Back to GetFilings.com
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 September 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, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1661467
(State of organization) (I.R.S. Employer Identification No.)
1140 Avenue of the Americas (212) 835-0200
New York, New York 10036 (Registrant's telephone number,
(Address of principal executive offices) including area code)
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]
The number of shares of common stock, $0.01 par value, issued and
outstanding as of November 10, 2004 was 5,000,000.
*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, INC. AND CONSOLIDATED SUBSIDIARIES
TABLE OF CONTENTS
Page No.
--------
Part I. FINANCIAL INFORMATION:
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations and Comprehensive Loss for the
Quarters and Three Quarters Ended September 30, 2004 and 2003................... 2
Condensed Consolidated Balance Sheets at September 30, 2004 and
December 31, 2003............................................................... 3
Condensed Consolidated Statements of Cash Flows for the Three Quarters Ended
September 30, 2004 and 2003..................................................... 4
Notes to Unaudited Condensed 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.......................... 25
Item 4 - Controls and Procedures......................................................... 25
Part II. OTHER INFORMATION:
Item 5 - Other Information............................................................... 25
Item 6 - Exhibits........................................................................ 25
SIGNATURES............................................................................... 26
1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
(In thousands)
Quarters Ended Three Quarters Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Sales................................................. $88,848 $68,375 $252,308 $209,336
Commission income..................................... 82 122 280 410
----------- ----------- ----------- -----------
Total revenue...................................... 88,930 68,497 252,588 209,746
----------- ----------- ----------- -----------
Operating costs and expenses:
Cost of sales...................................... 76,461 64,226 221,395 191,470
Selling, general and administrative expenses....... 9,626 7,281 24,794 22,841
Restructuring charges, net ........................ 129 2,659 726 2,659
----------- ----------- ----------- -----------
Total operating costs and expenses ................ 86,216 74,166 246,915 216,970
----------- ----------- ----------- -----------
Operating income (loss) ........................... 2,714 (5,669) 5,673 (7,224)
Other income (expense):
Other income, net.................................. 4 25 91 67
Interest expense, net.............................. (3,993) (3,229) (10,385) (9,804)
----------- ----------- ----------- -----------
Loss before income tax provision (benefit),
minority interest and discontinued operations.... (1,275) (8,873) (4,621) (16,961)
Income tax provision (benefit) ....................... 814 (955) 1,600 (963)
----------- ----------- ----------- -----------
Loss before minority interest and discontinued
operations ...................................... (2,089) (7,918) (6,221) (15,998)
Minority interest .................................... (41) (10) (39) (43)
----------- ----------- ----------- -----------
Loss from continuing operations ................... (2,130) (7,928) (6,260) (16,041)
Income (loss) from discontinued operations ........... -- 115 (824) 1,175
----------- ----------- ----------- -----------
Net loss .......................................... (2,130) (7,813) (7,084) (14,866)
Other comprehensive (loss) income:
Foreign currency translation adjustment............ (67) 487 2,810 1,773
Deferred (loss) gain on derivatives, net........... (247) (436) 386 (397)
----------- ----------- ----------- -----------
Comprehensive loss ................................ $(2,444) $(7,762) $(3,888) $(13,490)
=========== =========== =========== ===========
See notes to unaudited condensed consolidated financial statements.
