring charge of $417,000 for
severance costs of seven employees. Of this amount, $405,000 has been paid
through March 31, 2004.
Also in 2003, Metallurg transferred certain sales and administrative
functions for tantalum and niobium products from its headquarters location to
its production facilities in Brazil. As a result, severance costs of $120,000
for two employees were recorded at December 31, 2003. Of this amount, $77,000
has been paid through March 31, 2004.
In 2002, Metallurg, Inc. recorded a restructuring charge of $1,989,000 for
severance costs of nine employees terminated during the year at its headquarters
location. Under the terms of certain executive employment and severance
agreements, the severance was to be paid over a period of up to 18 months. Of
this amount, $1,910,000 has been paid through March 31, 2004.
A summary of the restructuring and asset impairment charges is as follows
(in thousands):
Utilization through
March, 31, 2004 Balance at
Total ------------------- March 31,
provision Cash Non-cash 2004
--------- ------- --------- ----------
LSM:
Severance and other employee costs ... $ 3,749 $(3,220) $ 30 $559
Write-down of plant and equipment .... 6,706 -- (6,706) --
------- ------- ------- ----
10,455 (3,220) (6,676) 559
Other:
Severance and other employee costs ... 2,526 (2,392) -- 134
------- ------- ------- ----
Total ........................ $12,981 $(5,612) $(6,676) $693
======= ======= ======= ====
7. Restricted cash
On January 14, 2004, the Revolving Credit Facility was amended and the
minimum liquidity covenant was eliminated. In its place, the Company was
required to deposit a total of $7,000,000 into a special cash collateral account
as additional security for the Revolving Credit Facility.
9
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
8. Inventories
Inventories consist of the following (in thousands):
March 31, December 31,
2004 2003
--------- ------------
Raw materials .......................... $17,268 $ 8,855
Work in process ........................ 877 467
Finished goods ......................... 36,858 33,762
Other .................................. 1,282 1,373
------- -------
Total ............................... $56,285 $44,457
======= =======
9. Contingent Liabilities
The Company defends, from time to time, various claims and legal actions
arising in the normal course of business, including those relating to
environmental matters. Management believes, based on the advice of counsel, that
the outcome of such matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
There can be no assurance, however, that future litigation or proceedings will
not result in an adverse judgment against the Company that could have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows in the future.
10. Retirement Plans
The Company maintains defined benefit plans for its employees in the U.S.,
the U.K. and Norway. Net pension cost for these plans consisted of the following
for the quarters ended March 31, 2004 and 2003, respectively (in thousands):
Quarters ended March 31,
------------------------
2004 2003
------- -------
Components of net periodic benefit cost:
Service cost ................................... $ 828 $ 694
Interest cost .................................. 1,875 1,682
Expected return on plan assets ................. (1,877) (1,442)
Net amortization and deferral .................. 659 772
------- -------
Total net periodic benefit cost ............. $ 1,485 $ 1,706
======= =======
The Company previously disclosed in its financial statements for the year
ended December 31, 2003 that it expected to contribute $4,694,000 to its pension
plans in 2004. As of March 31, 2004, $1,375,000 of contributions have been made.
The Company presently anticipates contributing an additional $4,412,000 to fund
its pension plan in 2004 for a total of $5,787,000.
11. Related Party Transactions
On January 15, 2004, a related party bought a $1,077,000 note from
Metallurg Holdings with the proceeds of the interest payment due to them as a
holder of Senior Discount Notes. This note is classified as long-term debt and
is payable on July 15, 2008 along with interest accrued at 12 3/4% per annum.
During February 2004, SMC was awarded a five-year supply contract by
Comision Federal de Electricidad, the national electric utility company of
Mexico, for vanadium-containing raw materials for its Cambridge, Ohio plant. The
terms of the contract required an upfront payment of approximately $9 million.
Safeguard International, for its own account and for the accounts of others, and
SCP Private Equity Partners, L.P., another shareholder of Metallurg Holdings,
provided an $8 million loan so that SMC can complete the purchase. The loan
bears interest at 8% and is collateralized by a second lien on all of the assets
of the Borrowers and Guarantors under the Revolving Credit Facility.
10
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
12. Supplemental Guarantor Information
In November 1997, Metallurg, Inc. issued $100 million principal amount of
its 11% Senior Notes due 2007. Under the terms of the Senior Notes, SMC,
Metallurg Holdings Corporation, Metallurg Services, Inc., Metallurg
International Resources, LLC ("MIR, LLC") and MIR (China), Inc. (collectively,
the "Guarantors"), wholly owned subsidiaries of Metallurg, Inc., have fully and
unconditionally guaranteed on a joint and several basis Metallurg, Inc.'s
obligations to pay principal, premium and interest relative to the Senior Notes.
