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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 June 30, 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 Consolidated Statements of Operations for the Quarters and Two Quarters
Ended June 30, 2004 and 2003............................................................. 2
Condensed Consolidated Balance Sheets at June 30, 2004 and
December 31, 2003 ....................................................................... 3
Condensed Consolidated Statements of Cash Flows for the Two Quarters Ended June
30, 2004 and 2003........................................................................ 4
Notes to Condensed Unaudited Consolidated Financial Statements........................... 5-15
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................ 16-24
Item 3 - Quantitative and Qualitative Disclosure of Market Risk................................... 24
Item 4 - Controls and Procedures.................................................................. 25
Item 5 - Other information........................................................................ 25
Part II OTHER INFORMATION:
Item 6 - Exhibits and Reports on Form 8-K......................................................... 25
Signature Page.................................................................................... 26
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 Two Quarters Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
---- ---- ---- ----
Sales..................................................... $88,041 $70,970 $163,460 $140,961
Commission income......................................... 67 134 198 288
------- ------- -------- --------
Total revenue.......................................... 88,108 71,104 163,658 141,249
------- ------- -------- --------
Operating costs and expenses:
Cost of sales.......................................... 76,700 64,604 144,934 127,244
Selling, general and administrative expenses........... 8,210 8,017 15,177 15,605
Restructuring charges, net ............................ 500 -- 597 --
------- ------- -------- --------
Total operating costs and expenses .................... 85,410 72,621 160,708 142,849
------- ------- -------- --------
Operating income (loss) ............................... 2,698 (1,517) 2,950 (1,600)
Other income (expense):
Other income, net...................................... 39 12 87 42
Interest expense, net.................................. (4,847) (4,539) (9,083) (9,041)
------- ------- -------- --------
Loss before income tax provision (benefit), minority
interest and discontinued operations................. (2,110) (6,044) (6,046) (10,599)
Income tax provision (benefit) ........................... 690 (211) 786 (6)
------- ------- -------- --------
Loss before minority interest and discontinued
operations .......................................... (2,800) (5,833) (6,832) (10,593)
Minority interest ........................................ (37) (9) 2 (33)
------- ------- -------- --------
Loss from continuing operations ....................... (2,837) (5,842) (6,830) (10,626)
Income (loss) from discontinued operations ............... -- 573 (824) 1,060
------- ------- -------- --------
Net loss .............................................. (2,837) (5,269) (7,654) (9,566)
Other comprehensive (loss) income:
Foreign currency translation adjustment................ (236) 1,315 2,877 1,286
Deferred (loss) gain on derivatives, net............... (234) 66 633 39
------- ------- -------- --------
Comprehensive loss .................................... $(3,307) $(3,888) $ (4,144) $ (8,241)
======= ======= ======== ========
See notes to condensed unaudited consolidated financial statements.
2
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2004 2003
-------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................................................ $ 4,327 $ 18,557
Restricted cash.......................................................... 7,000 --
Accounts receivable, net................................................. 47,434 37,771
Inventories.............................................................. 62,658 44,457
Prepaid expenses and other current assets................................ 11,466 8,107
Discontinued operations - current assets................................. -- 14,738
-------- --------
Total current assets................................................... 132,885 123,630
Property, plant and equipment, net.......................................... 52,027 54,324
Other assets................................................................ 21,765 20,333
Discontinued operations - non-current assets................................ -- 1,948
-------- --------
Total.................................................................. $206,677 $200,235
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Short-term debt and current portion of long-term debt.................... $ 24,902 $ 8,315
Accounts payable......................................................... 29,716 25,808
Accrued expenses......................................................... 13,336 12,946
Other current liabilities................................................ 3,918 3,340
Discontinued operations - current liabilities............................ -- 9,843
-------- --------
Total current liabilities.............................................. 71,872 60,252
-------- --------
Long-term Liabilities:
Long-term debt........................................................... 160,479 160,357
Accrued pension liabilities.............................................. 29,454 29,543
Environmental liabilities, net........................................... 21,610 22,678
Other liabilities........................................................ 1,010 1,000
Discontinued operations - non-current liabilities........................ -- 218
-------- --------
Total long-term liabilities............................................ 212,553 213,796
-------- --------
Total liabilities...................................................... 284,425 274,048
-------- --------
Minority Interest........................................................... 465 256
-------- --------
Shareholders' Deficit:
Additional paid-in capital............................................... 59,911 59,911
Accumulated other comprehensive loss..................................... (21,734) (25,244)
Retained deficit......................................................... (116,390) (108,736)
-------- --------
Total shareholders' deficit............................................ (78,213) (74,069)
-------- --------
Total.................................................................. $206,677 $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)
Two Quarters Ended
June 30,
-------------------------
2004 2003
-------- --------
Cash Flows from Operating Activities:
Net loss ......................................................................... $ (7,654) $ (9,566)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................. 3,848 4,005
Deferred income taxes ......................................................... (421) (587)
Restructuring charges.......................................................... 597 --
Loss on sale of discontinued operations........................................ 1,162 --
Interest accretion on Senior Discount Notes.................................... -- 2,409
Change in operating assets and liabilities:
Increase in accounts receivable .............................................. (9,371) (1,886)
Increase in inventories ...................................................... (18,030) (6,398)
Increase in other current assets ............................................. (3,100) (1,019)
Increase in accounts payable and accrued expenses ............................ 7,273 760
Environmental payments ....................................................... (1,613) (1,247)
Restructuring payments ....................................................... (2,048) (750)
Other assets and liabilities, net ............................................ (18) 1,917
Discontinued operations - operating activities ................................... (719) (601)
-------- --------
Net cash used in operating activities ...................................... (30,094) (12,963)
-------- --------
Cash Flows from Investing Activities:
Additions to property, plant and equipment ....................................... (765) (1,745)
Proceeds from sale of discontinued operation...................................... 8,275 --
Other, net ....................................................................... (1,370) 1,018
Discontinued operations - investing activities ................................... 33 (170)
-------- --------
Net cash provided by (used in) investing activities ........................ 6,173 (897)
-------- --------
Cash Flows from Financing Activities:
Repayment of long-term debt, net ................................................. (417) (49)
Borrowings of short-term debt, net ............................................... 15,732 1,507
Restricted cash deposited to collateralize Revolving Credit Facility.............. (7,000) --
Discontinued operations - financing activities ................................... 1,139 232
-------- --------
Net cash provided by financing activities .................................. 9,454 1,690
-------- --------
Effects of exchange rate changes on cash and cash equivalents .................... 237 117
-------- --------
Net decrease in cash and cash equivalents......................................... (14,230) (12,053)
Cash and cash equivalents - beginning of period................................... 18,557 24,256
-------- --------
Cash and cash equivalents - end of period......................................... $ 4,327 $ 12,203
======== ========
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
In its annual report on Form 10-K dated December 31, 2003 and in its
quarterly report on Form 10-Q dated March 31, 2004, Metallurg Holdings, Inc.