2
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 14,774 $ 18,238
Accounts receivable, net .................................. 46,550 37,840
Inventories ............................................... 62,749 44,457
Prepaid expenses and other current assets ................. 10,451 7,987
Discontinued operations - current assets .................. -- 14,738
--------- ---------
Total current assets .................................... 134,524 123,260
Property, plant and equipment, net ........................... 51,660 54,324
Other assets ................................................. 25,319 19,921
Discontinued operations - non-current assets ................. -- 1,948
--------- ---------
Total ................................................... $ 211,503 $ 199,453
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Short-term debt and current portion of long-term debt ..... $ 12,678 $ 8,315
Accounts payable .......................................... 28,963 25,761
Accrued expenses .......................................... 14,413 10,237
Other current liabilities ................................. 4,697 3,332
Discontinued operations - current liabilities ............. -- 9,843
--------- ---------
Total current liabilities ............................... 60,751 57,488
--------- ---------
Long-term Liabilities:
Long-term debt ............................................ 136,558 120,022
Accrued pension liabilities ............................... 28,848 29,543
Environmental liabilities, net ............................ 20,439 22,678
Other liabilities ......................................... 1,491 1,000
Discontinued operations - non-current liabilities ......... -- 218
--------- ---------
Total long-term liabilities ............................. 187,336 173,461
--------- ---------
Total liabilities ....................................... 248,087 230,949
--------- ---------
Minority Interest ............................................ 540 256
--------- ---------
Shareholder's Deficit:
Common stock .............................................. 50 50
Due from parent company ................................... (1,494) (21,715)
Additional paid-in capital ................................ 45,619 67,324
Accumulated other comprehensive loss ...................... (22,451) (25,647)
Accumulated deficit ....................................... (58,848) (51,764)
--------- ---------
Total shareholder's deficit ............................. (37,124) (31,752)
--------- ---------
Total ................................................... $ 211,503 $ 199,453
========= =========
See notes to unaudited condensed consolidated financial statements.
3
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Quarters Ended
September 30,
---------------------
2004 2003
--------- ---------
Cash Flows from Operating Activities:
Net loss .................................................................. $ (7,084) $(14,866)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 5,747 5,893
Deferred income taxes .................................................. (455) (1,399)
Restructuring charges .................................................. 726 2,659
Loss on sale of discontinued operations ................................ 1,162 --
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable ............................ (8,608) 1,501
(Increase) decrease in inventories .................................... (18,222) 1,265
Increase in other current assets ...................................... (1,747) (1,309)
Increase (decrease) in accounts payable and accrued expenses .......... 10,101 (2,262)
Environmental remediation payments .................................... (2,746) (1,686)
Restructuring payments ................................................ (2,282) (1,060)
Other assets and liabilities, net ..................................... (4,442) 1,256
Discontinued operations - operating activities ............................ (719) (1,381)
-------- --------
Net cash used in operating activities ............................... (28,569) (11,389)
-------- --------
Cash Flows from Investing Activities:
Additions to property, plant and equipment ................................ (2,101) (2,248)
Proceeds from sale of discontinued operation .............................. 8,255 --
Other, net ................................................................ (1,350) 1,152
Discontinued operations - investing activities ............................ 33 (221)
-------- --------
Net cash provided by (used in) investing activities ................. 4,837 (1,317)
-------- --------
Cash Flows from Financing Activities:
Borrowings (repayments) of long-term debt, net ............................ 15,969 (30)
Borrowings of short-term debt, net ........................................ 4,486 1,800
Capital contributions ..................................................... -- 10,000
Loan to parent company .................................................... (1,484) --
Discontinued operations - financing activities ............................ 1,139 1,977
-------- --------
Net cash provided by financing activities ........................... 20,110 13,747
-------- --------
Effects of exchange rate changes on cash and cash equivalents ............. 158 341
-------- --------
Net (decrease) increase in cash and cash equivalents ...................... (3,464) 1,382
Cash and cash equivalents - beginning of period ........................... 18,238 24,251
-------- --------
Cash and cash equivalents - end of period ................................. $ 14,774 $ 25,633
======== ========
See notes to unaudited condensed consolidated financial statements.
4
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Going Concern
In its annual report on Form 10-K dated December 31, 2003 Metallurg, Inc.
and its majority-owned subsidiaries (collectively, "Metallurg") disclosed
factors that might have precluded Metallurg from continuing as a going concern.
On August 13, 2004, Metallurg entered into a new financing agreement to replace
the facility with Fleet National Bank. See "Note 8. Borrowings". Metallurg
believes that the new facility along with anticipated improved operating results
as a result of recent restructuring efforts and improving market conditions will
provide adequate liquidity for Metallurg to meet its obligations as they come
due over the next year.