Management has determined that separate, full financial statements of the
Guarantors would not be material to potential investors and, accordingly, such
financial statements are not provided. Supplemental financial information of the
Guarantors is presented below.
Metallurg, Inc. and its Consolidated Subsidiaries
Condensed Consolidating Statement of Operations (Unaudited)
Quarter Ended March 31, 2004
(In thousands)
Combined
Combined Non-
Metallurg, Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------ ------------
Total revenue ................................. $32,734 $55,636 $(12,820) $75,550
------- ------- -------- -------
Operating costs and expenses:
Cost of sales .............................. 30,229 50,406 (12,401) 68,234
Selling, general and administrative
expenses ................................ $ 1,293 1,827 3,844 -- 6,964
Restructuring charges ...................... -- -- 97 -- 97
------- ------- ------- -------- -------
Total operating costs and expenses ......... 1,293 32,056 54,347 (12,401) 75,295
------- ------- ------- -------- -------
Operating (loss) income .................... (1,293) 678 1,289 (419) 255
Other income (expense):
Other income, net .......................... -- -- 48 -- 48
Interest (expense) income, net ............. (2,193) 134 (862) -- (2,921)
Equity in earnings of subsidiaries ......... (441) 2,852 865 (3,276) --
------- ------- ------- -------- -------
(Loss) income before income tax (benefit)
provision and minority interest ......... (3,927) 3,664 1,340 (3,695) (2,618)
Income tax (benefit) provision ................ (458) 496 58 -- 96
------- ------- ------- -------- -------
(Loss) income before minority interest ..... (3,469) 3,168 1,282 (3,695) (2,714)
Minority interest ............................. -- -- 39 -- 39
------- ------- ------- -------- -------
(Loss) income before discontinued
operations .............................. (3,469) 3,168 1,321 (3,695) (2,675)
Discontinued operations ....................... (30) (3,577) 2,783 -- (824)
------- ------- ------- -------- -------
Net (loss) income .......................... (3,499) (409) 4,104 (3,695) (3,499)
Other comprehensive income (loss):
Foreign currency translation adjustment .... 3,113 3,113 5,743 (8,856) 3,113
Deferred gain on derivatives, net .......... 867 867 1,734 (2,601) 867
------- ------- ------- -------- -------
Comprehensive income ....................... $ 481 $ 3,571 $11,581 $(15,152) $ 481
======= ======= ======= ======== =======
11
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
12. Supplemental Guarantor Information - (Continued)
Metallurg, Inc. and its Consolidated Subsidiaries
Condensed Consolidating Balance Sheet (Unaudited)
March 31, 2004
(In thousands)
Combined
Combined Non-
Metallurg, Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ................ $ 4,819 $ 64 $ 8,090 $ 12,973
Restricted cash .......................... 7,000 -- -- 7,000
Accounts receivable, net ................. 46,075 23,575 40,044 $ (64,977) 44,717
Inventories .............................. -- 31,027 25,858 (600) 56,285
Prepaid expenses and other current
assets ................................ 1,170 3,072 8,297 (3,009) 9,530
-------- -------- -------- --------- --------
Total current assets ............... 59,064 57,738 82,289 (68,586) 130,505
Investments - intergroup .................... 48,661 2,280 31,490 (82,431) --
Property, plant and equipment, net .......... 209 21,148 32,009 -- 53,366
Other assets ................................ 10,587 57,944 10,783 (57,826) 21,488
-------- -------- -------- --------- --------
Total .............................. $118,521 $139,110 $156,571 $(208,843) $205,359
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDER'S
(DEFICIT) EQUITY
Current Liabilities:
Short-term debt and current portion of
long-term debt ........................ $ 8,000 $ 9,300 $ 17,300
Accounts payable ......................... 7,734 $ 60,276 28,389 $ (64,977) 31,422
Accrued expenses ......................... 4,350 8,175 2,992 -- 15,517
Other current liabilities ................ -- 3,009 554 (3,009) 554
-------- -------- -------- --------- --------
Total current liabilities .......... 20,084 71,460 41,235 (67,986) 64,793
-------- -------- -------- --------- --------
Long-term Liabilities:
Long-term debt ........................... 100,000 -- 19,878 -- 119,878
Accrued pension liabilities .............. 5,726 687 24,482 -- 30,895
Environmental liabilities, net ........... -- 21,056 75 -- 21,131
Other liabilities ........................ 25,476 -- 33,361 (57,826) 1,011
-------- -------- -------- --------- --------
Total long-term liabilities ........ 131,202 21,743 77,796 (57,826) 172,915
-------- -------- -------- --------- --------
Total liabilities .................. 151,286 93,203 119,031 (125,812) 237,708
-------- -------- -------- --------- --------
Minority Interest ........................... -- -- 416 -- 416
-------- -------- -------- --------- --------
Shareholder's (Deficit) Equity:
Common stock ............................. 50 1,217 109,133 (110,350) 50