("Metallurg Holdings") and its majority-owned subsidiaries (collectively, the
"Company") disclosed factors that might have precluded the Company from
continuing as a going concern. On August 13, 2004, the Company entered into a
new financing agreement to replace the existing facility with Fleet National
Bank and new term loans that provide additional liquidity for working capital
purposes and to fund its interest payments on its $121 million of 12 3/4% Senior
Discount Notes due 2008 (the "Senior Discount Notes") due July 15, 2004, and
subject to certain conditions, the interest payment due January 15, 2005. See
"Note 13. Subsequent Events". The Company believes that the new facility, along
with anticipated improved operating results as a result of recent restructuring
efforts, will provide adequate liquidity for the Company to meet its obligations
as they come due through the second quarter of 2005. At this time, Metallurg
Holdings does not have access to sufficient funds to make the interest payment
due July 15, 2005 on its Senior Discount Notes. It is anticipated that Metallurg
Holdings will pursue alternative transactions to meet such interest payment
obligations. No assurances can be given that such a transaction can be
completed.
In addition, on August 12, 2004, a related party bought a $1,077,000 note
from Metallurg Holdings with the proceeds of the interest payment due to them on
July 15, 2004 as a holder of Senior Discount Notes. This note will be classified
as long-term debt and is payable on July 15, 2008 along with interest accrued at
12 3/4% per annum.
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 annual report on Form 10-K for the year ended December 31,
2003.
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.
5
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
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):
Two Quarters Ended
June 30,
----------------------
2004 2003
---- ----
Net loss, as reported.......................... $(7,654) $(9,566)
Less: compensation expense for option awards
determined by the fair value based method,
net of related tax effects .................. 21 28
------- -------
Pro forma net loss......................... $(7,675) $(9,594)
======= =======
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):
Two Quarters ended
June 30,
-------------------------
2004 2003
------ -------
Results of operations:
Total revenue..................................... $9,140 $26,386
Income before income tax provision................ 509 1,663
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
=======
6
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
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".
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.
7
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
5. Segments and Related Information - (Continued)
Intersegment Consolidated
LSM SMC CIF Other Eliminations Totals
--- --- --- ----- ------------ ------
Quarter Ended June 30, 2004
Revenue from external customers.... $41,265 $36,023 $8,513 $2,307 $88,108
Intergroup revenue................. 8,765 610 2,643 2,452 $(14,470) --
Income tax provision (benefit) .... 543 450 136 (439) -- 690
Net income (loss).................. 519 1,509 378 (1,110) (4,133) (2,837)
Intersegment Consolidated
LSM SMC CIF Other Eliminations Totals
--- --- --- ----- ------------ ------
Quarter Ended June 30, 2003
Revenue from external customers.... $35,273 $24,517 $3,762 $7,552 $71,104
Intergroup revenue................. 6,433 1,055 3,998 549 $(12,035) --
Income tax provision (benefit)..... 34 (767) (127) 649 -- (211)
Net loss .......................... (2) (85) (339) (3,955) (888) (5,269)
Intersegment Consolidated
LSM SMC CIF Other Eliminations Totals
--- --- --- ----- ------------ ------
Two Quarters Ended
June 30, 2004
Revenue from external customers.... $76,699 $65,206 $15,451 $6,302 $163,658
Intergroup revenue................. 16,348 1,879 5,545 4,480 $(28,252) --
Income tax provision (benefit) .... 632 852 171 (869) -- 786
Net income (loss).................. 832 1,246 592 (2,496) (7,828) (7,654)
Intersegment Consolidated
LSM SMC CIF Other Eliminations Totals
--- --- --- ----- ------------ ------
Two Quarters Ended
June 30, 2003
Revenue from external customers.... $74,059 $45,901 $7,931 $13,358 $141,249
Intergroup revenue................. 13,346 1,624 6,912 900 $(22,782) --
Income tax provision (benefit) .... 151 (760) -- 603 -- (6)
Net income (loss).................. 188 (349) (42) (6,208) (3,155) (9,566)
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. An additional amount
of $219,000 was recorded in 2004 for the severance costs of an additional four
employees. In 2004, LSM announced a restructuring at its aluminum powder
division. Eleven employees were terminated and $97,000 was recorded as
restructuring expense. Also in 2004, LSM announced the closure of its aluminum
production facility in Norway. At this facility, 28 employees were terminated
and severance costs of $291,000 were recorded as restructuring expense. An
additional nine employees are expected to be terminated in the third quarter at
the Norwegian facility.