On August 12, 2004, Metallurg, Inc. sold all of its previously acquired
12 3/4% Senior Discount Notes due 2008 (the "Senior Discount Notes") of
Metallurg Holdings, Inc. ("Metallurg Holdings"), Metallurg, Inc.'s parent
company, and related accrued interest to Metallurg Holdings for $10,000.
Metallurg had recorded these items as due from parent company in its
consolidated balance sheet. For accounting purposes only, the difference between
the amount recorded as due from parent company and the amount received from
Metallurg Holdings was recorded as a deemed dividend to Metallurg Holdings.
In addition, on August 13, 2004, Metallurg Holdings obtained financing,
the proceeds of which enabled it to make its interest payment on its outstanding
Senior Discount Notes due July 15, 2004 and, subject to certain conditions, the
interest payment that is due January 15, 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. However, 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.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Metallurg. 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 only 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 Metallurg, Inc.'s annual report on Form 10-K for the year ended December 31,
2003.
Metallurg, Inc. is a wholly-owned subsidiary of Metallurg Holdings since
the acquisition date of July 13, 1998. The financial statements do not reflect
the pushdown of purchase accounting adjustments recorded by Metallurg Holdings.
On March 8, 2004, Metallurg 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, Inc. is a wholly-
owned subsidiary of Metallurg Holdings.
5
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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 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):
Three Quarters Ended
September 30,
----------------------
2004 2003
-------- ---------
Net loss, as reported.......................... $(7,084) $(14,866)
Less: compensation expense for option awards
determined by the fair value based method,
net of related tax effects .................. 31 29
-------- ---------
Pro forma net loss......................... $(7,115) $(14,895)
======== =========
4. Discontinued Operations
On March 8, 2004, Metallurg 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, Metallurg 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
the sale (in thousands):
Three Quarters Ended
September 30,
----------------------
2004 2003
-------- ---------
Results of operations:
Total revenue..................................... $9,140 $41,954
Income before income tax provision................ 509 1,830
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, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
5. Segments and Related Information
Metallurg operates in one significant industry segment, the manufacture
and sale of performance-enhancing additives mainly for the metallurgical
industry. Metallurg is organized around its major production facilities in the
U.K., the U.S. and Brazil. In addition to its own products, Metallurg
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. that 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 closed its Norwegian production facility in August 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 Metallurg'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. Metallurg 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, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
5. Segments and Related Information - (Continued)
Intersegment Consolidated
LSM SMC CIF Other Eliminations Totals
--- --- --- ----- ------------ ------
Quarter Ended
September 30, 2004
Revenue from external customers.... $43,582 $33,323 $10,369 $1,656 $88,930
Intergroup revenue................. 7,154 758 3,134 3,062 $(14,108) --
Income tax provision (benefit) .... 479 303 351 (319) -- 814
Net income (loss).................. 797 1,292 121 207 (4,547) (2,130)
Intersegment Consolidated
LSM SMC CIF Other Eliminations Totals
--- --- --- ----- ------------ ------
Quarter Ended
September 30, 2003
Revenue from external customers.... $32,612 $23,630 $5,920 $6,335 $68,497
Intergroup revenue................. 6,719 827 3,778 1,219 $(12,543) --
Income tax (benefit) provision..... (860) (290) -- 195 -- (955)
Net loss .......................... (2,248) (1,279) (67) (12,197) 7,978 (7,813)
Intersegment Consolidated
LSM SMC CIF Other Eliminations Totals
--- --- --- ----- ------------ ------
Three Quarters Ended
September 30, 2004
Revenue from external customers.... $120,281 $98,529 $25,820 $7,958 $252,588
Intergroup revenue................. 23,502 2,637 8,679 7,542 $(42,360) --
Income tax provision (benefit) .... 1,111 1,155 522 (1,188) -- 1,600
Net income (loss).................. 1,629 2,538 713 411 (12,375) (7,084)
Intersegment Consolidated
LSM SMC CIF Other Eliminations Totals
--- --- --- ----- ------------ ------
Three Quarters Ended
September 30, 2003
Revenue from external customers.... $106,671 $69,531 $13,851 $19,693 $209,746
Intergroup revenue................. 20,065 2,451 10,690 2,119 $(35,325) --
Income tax (benefit) provision..... (709) (1,050) -- 796 -- (963)
Net loss........................... (2,060) (1,628) (109) (15,892) 4,823 (14,866)
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 $3,652,000 of severance costs for 62
employees and 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 completed 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, 37 employees were terminated
and severance costs of $420,000 were recorded as restructuring expense.