Due from parent company .................. (23,209) -- -- -- (23,209)
Additional paid-in capital ............... 67,324 127,457 7,076 (134,533) 67,324
Accumulated other comprehensive loss ..... (21,667) (18,178) (33,570) 51,748 (21,667)
Retained deficit ......................... (55,263) (64,589) (45,515) 110,104 (55,263)
-------- -------- -------- --------- --------
Total shareholder's (deficit) equity (32,765) 45,907 37,124 (83,031) (32,765)
-------- -------- -------- --------- --------
Total .............................. $118,521 $139,110 $156,571 $(208,843) $205,359
======== ======== ======== ========= ========
12
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
12. Supplemental Guarantor Information - (Continued)
Metallurg, Inc. and its Consolidated Subsidiaries
Condensed Consolidating Statement of Cash Flows (Unaudited)
Quarter Ended March 31, 2004
(In thousands)
Combined
Combined Non-
Metallurg, Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------- ------------ ------------ ------------
Cash Flows from Operating Activities .................... $ (601) $(11,053) $(1,436) $(13,090)
------- -------- ------- --------
Cash Flows from Investing Activities:
Additions to property, plant and equipment ........... (2) (97) (190) (289)
Other, net ........................................... -- -- 6,938 6,938
------- -------- ------- --------
Net cash (used in) provided by investing
activities ..................................... (2) (97) 6,748 6,649
------- -------- ------- --------
Cash Flows from Financing Activities:
Intergroup (repayments) borrowings ................... (8,312) 18,199 (9,887) --
Repayment of long-term debt, net ..................... -- -- (90) (90)
Borrowings of short-term debt, net ................... 8,000 -- 441 8,441
Dividends received (paid) ............................ 7,819 (7,730) (89) --
Restricted cash deposited to collateralize Revolving
Credit Facility ................................... (7,000) -- -- (7,000)
Other, net ........................................... (1,494) -- 1,139 (355)
------- -------- ------- --------
Net cash (used in) provided by
financing activities............................ (987) 10,469 (8,486) 996
------- -------- ------- --------
Effects of exchange rate changes on cash and cash
equivalents .......................................... -- -- 180 180
------- -------- ------- --------
Net decrease in cash and cash equivalents ............... (1,590) (681) (2,994) (5,265)
Cash and cash equivalents -
beginning of period .................................. 6,409 745 11,084 18,238
------- -------- ------- --------
Cash and cash equivalents -
end of period ........................................ $ 4,819 $ 64 $ 8,090 $ 12,973
======= ======== ======= ========
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed under the captions "Business and Properties" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Annual Report on Form 10-Q may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements may be identified by the use of
words such as "plans", "expect", "believe", "should", "could", "anticipate",
"intend" and other expressions that indicate future events or trends. All
statements that address expectations or projections about the future, including
statements about the Company's strategy for growth, product development, market
position, expenditures and financial results are forward-looking statements and
as such may involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance and achievements of the Company
to be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements.
Factors that may cause the Company's results to be materially different
include:
- The cyclical nature of Metallurg's business.
- Metallurg's dependence on foreign customers. Metallurg operates
throughout the world and derives a significant amount of its revenues
from outside of the U.S.
- The impact of changes in foreign exchange rates and foreign trade
regulations on Metallurg's competitive standing. Revenues and earnings
from outside the U.S. could be materially affected by exchange rate
fluctuations.
- The ability to complete a restructuring of its balance sheet on
favorable terms, if at all.
- The ability to meet debt service requirements.
- The availability of raw materials, particularly vanadium-containing
materials. See "Items 1 and 2. Business and Properties - Limited
Sources for Raw Materials".
- The impact of worldwide competition.
- The economic strength of Metallurg's markets generally and
particularly the strength of the demand for aluminum, superalloys,
titanium alloys, iron and steel in those markets.
- The impact of changes in technology and methods of marketing.
- The accuracy of Metallurg's estimates of the costs of environmental
remediation.
- The extension or expiration of existing anti-dumping duties. See
"Items 1 and 2. Business and Properties - Anti-Dumping Duties".
- The performance of world financial markets and the resulting effect on
pension expense of Metallurg's defined benefit plans.