8
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
6. Restructuring and Asset Impairment Charges - (Continued)
In a continuing effort to improve Metallurg'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 Metallurg's Canadian operations
into the New Jersey operations of SMC. As a result of this plan, Metallurg's
Canadian subsidiary recognized a restructuring charge of $417,000 for severance
costs of seven employees. Of this amount, $407,000 has been paid through June
30, 2004 and the remaining $10,000 has been reversed as a change in estimate.
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. The entire amount has been
paid through June 30, 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, $1,975,000 has been paid through June 30, 2004.
A summary of the restructuring and asset impairment charges is as follows
(in thousands):
Utilization through
June 30, 2004 Balance at
Total ---------------------- June 30,
Provision Cash Non-cash 2004
--------- ---- -------- ----
LSM:
Severance and other employee costs........ $4,249 $(3,903) $ (28) $318
Write-down of plant and equipment......... 6,706 -- (6,706) --
------- ------- ------- ----
10,955 (3,903) (6,734) 318
Other:
Severance and other employee costs........ 2,526 (2,502) (10) 14
------- ------- ------- ----
Total................................ $13,481 $(6,405) $(6,744) $332
======= ======= ======= ====
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 collateral for the Revolving Credit Facility. In connection with
the new financing described in Note 13, the Company is no longer required to
maintain a restricted cash balance.
8. Inventories
Inventories consist of the following (in thousands):
June 30, December 31,
2004 2003
-------- ------------
Raw materials........................... $17,431 $ 8,855
Work in process......................... 848 467
Finished goods.......................... 43,024 33,762
Other................................... 1,355 1,373
------- -------
Total.............................. $62,658 $44,457
======= =======
9
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
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 June 30, 2004 and 2003, respectively (in thousands):
Quarters Ended Two Quarters Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
---- ---- ---- ----
Components of net periodic benefit cost:
Service cost................................ $ 815 $ 748 $ 1,643 $ 1,442
Interest cost............................... 1,844 1,809 3,719 3,491
Expected return on plan assets.............. (1,846) (1,549) (3,723) (2,991)
Net amortization and deferral............... 647 836 1,306 1,608
------- ------- ------- -------
Total net periodic benefit cost.......... $ 1,460 $ 1,844 $ 2,945 $ 3,550
======= ======= ======= =======
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 June 30, 2004, $2,886,000 of contributions have been made.
The Company presently anticipates contributing an additional $3,098,000 to fund
its pension plan in 2004 for a total of $5,984,000.
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 subordinated loan so that SMC could 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 June 30, 2004
(In thousands)
Combined
Combined Non-
Metallurg, Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---- ------------ ------------ ------------ ------------
Total revenue.................................. $37,974 $64,151 $(14,017) $88,108
------- ------- -------- -------
Operating costs and expenses:
Cost of sales............................... 33,445 57,097 (13,842) 76,700
Selling, general and administrative
expenses ................................. $ 1,752 2,242 4,210 -- 8,204
Restructuring charges....................... -- -- 500 -- 500
-------- ------ ----- ------- -------
Total operating costs and expenses.......... 1,752 35,687 61,807 (13,842) 85,404
-------- ------ ----- ------- -------
Operating (loss) income..................... (1,752) 2,287 2,344 (175) 2,704
Other income (expense):
Other income, net........................... -- -- 39 -- 39
Interest expense, net....................... (2,542) (68) (861) -- (3,471)
Equity in earnings of subsidiaries.......... 2,444 617 897 (3,958) --
-------- ------ ----- ------- -------
(Loss) income before income tax
(benefit) provision and minority
interest.................................. (1,850) 2,836 2,419 (4,133) (728)
Income tax (benefit) provision................. (395) 439 646 -- 690
-------- ------ ----- ------- -------
(Loss) income before minority interest...... (1,455) 2,397 1,773 (4,133) (1,418)
Minority interest.............................. -- -- (37) -- (37)
-------- ------ ----- ------- -------
Net (loss) income .......................... (1,455) 2,397 1,736 (4,133) (1,455)
Other comprehensive income (loss):
Foreign currency translation adjustment..... (236) (236) (452) 688 (236)
Deferred gain on derivatives, net........... (234) (234) (468) 702 (234)
-------- ------ ----- ------- -------
Comprehensive (loss) income................ $(1,925) $1,927 $ 816 $(2,743) $(1,925)
======== ====== ===== ======= =======
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 Statement of Operations (Unaudited)
Two Quarters Ended June 30, 2004
(In thousands)
Combined
Combined Non-
Metallurg, Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---- ------------ ------------ ------------ ------------
Total revenue................................. $70,708 $119,787 $(26,837) $163,658
------- ------- -------- --------
Operating costs and expenses:
Cost of sales.............................. 63,674 107,503 (26,243) 144,934
Selling, general and administrative
expenses ................................ $ 3,045 4,069 8,054 -- 15,168
Restructuring charges...................... -- -- 597 -- 597
------- ------- ------- -------- --------
Total operating costs and expenses......... 3,045 67,743 116,154 (26,243) 160,699
------- ------- ------- -------- --------
Operating (loss) income.................... (3,045) 2,965 3,633 (594) 2,959
Other income (expense):
Other income, net.......................... -- -- 87 -- 87
Interest (expense) income, net............. (4,735) 66 (1,723) -- (6,392)
Equity in earnings of subsidiaries......... 2,003 3,469 1,762 (7,234) --
------- ------- ------- -------- --------
(Loss) income before income tax