8
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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
September 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 September 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 September 30, 2004.
A summary of the restructuring and asset impairment charges is as follows
(in thousands):
Utilization through
September 30, 2004 Balance at
Total ------------------------ September 30,
Provision Cash Non-cash 2004
------- -------- -------- ----
LSM:
Severance and other employee costs....... $ 4,388 $(4,100) $ (78) $210
Write-down of plant and equipment........ 6,706 -- (6,706) --
------- ------- ------- ----
11,094 (4,100) (6,784) 210
Other:
Severance and other employee costs....... 2,526 (2,502) (10) 14
------- ------- ------- ----
Total............................... $13,620 $(6,602) $(6,794) $224
======= ======= ======= ====
7. Inventories
Inventories consist of the following (in thousands):
September 30, December 31,
2004 2003
------------ ------------
Raw materials.......................... $18,658 $8,855
Work in process........................ 737 467
Finished goods......................... 41,996 33,762
Other.................................. 1,358 1,373
------- -------
Total............................. $62,749 $44,457
======= =======
9
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
8. Borrowings
On August 13, 2004, Metallurg, Inc. entered into a financing agreement
maturing on August 31, 2007 with MHR Institutional Partners II LP, as agent
("MHR"). The financing agreement, described below, replaced 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.
This financing agreement initially provided Metallurg, Inc. a $10 million
term loan for working capital and a $21 million letter of credit facility. It
allows for $15 million of the letter of credit facility to be converted to a
term loan with the proceeds being used by SMC to settle certain environmental
remediation obligations at its Newfield facility. Transaction costs of $4.4
million were capitalized and are being amortized over three years. Interest
accrues on outstanding balances at a rate of 20% per annum of which one-half is
paid in cash monthly in arrears and one-half is paid-in-kind by being added to
the outstanding principal balances on a monthly basis. In addition, Metallurg
pays 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. The financing agreement is fully
collateralized by all of the assets of Metallurg, Inc. and SMC, fully guaranteed
by 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. The total amount outstanding under this
agreement is $10.1 million in loans and $20.8 million in letters of credit at
September 30, 2004.
9. Contingent Liabilities
Metallurg 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
Metallurg'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 Metallurg that could have a
material adverse effect on Metallurg's consolidated financial position, results
of operations or cash flows in the future.
10
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
10. Retirement Plans
Metallurg 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 and three quarters ended September 30, 2004 and 2003,
respectively (in thousands):
Quarters Ended Three Quarters Ended
September 30, September 30,
------------------------- -------------------------
2004 2003 2004 2003
------- ------ ------- -------
Components of net periodic benefit cost:
Service cost...................................... $ 839 $ 675 $ 2,482 $ 2,117
Interest cost..................................... 1,896 1,635 5,615 5,126
Expected return on plan assets.................... (1,898) (1,403) (5,621) (4,394)
Net amortization and deferral..................... 666 746 1,972 2,354
------- ------ ------- -------
Total net periodic benefit cost................ $ 1,503 $1,653 $ 4,448 $ 5,203
======= ====== ======= =======
As of September 30, 2004, $5,146,000 of contributions have been made.
Metallurg presently anticipates contributing an additional $1,660,000 to fund
its pension plan in 2004 for a total of $6,806,000.
11. Related Party Transactions
On January 15, 2004, Metallurg, Inc. loaned Metallurg Holdings, its parent
company, approximately $1.5 million in order for Metallurg Holdings to make the
interest payment on its Senior Discount Notes to non-related parties. The loan
is classified as due from parent company in the balance sheet.