- The possible disruption of business or increases in the cost of doing
business resulting from terrorist activities or global conflicts.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Critical Accounting Estimates
For a discussion of the critical accounting estimates affecting the
Company, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Critical Accounting Estimates" beginning
on page 24 of the Company's annual report on Form 10-K for the year ended
December 31, 2003. The critical accounting estimates affecting the Company have
not changed since December 31, 2003.
Overview
The Company is a leading international producer and seller of high-quality
specialty metals and metal alloys that are essential to the production of
high-performance aluminum and titanium alloys, specialty steels, superalloys and
certain non-metallic materials for various applications in the aerospace, power
supply, automotive, petrochemical processing, capital equipment and construction
industries. The Company operates production facilities in the U.K., the U.S. and
Brazil. The Company's products are primarily sold to one of three major market
sectors: the aluminum industry, the steel industry and the superalloy industry.
14
Overall operating conditions in each of these sectors have remained quite
challenging over the past few years with significant pressure on prices caused
by increased competition, lower overall demand from customers and lackluster
economic conditions worldwide. These difficult business conditions persisted
throughout most of 2003. Demand started to show signs of improvement in the
fourth quarter of 2003 and continued to improve during the first quarter of 2004
due to higher economic activity in Europe, the Americas and especially Asia.
Additionally, a decline in the U.S. dollar caused prices for some of our
products to rise as foreign competitors increased prices to offset the negative
effect of the currency movement. While we cannot predict demand or prices in the
markets we serve, this discussion presents a general overview of each of our
major market sectors:
Demand from the aluminum market continues to rebound from the low levels
experienced early last year, coinciding with increased global economic activity.
On the supply side, there still exists a significant amount of excess, as well
as idle, capacity in the industry. While prices for aluminum continued to
increase in 2004, our main products - aluminum master alloys and compacted
products - continue to be subject to pricing pressure, primarily due to
overcapacity. Continuing consolidation in the aluminum industry also has
contributed to the pressure on prices for our products. These same conditions
are expected to continue throughout 2004, as the industry still faces
overcapacity and significant price competition. During January 2004, Metallurg
decided to start the closure process of its master alloy facility in Norway
(Hydelko) to reduce excess capacity in the industry. Customers will continue to
be served from our facilities in the U.K. and Brazil. The Company continues to
implement cost reduction initiatives to offset price declines.
The domestic steel industry continues to operate at moderately high levels
of production. Industry fundamentals for the steel sector have improved from the
difficult conditions seen over the past few years, particularly as a result of
the consolidation of a number of producers within the industry and the weak U.S.
dollar. During 2003, fundamentals in the ferrovanadium market have changed as
several producers closed operations due to very low pricing over the past few
years. Due to a shortage of raw materials, Metallurg was forced to significantly
cut production rates at its processing facility in Ohio, adding to a lack of
ferrovanadium units in North America. Also, a labor strike at this facility
during the second half of the year impacted overall production rates. Demand for
ferrovanadium has recently improved, driven in part by increased demand for
ferrovanadium-containing steels in Chinese construction applications. The global
supply/demand outlook for ferrovanadium has changed, with Asia expected to
become a net importer of material instead of a net exporter. As a result, prices
for ferrovanadium steadily increased in 2003, and in early 2004, increased to
levels not seen since the mid 1990's. Metallurg has been unable to take full
advantage of increased selling prices due to a shortage of raw materials. In the
first quarter of 2004, Metallurg was successful in securing a significant source
of raw materials to lower production costs and enhance profitability. In April
2004, the labor strike affecting the ferrovanadium production facility in
Cambridge, Ohio was settled with the ratification of a new three-year contract.
Management expects that the effects of securing new raw materials and settling
the labor strike will be realized in the second quarter of 2004.
The superalloy industry continued to be impacted by the downturn in the
commercial aerospace industry, as well as a reduction in power generation
projects and services (i.e., land-based turbines). Commercial production rates
for the aerospace industry are well below historical averages, especially in the
U.S., but appear likely to rebound as new orders have increased on year-to-year
basis. Due to the long lead times in this market, excess inventory has been a
factor leading to low prices and volumes for products supplied to this industry.
During the first quarter of 2004, prices for titanium and chrome products
increased significantly due to perceived supply shortages and higher worldwide
demand for these metals.
Metallurg Holdings currently does not expect to have sufficient cash on
hand to make the interest payments due on its Senior Discount Notes. As all of
Metallurg, Inc.'s outstanding common stock has been pledged as collateral for
Metallurg Holdings' obligations under the Senior Discount Notes, if Metallurg
Holdings were unable to make interest payments when due, it could lead to a
foreclosure on its assets, principally the equity of Metallurg, Inc. Such
foreclosure would create a default in accordance with the indenture terms of the
Senior Notes. In the event the Company is unable to modify the terms of its
existing credit facility or obtain other sources of capital and liquidity, it is
possible that the Company could be unable to satisfy other obligations as they
become due.