(benefit) provision and minority
interest................................. (5,777) 6,500 3,759 (7,828) (3,346)
------- ------- ------- -------- --------
Income tax (benefit) provision................ (853) 935 704 -- 786
(Loss) income before minority interest..... (4,924) 5,565 3,055 (7,828) (4,132)
Minority interest............................. -- -- 2 -- 2
------- ------- ------- -------- --------
(Loss) income before discontinued
operations............................... (4,924) 5,565 3,057 (7,828) (4,130)
Discontinued operations....................... (30) (3,577) 2,783 -- (824)
------- ------- ------- -------- --------
Net (loss) income ......................... (4,954) 1,988 5,840 (7,828) (4,954)
Other comprehensive income (loss):
Foreign currency translation adjustment.... 2,877 2,877 5,291 (8,168) 2,877
Deferred gain on derivatives, net.......... 633 633 1,266 (1,899) 633
------- ------- ------- -------- --------
Comprehensive (loss) income............... $(1,444) $ 5,498 $12,397 $(17,895) $ (1,444)
======= ======= ======= ======== ========
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 Balance Sheet (Unaudited)
June 30, 2004
(In thousands)
Combined
Combined Non-
Metallurg, Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents............ $ 1,909 $ 662 $ 1,438 $ 4,009
Restricted cash...................... 7,000 -- -- 7,000
Accounts receivable, net............. 27,778 28,024 48,539 $ (56,837) 47,504
Inventories.......................... -- 34,338 29,095 (775) 62,658
Prepaid expenses and other current
assets............................. 2,479 2,970 8,849 (2,948) 11,350
--------- --------- --------- --------- ---------
Total current assets............. 39,166 65,994 87,921 (60,560) 132,521
Investments - intergroup................ 50,704 2,087 31,779 (84,570) --
Property, plant and equipment, net...... 144 19,901 31,982 -- 52,027
Other assets............................ 11,028 40,772 10,576 (40,965) 21,411
--------- --------- --------- --------- ---------
Total............................ $ 101,042 $ 128,754 $ 162,258 $(186,095) $ 205,959
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDER'S
(DEFICIT) EQUITY
Current Liabilities:
Short-term debt and current portion of
long-term debt..................... $ 11,000 $ 13,902 $ 24,902
Accounts payable..................... 8,993 $ 48,014 29,499 $ (56,837) 29,669
Accrued expenses..................... 1,576 5,205 3,844 -- 10,625
Other current liabilities............ -- 5,366 1,492 (2,948) 3,910
--------- --------- --------- --------- ---------
Total current liabilities........ 21,569 58,585 48,737 (59,785) 69,106
--------- --------- --------- --------- ---------
Long-term Liabilities:
Long-term debt....................... 100,000 -- 19,004 -- 119,004
Accrued pension liabilities.......... 5,863 712 22,879 -- 29,454
Environmental liabilities, net....... -- 21,554 56 -- 21,610
Other liabilities.................... 8,300 -- 33,675 (40,965) 1,010
--------- --------- --------- --------- ---------
Total long-term liabilities...... 114,163 22,266 75,614 (40,965) 171,078
--------- --------- --------- --------- ---------
Total liabilities................ 135,732 80,851 124,351 (100,750) 240,184
--------- --------- --------- --------- ---------
Minority Interest....................... -- -- 465 -- 465
--------- --------- --------- --------- ---------
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. (22,137) (18,648) (34,490) 53,138 (22,137)
Accumulated deficit.................. (56,718) (62,123) (44,277) 106,400 (56,718)
--------- --------- --------- --------- ---------
Total shareholder's (deficit)
equity.......................... (34,690) 47,903 37,442 (85,345) (34,690)
--------- --------- --------- --------- ---------
Total............................ $ 101,042 $ 128,754 $ 162,258 $(186,095) $ 205,959
========= ========= ========= ========= =========
13
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)
Two Quarters Ended June 30, 2004
(In thousands)
Combined
Combined Non-
Metallurg, Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------- ------------ ------------ ------------
Cash Flows from Operating Activities.............. $(8,415) $(8,243) $(11,941) $(28,599)
------- ------- -------- --------
Cash Flows from Investing Activities:
Additions to property, plant and equipment..... (64) (225) (476) (765)
Other, net..................................... -- -- 6,938 6,938
------- ------- -------- --------
Net cash (used in) provided by investing
activities................................. (64) (225) 6,462 6,173
------- ------- -------- --------
Cash Flows from Financing Activities:
Intergroup (repayments) borrowings............. (6,527) 16,115 (9,588) --
Repayment of long-term debt, net............... -- -- (417) (417)
Borrowings of short-term debt, net............. 11,000 -- 4,732 15,732
Dividends received (paid)...................... 8,000 (7,730) (270) --
Restricted cash deposited to collateralize
Revolving Credit Facility................... (7,000) -- -- (7,000)
Other, net..................................... (1,494) -- 1,139 (355)
------- ------- -------- --------
Net cash provided by (used in)
financing activities...................... 3,979 8,385 (4,404) 7,960
------- ------- -------- --------
Effects of exchange rate changes on cash and cash
equivalents.................................... -- -- 237 237
------- ------- -------- --------
Net decrease in cash and cash equivalents......... (4,500) (83) (9,646) (14,229)
Cash and cash equivalents -
beginning of period............................ 6,409 745 11,084 18,238
------- ------- -------- --------
Cash and cash equivalents -
End of period.................................. $ 1,909 $ 662 $ 1,438 $ 4,009
======= ======= ======= ========
14
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
13. Subsequent Events
On August 13, 2004, Metallurg Holdings and Metallurg, Inc. entered into a
financing agreement maturing on August 31, 2007 with MHR Institutional Partners
II LP, as agent ("MHR"). This financing agreement, described below, replaces the
existing facility with Fleet National Bank that would have otherwise expired on
October 29, 2004. The financing agreement also requires Metallurg to maintain
a minimum borrowing base and achieve minimum Consolidated EBITDA, as defined.
Facility A with Metallurg - This financing agreement initially provides
Metallurg, Inc. a $10 million term loan for working capital and an approximately
$21 million credit facility either to support existing letters of credit issued
by Fleet National Bank or to provide new letters of credit to collateralize
SMC's environmental remediation obligations. Metallurg is also negotiating with
TRC Companies, Inc. ("TRC") and the New Jersey Department of Environmental
Protection for TRC to assume approximately $15 million of Metallurg's
environmental liabilities and indemnify Metallurg of such liabilities. The new
financing agreement provides that, upon completion of this agreement with TRC,
MHR will provide Metallurg with a second term loan in the amount of $15 million
and reduce the credit facility for letters of credit to $6 million. Total
transaction costs, including commitment and closing fees paid to MHR of $2.7
million, will be capitalized and amortized over three years, along with other
transaction costs. Interest will accrue at a rate of 20% per annum on all
outstanding balances, of which one-half will be paid in cash monthly in arrears
and one-half will be paid-in-kind by being added to the outstanding principal
balances on a monthly basis. In addition, Metallurg will pay MHR a monthly
letter of credit commitment fee of 4% per annum on all outstanding letters of
credit, a facility maintenance fee of $620,000 on December 31, 2004 and $310,000
on each June 30th and December 31st thereafter, and a monthly monitoring fee of
$40,000 in 2004, $30,000 in 2005 and $20,000 thereafter. Mandatory quarterly
repayments begin on October 1, 2005 in the amount of $1,000,000 and voluntary
repayments may be made beginning July 31, 2005 along with prepayment penalties.
Facility A is fully guaranteed by all of the assets of Metallurg, Inc., SMC,
Metallurg Holdings Corporation, Metallurg International Resources, LLC and
Metallurg Services, Inc., and partially guaranteed by Metallurg, Inc.'s major
subsidiaries in the U.K. and Brazil.
Facility B with Metallurg Holdings - The financing agreement also provides
Metallurg Holdings with two term loans. The first term loan in the amount of
$1,675,000 was made on the closing date to be used to pay interest owed as of
July 15, 2004 on the Senior Discount Notes. An additional amount of $1,600,000
reduced by dividends paid by Metallurg to Metallurg Holdings, up to a maximum of
$787,500, will be made by January 15, 2005 to pay a portion of the interest due
on that date on the Senior Discount Notes. At the closing of the financing
agreement, Metallurg Holdings paid MHR total transaction fees of $75,000 that
will be capitalized and amortized over three years. An additional fee of $37,500
will be made upon the funding of the second term loan and will be amortized over
2 1/2 years. Interest will accrue at a rate of 20% per annum on all outstanding
balances will be paid-in-kind by being added to the outstanding principal
balances on a monthly basis. In addition, Metallurg Holdings will pay MHR a
facility maintenance fee of $49,250 on December 31, 2004 and $24,625 on each
June 30th and December 31st thereafter. This fee will be paid-in-kind by being
added to the outstanding principal balances on a monthly basis. Facility B is
fully guaranteed by all of the assets of Metallurg, Inc.
As an additional requirement of the new financing agreement, the terms of
the $8 million subordinated loan, provided in February 2004 by related parties,
were amended. Principal payments have been deferred until such time as all
amounts under the new financing agreement have been repaid in full, and interest
on the loan is now paid-in-kind and added to the principal balance.
In addition, on August 12, 2004, a related party bought a $1,077,000 note
from Metallurg Holdings with the proceeds of the interest payment due to them on
July 15, 2004 as a holder of Senior Discount Notes. This note will be classified
as long-term debt and is payable on July 15, 2008 along with interest accrued at
12 3/4% per annum.
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed under the caption "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 the Company's business.
- The Company's dependence on foreign customers. The Company 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 the Company's competitive standing. Revenues and earnings
from outside the U.S. could be materially affected by exchange rate
fluctuations.
- The ability to complete a refinancing of the financing agreement with MHR
or otherwise complete a restructuring of its balance sheet, in either
case 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 the Company'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 the Company'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 the Company'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.
16
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.
Overall operating conditions in each of these sectors have remained very
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 half 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 2004, the Company started
the closure process of its master alloy facility in Norway (Hydelko) to reduce
excess capacity in the industry and expects to be completed with this process in
the third quarter. 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, the Company 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 2004 to levels
not seen since the mid 1990's. In the first quarter of 2004, the Company 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 should enhance
profitability during 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 half of 2004, prices for titanium and chrome products increased
significantly due to perceived supply shortages and higher worldwide demand for
these metals.
17
On August 13, 2004, the Company entered into a new financing agreement to
replace the existing facility with Fleet National Bank, to provide additional
working capital and to pay outstanding interest on its Senior Discount Notes.
The Company believes that the new financing agreement, along with anticipated
improved operations after recent restructuring efforts, will provide adequate
liquidity for the Company to meet its obligations as they come due through the
second quarter of 2005. At this time Metallurg Holdings does not have access to
sufficient funds to make the interest payment due July 15, 2005 on its Senior
Discount Notes. It is anticipated that Metallurg Holdings will pursue
alternative transactions to meet such interest payment obligations. No
assurances can be given that such a transaction can be completed.
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 Operation" to the Company's
Consolidated Financial Statements.
Results of Operations - The Quarter Ended June 30, 2004 Compared to the Quarter
Ended June 30, 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 June 30, 2004
Total revenue....................... $50,030 $36,633 $11,156 $4,759 $(14,470) $88,108
Gross profit........................ 5,250 4,573 1,349 411 (175) 11,408
SG&A................................ 3,301 2,214 563 2,132 -- 8,210
Operating income (loss)............. 1,439 2,359 786 (1,711) (175) 2,698
Interest expense, net............... (360) (400) (272) (3,815) -- (4,847)
Income tax provision (benefit)...... 543 450 136 (439) -- 690
Net income (loss)................... 519 1,509 378 (1,110) (4,133) (2,837)
Quarter Ended June 30, 2003
Total revenue....................... $41,706 $25,572 $7,760 $8,101 $(12,035) $71,104
Gross profit........................ 4,188 1,073 228 950 61 6,500
SG&A................................ 3,744 1,805 496 1,972 -- 8,017
Operating income (loss)............. 444 (732) (268) (1,022) 61 (1,517)
Interest expense, net............... (415) (120) (198) (3,806) -- (4,539)
Income tax provision (benefit)...... 34 (767) (127) 649 -- (211)
Net loss ........................... (2) (85) (339) (3,955) (888) (5,269)
18
Total Revenue
Consolidated total revenue increased by $17.0 million (24%) in the quarter
ended June 30, 2004.