15
During 2003 and continuing in 2004, the Company continued to restructure
its businesses. The Company took action to reduce costs at LSM through employee
terminations and discontinuing unprofitable businesses, and in North America by
consolidating sales offices. In September 2003, the Company sold all of its
interests in its German facility engaged in the manufacture of low carbon
ferrochrome, and its Turkish chrome ore mines. In December 2003, the Company
reached an agreement to sell its South African sales office. This sale was
completed in March 2004. See "Note 4. Discontinued Operations" to the Company's
Consolidated Financial Statements.
Results of Operations - The Quarter Ended March 31, 2004 Compared to the Quarter
Ended March 31, 2003
The Company operates in one significant industry segment, the manufacture
and sale of performance-enhancing additives mainly for the metallurgical
industry. The Company is organized around its major production facilities in the
U.K., the U.S. and Brazil. In addition to its own products, the Company
distributes products manufactured by third parties.
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands). Each segment records
direct expenses related to its employees and operations. The "Other" column
includes corporate related items and results of subsidiaries not meeting the
quantitative thresholds as prescribed by applicable accounting rules for
determining reportable segments. The Company does not allocate general corporate
overhead expenses to operating segments. The accounting policies of the segments
are the same as those of the consolidated group. Transactions among segments are
established based on negotiation among the parties. There have been no material
changes in segment assets from the amounts disclosed in the last annual report.
Intersegment
(In thousands) LSM SMC CIF Other Eliminations Consolidated
------- ------- ------ ------- ------------ ------------
Quarter Ended March 31, 2004
Total revenue.................... $43,017 $30,452 $9,840 $ 6,023 $(13,782) $75,550
Gross profit..................... 3,650 2,178 980 927 (419) 7,316
SG&A............................. 2,883 1,804 526 1,754 -- 6,967
Operating income (loss).......... 670 374 454 (827) (419) 252
Interest expense, net............ (355) (235) (205) (3,441) -- (4,236)
Income tax provision (benefit)... 89 402 35 (430) -- 96
Net income (loss)................ 313 (263) 214 (1,386) (3,695) (4,817)
Quarter Ended March 31, 2003
Total revenue.................... $45,699 $21,953 $7,083 $ 6,157 $(10,747) $70,145
Gross profit..................... 4,438 1,470 1,016 838 (257) 7,505
SG&A............................. 3,745 1,648 388 1,807 -- 7,588
Operating income (loss).......... 693 (178) 628 (969) (257) (83)
Interest expense, net............ (392) (79) (204) (3,827) -- (4,502)
Income tax provision (benefit)... 117 7 127 (46) -- 205
Net income (loss) ............... 190 (264) 297 (2,253) (2,267) (4,297)
Total Revenue
Consolidated total revenue increased by $5.4 million (8%) in the quarter
ended March 31, 2004.
LSM revenue was $2.7 million (6%) lower than the quarter ended March 31,
2003. Sales of aluminum master alloys and compacted products decreased by $1.3
million, primarily as a result of a 19% decrease in sales volume. Sales of
aluminum powder fell by $1.7 million, due to a 22% decrease in sales volume.
Sales of metal powders fell by $1.5 million as a result of decreases in both
sales volume and average selling prices. Sales of nickel products rose by $1.0
million due to higher selling prices. Sales of ferrotitanium were $1.1 million
higher, due to a 51% increase in average unit selling prices, despite a 20%
decrease in sales volumes.
16
SMC revenue was $8.5 million (39%) higher than the quarter ended March 31,
2003. Sales of aluminum products increased by $2.8 million as a result of a 29%
increase in shipments. Sales of vanadium products, produced in SMC's Ohio plant,
increased by $4.2 million primarily as a result of increased average selling
prices. Sales of niobium products rose by $0.9 million, primarily as a result of
a 76% increase in shipments of ferroniobium to the steel industry.
CIF revenue was $2.8 million (39%) higher than the quarter ended March 31,
2003. Sales of aluminum master alloys increased by $2.0 million, primarily as a
result of a 60% increase in selling volumes. Sales of niobium products rose by
$1.3 million, due to an increase in demand.
Gross Profit
Consolidated gross profit decreased to $7.3 million (9.7% of total revenue)
for the quarter ended March 31, 2004 from $7.5 million (10.7% of total revenue)
for the quarter ended March 31, 2003.