LSM revenue was $8.3 million (20%) higher than the quarter ended June 30,
2003. Sales of aluminum products increased by $0.5 million, as a result of a 10%
increase in sales prices offset by a 7% decrease in sales volume. Sales of
chrome products increased by $0.9 million as a result of an 11% increase in
sales volume. Sales of nickel products rose by $1.4 million due to both higher
sales volume and prices. Sales of ferrotitanium were $5.3 million higher, due to
a 105% increase in average unit selling prices.
SMC revenue was $11.1 million (43%) higher than the quarter ended June 30,
2003. Sales of aluminum products increased by $2.3 million as a result of a 10%
increase in shipments and a 16% increase in selling prices. Sales of vanadium
products, produced in SMC's Ohio plant, increased by $6.1 million primarily as a
result of both increased average selling prices and sales volume.
CIF revenue was $3.4 million (44%) higher than the quarter ended June 30,
2003. Sales of aluminum master alloys increased by $1.9 million, primarily as a
result of a 36% increase in selling volumes. Sales of niobium products rose by
$1.0 million, due to an increase in demand.
Gross Profit
Consolidated gross profit increased to $11.4 million (12.9% of total
revenue) for the quarter ended June 30, 2004 from $6.5 million (9.1% of total
revenue) for the quarter ended June 30, 2003.
LSM gross profit was $1.1 million (25%) higher than the quarter ended June
30, 2003. Gross profits from aluminum products decreased by $1.3 million,
despite higher selling prices, due to decreased volumes and higher unit costs.
Gross profit from ferrotitanium improved by $0.8 million as a result of higher
prices.
SMC gross profit was $3.5 million (326%) higher than the quarter ended
June 30, 2003. Gross profit from vanadium products improved by $3.0 million as a
result of an increases in sales volume and average selling prices, partially
offset by the increase in unit costs. Gross profit from aluminum products rose
by $0.2 million, due to increased shipments.
CIF gross profit increased by $1.1 million from the quarter ended June 30,
2003 as most of their major product lines improved from the prior year.
Selling, General and Administrative Expenses ("SG&A")
SG&A increased to $8.2 million for the quarter ended June 30, 2004
compared to $8.0 million for the quarter ended June 30, 2003. Higher
professional fees, particularly those associated with refinancing activities,
offset the decrease in compensation and other expenses resulting from recent
restructuring programs. For the quarter ended June 30, 2004, SG&A represented
9.3% of total revenue compared to 11.3% for the quarter ended June 30, 2003.
Operating Income (Loss)
Operating income was $2.7 million for the quarter ended June 30, 2004
compared to an operating loss of $1.5 million for the quarter ended June 30,
2003 due primarily to the increase in gross profit as discussed above.
19
Interest Expense, Net
Interest expense, net, was as follows (in thousands):
Quarters Ended June 30,
-----------------------
2004 2003
---- ----
Interest income................................... $ 258 $ 253
Interest expense.................................. (5,105) (4,792)
------- -------
Interest expense, net........................ $(4,847) $(4,539)
======= =======
Income Tax Provision, Net
Income tax provision, net of tax benefits, was as follows (in thousands):
Quarters Ended June 30,
-----------------------
2004 2003
---- ----
Total current..................................... $ 889 $ 42
Total deferred.................................... (199) (253)
----- -----
Income tax provision, net.................... $ 690 $(211)
===== =====
The difference between the statutory federal income tax rate and
Metallurg's effective rate for the quarter ended June 30, 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 $2.8 million for the quarter ended June 30,
2004 compared to a net loss of $5.3 million for the quarter ended June 30, 2003.
Net loss for the quarter ended June 30, 2003 also included income from
discontinued operations of $0.6 million. See "Note 4. Discontinued Operations"
to the Company's Consolidated Financial Statements.
Results of Operations - The Two Quarters Ended June 30, 2004 Compared to the Two
Quarters Ended June 30, 2003
Intersegment
(In thousands) LSM SMC CIF Other Eliminations Consolidated
--- --- --- ----- ------------ ------------
Two Quarters Ended June 30, 2004
Total revenue.......................... $93,047 $67,085 $20,996 $10,782 $(28,252) $163,658
Gross profit........................... 8,900 6,751 2,329 1,338 (594) 18,724
SG&A................................... 6,184 4,018 1,089 3,886 -- 15,177
Operating income (loss)................ 2,109 2,733 1,240 (2,538) (594) 2,950
Interest expense, net.................. (715) (635) (477) (7,256) -- (9,083)
Income tax provision (benefit)......... 632 852 171 (869) -- 786
Net income (loss)...................... 832 1,246 592 (2,496) (7,828) (7,654)
20
Two Quarters Ended June 30, 2003
Total revenue.......................... $87,405 $47,525 $14,843 $14,258 $(22,782) $141,249
Gross profit........................... 8,626 2,543 1,244 1,788 (196) 14,005
SG&A................................... 7,489 3,453 884 3,779 -- 15,605
Operating income (loss)................ 1,137 (910) 360 (1,991) (196) (1,600)
Interest expense, net.................. (807) (199) (402) (7,633) -- (9,041)
Income tax provision (benefit)......... 151 (760) 603 -- (6)
Net income (loss) ..................... 188 (349) (42) (6,208) (3,155) (9,566)
Total Revenue
Consolidated total revenue increased by $22.4 million (16%) in the two
quarters ended June 30, 2004.