LSM gross profit was $0.8 million (18%) lower than the quarter ended March
31, 2003. Gross profits from aluminum master alloys and compacted aluminum
products decreased by $0.4 million, due to decreased volumes and higher unit
costs. Aluminum powder gross profits fell by $1.1 million as a result of
decreased volumes and higher unit costs. Gross profit from chrome products
increased by $0.3 million due to an increase in selling prices. Gross profit
from ferrotitanium improved by $0.3 million as a result of higher prices.
SMC gross profit was $0.7 million (48%) higher than the quarter ended March
31, 2003. Gross profit from vanadium products improved by $0.5 million as a
result of an increase in average selling prices, partially offset by the
increase in unit costs. Gross profit from aluminum products rose by $0.1
million, due to increased shipments.
CIF gross profit was virtually unchanged from the quarter ended March 31,
2003.
Selling, General and Administrative Expenses ("SG&A")
SG&A decreased to $7.0 million for the quarter ended March 31, 2004 from
$7.6 million for the quarter ended March 31, 2003, a decrease of 8%. The
decrease was mainly reductions in compensation and other expenses resulting from
recent restructuring programs. For the quarter ended March 31, 2004, SG&A
represented 9.2% of total revenue compared to 10.8% for the quarter ended March
31, 2003.
Operating Income (Loss)
Operating income was $0.3 million for the quarter ended March 31, 2004
compared to an operating loss of $0.1 million for the quarter ended March 31,
2003, due primarily to the reduction in SG&A, discussed above.
Interest Expense, Net
Interest expense, net, was as follows (in thousands):
Quarters Ended March 31,
------------------------
2004 2003
------- -------
Interest income............ $ 621 $ 274
Interest expense........... (4,857) (4,776)
------- -------
Interest expense, net... $(4,236) $(4,502)
======= =======
17
Income Tax Provision, Net
Income tax provision, net of tax benefits, was as follows (in thousands):
Quarters Ended March 31,
------------------------
2004 2003
----- -----
Total current.................. $ 318 $ 539
Total deferred................. (222) (334)
----- -----
Income tax provision, net... $ 96 $ 205
===== =====
The difference between the statutory federal income tax rate and the
Company's effective rate for the quarter ended March 31, 2004, is principally
due to: (i) certain deductible temporary differences, principally domestic net
operating losses, which in other circumstances would have generated a deferred
tax benefit, have been fully provided for in a valuation allowance; (ii) taxes
paid on foreign dividends; and (iii) the excess of foreign tax rates over the
statutory federal income tax rate.
Net Loss
The Company had a net loss of $4.8 million for the quarter ended March 31,
2004 compared to a net loss $4.3 million for the quarter ended March 31, 2003.
Net losses also included income from discontinued operations of $0.3 million and
$0.5 million, net for the quarters ended March 31, 2004 and 2003, respectively
and a loss on sale of discontinued operations of $1.2 million in the quarter
ended March 31, 2004. See "Note 4. Discontinued Operations" to the Company's
Consolidated Financial Statements.
Liquidity and Financial Resources
General
The Company's sources of liquidity include cash and cash equivalents, cash
from operations and amounts available under credit facilities. At March 31,
2004, the Company had $13.3 million in unrestricted cash and cash equivalents
and working capital of $64.6 million as compared to $18.6 million and $63.4
million, respectively, at December 31, 2003.
Metallurg Holdings currently does not expect to have sufficient cash on
hand to make the interest payments due on the Senior Discount Notes. As all of
Metallurg, Inc.'s outstanding common stock has been pledged as collateral for
Metallurg Holdings' obligations under the Senior Discount Notes, if Metallurg
Holdings were unable to make interest payments when due, it could lead to a
foreclosure on its assets, principally the equity of Metallurg, Inc. Such
foreclosure would create a default in accordance with the indenture terms of the
Senior Notes and result in an acceleration of $100 million of Senior Note
indebtedness.
On June 1, 2004, Metallurg did not make the $5.5 million semi-annual
interest payment due on such date in respect of its Senior Notes. Under the
terms of the indenture governing the Senior Notes, Metallurg's failure to make
the interest payment may be cured within 30 days. If such payment default is not
cured within the 30-day grace period, an event of default will occur in respect
of the Senior Notes, as well as under the Revolving Credit Facility (described
below). In addition, in the event that the maturity of the Senior Notes or the
Revolving Credit Facility is accelerated as a result of such an event of
default, an event of default will occur under the Senior Discount Notes of
Metallurg Holdings. As all of Metallurg's outstanding common stock has been
pledged as collateral for the Metallurg Holdings' obligations under the Senior
Discount Notes, if Metallurg is unable to make its interest payments when due,
it could lead to a foreclosure on Metallurg's common stock.
Metallurg is highly leveraged. Interest payments of $5.5 million are due in
both June and December 2004 on the Senior Notes. In addition, Metallurg, Inc.'s
Revolving Credit Facility, as described below, with an outstanding amount of
$20.8 million at March 31, 2004, consisting of outstanding letters of credit, is
scheduled to expire on October 29, 2004. Metallurg is currently in compliance
with the terms of the Revolving Credit Facility, as amended. In the event
Metallurg does not succeed in its restructuring efforts, described below, it is
likely that liquidity will be inadequate to enable Metallurg to continue to make
the interest payments required with respect to the Senior Notes and repay the
Revolving Credit Facility.
18
In March 2004, Metallurg, Inc. retained Compass Advisers, LLP, as financial
advisors, and Paul, Weiss, Rifkind, Wharton & Garrison, LLP, as legal counsel,
to assist the Company in analyzing and evaluating possible transactions for the
principal purpose of refinancing the Revolving Credit Facility and restructuring
the balance sheets of the Company and Metallurg. Metallurg is currently engaged
in negotiations with potential lenders regarding a refinancing of the Revolving
Credit Facility. The Company neither expresses any opinion nor gives any
assurances whatsoever regarding whether, when, or on what terms it will be able
to refinance the Revolving Credit Facility or complete any broader restructuring
of its or Metallurg's respective balance sheets. Management believes that the
refinancing and restructuring is essential to the long-term viability of the
Company. If the Company and Metallurg are not able to reach agreements that
favorably resolve these issues, the Company likely will not have adequate
liquidity to enable it to make the interest payments required with respect to
its Senior Discount Notes, and Metallurg likely will not have adequate liquidity
to enable it to make the interest payments required with respect to its Senior
Notes, or to repay the Revolving Credit Facility. In such event, the Company and
Metallurg may have to resort to certain other measures to resolve its liquidity
issues, including having the Company or Metallurg, or both companies, ultimately
seek the protection afforded under the United States Bankruptcy Code.
Furthermore, any negotiated refinancing of the Revolving Credit Facility or
negotiated restructuring of the respective balance sheets of the Company and
Metallurg may require that the Company or Metallurg, or both such companies,
seek the protection afforded under the reorganization provisions of the United
States Bankruptcy Code.
The consolidated financial statements do not include any adjustments, which
could be significant, relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should Metallurg be unable to continue as a going concern.
Cash Flow Information
Cash Flows from Operating Activities - Cash used in operating activities
was $14.6 million for the quarter ended March 31, 2004 compared to $7.6 million
for the quarter ended March 31, 2003. In 2004, the net loss, an increase in
working capital and increased payments for environmental and restructuring
charges contributed to the cash used in operating activities.
Cash Flows from Investing Activities - Net cash provided by investing
activities was $6.6 million for the quarter ended March 31, 2004, compared to
$0.1 million for the quarter ended March 31, 2003. The net cash received from
the sale of discontinued operations was $8.3 million in the quarter ended March
31, 2004.
Cash Flows from Financing Activities - Cash provided by financing
activities was $2.5 million for the quarter ended March 31, 2004, compared to
cash used in financing activities of $0.7 million for the quarter ended March
31, 2003. An affiliate loaned Metallurg $8.0 million to facilitate the purchase
of raw material for the vanadium plant in the quarter ended March 31, 2004,
which was offset by cash deposited to collateralize the Revolving Credit
Facility.
Revolving Credit Facility - Metallurg, Inc., SMC and certain of Metallurg,
Inc.'s other subsidiaries (the "Borrowers") have a credit facility with certain
financial institutions led by Fleet National Bank as agent (the "Revolving
Credit Facility"), which expires in October 2004. This facility, as amended in
October 2003 and in January 2004, provides the Borrowers with up to $27.0
million for working capital requirements and general corporate purposes.
Interest is charged at a rate per annum equal to (i) LIBOR, plus 2.0% - 3.5% or
(ii) Prime, plus up to 1.0%, based on the performance of Metallurg, Inc. and
certain of its subsidiaries (the "North American Group"), as defined in the
Revolving Credit Facility. Interest rates on amounts borrowed are adjusted
quarterly, based on the North American Group's fixed charge coverage ratio. The
Borrowers are required to pay a fee of 0.25% - 0.50% per annum on the unused
portion of the facility. The total amount the Borrowers may borrow at any time
is limited to a borrowing base calculation that is based on eligible accounts
receivable, inventory and special cash collateral, as defined. At March 31,
2004, there were no borrowings under this facility; however, outstanding letters
of credit totaled $20.8 million. In addition, the Borrowers had unused borrowing
capacity of $2.2 million under this facility. On January 14, 2004, the Revolving
Credit Facility was amended and the minimum liquidity covenant was eliminated.