LSM revenue was $5.6 million (6%) higher than the two quarters ended June
30, 2003. Sales of aluminum products decreased by $2.5 million as a result of a
14% decrease in sales volume partially offset by a 10% increase in sales prices.
Sales of chrome products increased by $0.7 million as a result of a 6% increase
in sales volume. Sales of nickel products rose by $2.4 million due to both
higher sales volume and prices. Sales of ferrotitanium were $6.4 million higher,
due to a 81% increase in average unit selling prices.
SMC revenue was $19.6 million (41%) higher than the two quarters ended
June 30, 2003. Sales of aluminum products increased by $5.1 million as a result
of a 19% increase in shipments and an 11% increase in selling prices. Sales of
vanadium products, produced in SMC's Ohio plant, increased by $10.3 million as a
result of both increased average selling prices and sales volume.
CIF revenue was $6.2 million (41%) higher than the two quarters ended June
30, 2003. Sales of aluminum master alloys increased by $3.8 million, primarily
as a result of a 42% increase in selling volumes. Sales of niobium products rose
by $2.2 million, due to an increase in demand.
Gross Profit
Consolidated gross profit increased to $18.7 million (11.4% of total
revenue) for the two quarters ended June 30, 2004 from $14.0 million (9.9% of
total revenue) for the two quarters ended June 30, 2003.
LSM gross profit was $0.3 million (3%) higher than the two quarters ended
June 30, 2003. Gross profits from aluminum products decreased by $2.8 million,
despite higher selling prices, due to decreased volumes and higher unit costs.
Gross profit from ferrotitanium improved by $1.1 million as a result of higher
prices.
SMC gross profit was $4.2 million (165%) higher than the two quarters
ended June 30, 2003. Gross profit from vanadium products improved by $3.5
million as a result of an increases in sales volume and average selling prices,
partially offset by the increase in unit costs. Gross profit from aluminum
products rose by $0.3 million, due to increased shipments.
CIF gross profit increased by $1.1 million from the two quarters ended
June 30, 2003 as most of their major product lines improved from the prior year.
Selling, General and Administrative Expenses ("SG&A")
SG&A decreased to $15.2 million for the two quarters ended June 30, 2004
compared to $15.6 million for the two quarters ended June 30, 2003. Higher
professional fees, particularly those associated with refinancing activities,
partially offset the decrease in compensation and other expenses resulting from
recent restructuring programs. For the two quarters ended June 30, 2004, SG&A
represented 9.3% of total revenue compared to 11.0% for the two quarters ended
June 30, 2003.
21
Operating Income (Loss)
Operating income was $3.0 million for the two quarters ended June 30, 2004
compared to an operating loss of $1.6 million for the two quarters ended June
30, 2003 due primarily to the increase in gross profit as discussed above.
Interest Expense, Net
Interest expense, net, was as follows (in thousands):
Two Quarters Ended June 30,
---------------------------
2004 2003
-------- --------
Interest income................................... $ 879 $ 527
Interest expense.................................. (9,962) (9,568)
------- -------
Interest expense, net........................ $(9,083) $(9,041)
======= =======
Income Tax Provision, Net
Income tax provision, net of tax benefits, was as follows (in thousands):
Two Quarters Ended June 30,
---------------------------
2004 2003
------- ------
Total current..................................... $1,207 $ 581
Total deferred.................................... (421) (587)
------ -----
Income tax provision, net.................... $ 786 $ (6)
====== =====
The difference between the statutory federal income tax rate and
Metallurg's effective rate for the quarter ended June 30, 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 $7.7 million for the two quarters ended June
30, 2004 compared to a net loss of $9.6 million for the two quarters ended June
30, 2003. The net loss also included income from discontinued operations of $0.3
million and $1.1 million for the two quarters ended June 30, 2004 and 2003
respectively and a loss on sale of discontinued operations of $1.2 million in
the two quarters ended June 30, 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 June 30, 2004,
the Company had $4.3 million in unrestricted cash and cash equivalents and
working capital of $61.0 million as compared to $18.6 million and $63.4 million,
respectively, at December 31, 2003.
Cash Flow Information
Cash Flows from Operating Activities - Cash used in operating activities
was $30.1 million for the two quarters ended June 30, 2004 compared to $13.0
million for the two quarters ended June 30, 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 $6.2 million for the two quarters ended June 30, 2004, compared
to net cash used by investing activities of $0.9 million for the two quarters
ended June 30, 2003. The net cash received from the sale of discontinued
operations was $8.3 million in the two quarters ended June 30, 2004.
22
Cash Flows from Financing Activities - Cash provided by financing
activities was $9.5 million for the two quarters ended June 30, 2004, compared
to $1.7 million for the two quarters ended June 30, 2003. The Company received a
loan of $8.0 million from related parties to facilitate the purchase of raw
material for the vanadium plant in the two quarters ended June 30, 2004 and an
additional $7.7 million was used to increase working capital during 2004. These
borrowings are offset by cash deposited to collateralize the Revolving Credit
Facility.
Credit Facilities and Other Financing Arrangements
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. 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. At June 30, 2004, there were $3.0 million of
borrowings under this facility and outstanding letters of credit of $20.8
million. In addition, the Borrowers had unused borrowing capacity of $2.9
million under this facility.