In its place, Metallurg was required to deposit a total of $7.0 million into a
restricted cash account as additional security for the Revolving Credit
Facility.
19
LSM Revolving Credit Facilities - LSM has revolving credit facilities with
Barclays Bank plc ("Barclays") and HSBC Bank plc ("HSBC"). These facilities
provide LSM with up to 'L'5.5 million ($10.0 million) of borrowings,
'L'40.3 million ($73.6 million) of foreign exchange contracts and options
and 'L'4.0 million ($7.3 million) for other ancillary banking arrangements,
including bank guarantees. Borrowings under these facilities are secured by the
assets of LSM and are repayable on demand. Outstanding loans under these
facilities bear interest at rates of LIBOR plus 1.5% to 1.75%. At March 31,
2004, there were no borrowings under these facilities. LSM's Norwegian
subsidiary has an unsecured overdraft facility of NOK 15.0 million ($2.2
million). Borrowings under this facility bear interest at a rate of NIBOR plus
1.25%. At March 31, 2004, there was NOK 12.3 million ($1.8 million) outstanding
under this facility.
Other - CIF maintains short-term secured and unsecured borrowing
arrangements with various banks totaling $4.5 million. Borrowings under these
arrangements aggregated $4.4 million at March 31, 2004 at a weighted-average
interest rate of 9.4%.
Capital Expenditures
Metallurg invested $0.3 million in capital projects during the quarter
ended March 31, 2004. Metallurg's capital expenditures include projects related
to improving Metallurg's operations, productivity improvements, replacement
projects and ongoing environmental requirements (which are in addition to
expenditures discussed in "Environmental Remediation Costs" below). Capital
expenditures are projected to total approximately $3.9 million for the year
ended December 31, 2004, approximately half of which Metallurg believes will
result in decreased costs of production, improved efficiency and expanded
production capacities. The remaining planned capital expenditures are primarily
for replacement and repairs of existing facilities. Although Metallurg has
projected these items for the year ended December 31, 2004, Metallurg has not
committed purchases to vendors for all of these projects, as some projects
remain contingent on final approvals and other conditions and the actual timing
of expenditures may extend into 2005. Metallurg believes that these projects
will be funded through existing and future internally generated cash and credit
lines.
Environmental Remediation Costs
Losses associated with environmental remediation obligations are accrued
when such losses are deemed probable and reasonably estimable. Such accruals
generally are recognized no later than the completion of the remedial
feasibility study and are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental remediation
obligations are generally not discounted to their present value. During the
quarter ended March 31, 2004, Metallurg expended $1.0 million for environmental
remediation.
In 1997, SMC entered into settlement agreements with various environmental
regulatory authorities with regard to all of the significant environmental
remediation liabilities of which it is aware. Pursuant to these agreements, SMC
has agreed to perform environmental remediation, which, as of March 31, 2004,
had an estimated net cost of completion of $24.5 million. Of this amount,
Metallurg expects to spend $1.9 million in the remaining three quarters of 2004,
$4.9 million in 2005 and $3.0 million in 2006. These amounts have been accrued
for in prior years and are reflected in Metallurg's balance sheet liabilities.
While its remediation obligations and other environmental costs, in the
aggregate, will reduce its liquidity, Metallurg believes its cash balance, cash
from operations and cash available under its credit facilities are sufficient to
fund its current and anticipated future requirements for environmental
expenditures.
20
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Refer to the Market Risk section of Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's annual
report on Form 10-K for the year ended December 31, 2003, which is incorporated
by reference herein.
ITEM 4 - CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision of its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
of the Securities and Exchange Act of 1934 (the "Exchange Act")) are effective
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in its
Exchange Act filings.
There have been no significant changes in the Company's internal control
over financial reporting during the quarter covered by this report that have
materially affected, or are reasonable likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
Metallurg Holdings, Inc. filed a Report on Form 8-K under Item 2, and
provided financial statements pursuant to Item 7, with the Securities
and Exchange Commission on March 23, 2004, reporting the sale of its
South African sales office to a group of investors including local
management.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on June 16, 2004 on its
behalf by the undersigned thereunto duly authorized.
METALLURG HOLDINGS, INC.
By: /s/ Arthur R. Spector
------------------------------------
Arthur R. Spector
Executive Vice President
(Principal Financial Officer and
Principal Accounting Officer)
22
STATEMENT OF DIFFERENCES
The British pound sterling sign shall be expressed as..................... 'L'