MHR Credit Facility - On August 13, 2004, the Company refinanced the
Revolving Credit Facility into a new financing agreement with MHR maturing on
August 31, 2007. Facility A, under the financing agreement, initially provides
Metallurg, Inc. a $10 million term loan for working capital and an approximately
$21 million credit facility either to support existing letters of credit issued
by Fleet National Bank or to provide new letters of credit to collateralize
SMC's environmental remediation obligations. Metallurg is also negotiating with
TRC and the New Jersey Department of Environmental Protection for TRC to assume
approximately $15 million of Metallurg's environmental liabilities and indemnify
Metallurg of such liabilities. The new financing agreement provides that upon
completion of this agreement with TRC, MHR will provide Metallurg with a second
term loan in the amount of $15 million and reduce the credit facility for
letters of credit to $6 million. Interest will accrue at a rate of 20% per annum
on all outstanding balances of which one-half will be paid monthly in arrears
and one-half will be paid-in-kind by being added to the outstanding principal
balances on a monthly basis. In addition, Metallurg will pay MHR a monthly
letter of credit commitment fee of 4% per annum on all outstanding letters of
credit, a facility maintenance fee of $620,000 on December 31, 2004 and $310,000
on each June 30th and December 31st thereafter, and a monthly monitoring fee of
$40,000 in 2004, $30,000 in 2005 and $20,000 thereafter. Mandatory quarterly
repayments begin on October 1, 2005 in the amount of $1,000,000 and voluntary
repayments may be made beginning July 31, 2005 along with prepayment penalties.
Facility A is fully guaranteed by all of the assets of Metallurg, Inc., SMC,
Metallurg Holdings Corporation, Metallurg International Resources, LLC and
Metallurg Services, Inc., and partially guaranteed by Metallurg, Inc.'s major
subsidiaries in the U.K. and Brazil. Facility B, under the financing agreement,
provides Metallurg Holdings with two term loans. The first term loan in the
amount of $1,675,000 was made on the closing date to be used to pay interest
owed as of July 15, 2004 on its Senior Discount Notes. An additional amount of
$1,600,000 reduced by dividends paid by Metallurg to Metallurg Holdings, up to
a maximum of $787,500, will be made, subject to certain conditions, by
January 15, 2005 to pay a portion of the interest due on that date on its Senior
Discount Notes. Interest will accrue at a rate of 20% per annum on all
outstanding balances will be paid-in-kind by being added to the outstanding
principal balances on a monthly basis. In addition, Metallurg Holdings will pay
MHR a facility maintenance fee of $49,250 on December 31, 2004 and $24,625 on
each June 30th and December 31st thereafter. This fee will be paid-in-kind by
being added to the outstanding principal balances on a monthly basis. Total
transaction costs, including commitment and closing fees paid to MHR of $2.7
million, will be capitalized and amortized over three years along with other
transaction costs. An additional fee of $37,500 will be made upon the funding of
the second term loan and will be amortized over 2 1/2 years. Facility B is
guaranteed by all of the assets of Metallurg, Inc. The financing agreement also
requires Metallurg to maintain a minimum borrowing base and achieve minimum
Consolidated EBITDA, as defined. The Company anticipates that it will seek to
refinance these facilities on more favorable terms provided its operating
results continue to improve and such financing is available.
23
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 ($9.9 million) of borrowings,
'L'40.3 million ($72.8 million) of foreign exchange contracts and options
and 'L'4.0 million ($7.2 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 June 30, 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 June 30,
2004, there was approximately $1.8 million outstanding under this facility.
Other - CIF maintains short-term secured and unsecured borrowing
arrangements with various banks with interest rates ranging from 6.5% per annum
to 22.8% per annum. Borrowings under these arrangements totaled $6.6 million at
June 30, 2004.
Capital Expenditures
Metallurg invested $0.8 million in capital projects during the two
quarters ended June 30, 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 $4.3 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 two
quarters ended June 30, 2004, Metallurg spent $1.6 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 was aware. Pursuant to these agreements, SMC
has agreed to perform environmental remediation, which, as of June 30, 2004, had
an estimated net cost of completion of $24.0 million. Of this amount, Metallurg
expects to spend $18.7 million (including the TRC transaction discussed above)
in the remaining two quarters of 2004 and $0.6 million in 2005. 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 balances, cash
from operations and cash available under its credit facilities are sufficient to
fund its current and anticipated future requirements for environmental
expenditures.
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.
24
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")) were effective.
There have been no changes in the Company's internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange
Act) 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.
ITEM 5 - OTHER INFORMATION
The Company is not required to file reports with the Securities and
Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, but is filing this Quarterly Report on Form
10-Q on a voluntary basis. Accordingly, it is not an "issuer" as defined in
Section 2(a)(7) of the Sarbanes-Oxley Act of 2002.
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
The Company filed a Report on Form 8-K under Item 9, and provided
financial statements pursuant to Item 7, with the Securities and Exchange
Commission on April 14, 2004, filing its December 31, 2003 audited financial
statements in accordance with Regulation FD and reporting a delay in the filing
of its 10-K for the year ended December 31, 2003 beyond the due date required by
the indenture governing its Senior Discount Notes.
The Company filed a Report on Form 8-K under Item 12, and provided
financial statements pursuant to Item 7, with the Securities and Exchange
Commission on May 26, 2004, filing its March 31, 2004 financial statements in
accordance with Regulation FD and reporting a delay in the filing of its 10-Q
for the period ended March 31, 2004 beyond the due date required by the
indenture governing its Senior Discount Notes.
The Company filed a Report on Form 8-K under Item 5 with the Securities
and Exchange Commission on June 1, 2004, reporting the failure of Metallurg,
Inc. to make the interest payment on its Senior Notes.
The Company filed a Report on Form 8-K under Item 5 with the Securities
and Exchange Commission on June 16, 2004, reporting the filing 10-K for the year
ended December 31, 2003 and its 10-Q for the period ended March 31, 2004 as
required by the indenture governing its Senior Discount Notes.
The Company filed a Report on Form 8-K under Item 5 with the Securities
and Exchange Commission on June 18, 2004, reporting that Metallurg made the $5.5
million semi-annual interest payment due on June 1, 2004 in respect of its
Senior Notes plus additional interest from the due date until the payment date.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on August 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)
26
STATEMENT OF DIFFERENCE
The British pound sterling sign shall be expressed as...................... 'L'