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 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, as amended in conjunction with the new financing agreement
described in Note 8, is collateralized by a second lien on all of the assets of
the Borrowers and Guarantors under the financing agreement with MHR. Interest on
the loan at 8% per annum is paid-in-kind and added to the principal balance. The
total amount outstanding under this agreement is $8.2 million at September 30,
2004.
On August 12, 2004, Metallurg, Inc. sold all of its previously acquired
Senior Discount Notes of Metallurg Holdings and related accrued interest to
Metallurg Holdings for $10,000. Metallurg, Inc. had recorded these items as due
from parent company in its consolidated balance sheet. For accounting purposes
only, the difference between the amount recorded as due from parent company and
the amount received from Metallurg Holdings was recorded as a deemed dividend to
Metallurg Holdings.
11
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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.
Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income (Unaudited)
Quarter Ended September 30, 2004
(In thousands)
Combined
Combined Non-
Metallurg, Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---- ------------ ------------ ------------ ------------
Total revenue............................... $34,867 $67,589 $(13,526) $88,930
------- ------- -------- -------
Operating costs and expenses:
Cost of sales............................ 30,335 59,982 (13,856) 76,461
Selling, general and administrative
expenses .............................. $ 2,351 2,402 4,873 -- 9,626
Restructuring charges.................... -- -- 129 -- 129
------- ------- ------- -------- -------
Total operating costs and expenses....... 2,351 32,737 64,984 (13,856) 86,216
------- ------- ------- -------- -------
Operating (loss) income.................. (2,351) 2,130 2,605 330 2,714
Other income (expense):
Other income, net........................ -- -- 4 -- 4
Interest expense, net.................... (2,947) (75) (971) -- (3,993)
Equity in earnings of subsidiaries....... 2,853 1,106 918 (4,877) --
------- ------- ------- -------- -------
(Loss) income before income tax
(benefit) provision and minority
interest............................... (2,445) 3,161 2,556 (4,547) (1,275)
Income tax (benefit) provision.............. (315) 342 787 -- 814
------- ------- ------- -------- -------
(Loss) income before minority interest... (2,130) 2,819 1,769 (4,547) (2,089)
Minority interest........................... -- -- (41) -- (41)
------- ------- ------- -------- -------
Net (loss) income ....................... (2,130) 2,819 1,728 (4,547) (2,130)
Other comprehensive loss:
Foreign currency translation adjustment.. (67) (67) (125) 192 (67)
Deferred loss on derivatives, net........ (247) (247) (494) 741 (247)
------- ------- ------- -------- -------
Comprehensive (loss) income.............. $(2,444) $ 2,505 $ 1,109 $ (3,614) $(2,444)
======= ======= ======= ======== =======
12
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
12. Supplemental Guarantor Information - (Continued)
Condensed Consolidating Statement of Operations and Comprehensive (Loss)
Income (Unaudited)
Three Quarters Ended September 30, 2004
(In thousands)
Combined
Combined Non-
Metallurg, Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------- -------- -------- -------- --------
Total revenue .................................. $105,575 $187,376 $(40,363) $252,588
-------- -------- -------- --------
Operating costs and expenses:
Cost of sales ............................... 94,009 167,485 (40,099) 221,395
Selling, general and administrative
expenses .................................. 5,396 6,471 12,927 -- 24,794
Restructuring charges, net .................. -- -- 726 -- 726
------- -------- -------- -------- --------
Total operating costs and expenses .......... 5,396 100,480 181,138 (40,099) 246,915
------- -------- -------- -------- --------
Operating (loss) income ..................... (5,396) 5,095 6,238 (264) 5,673
Other income (expense):
Other income, net ........................... -- -- 91 -- 91
Interest expense, net ....................... (7,682) (9) (2,694) -- (10,385)
Equity in earnings of subsidiaries .......... 4,856 4,575 2,680 (12,111) --
------- -------- -------- -------- --------
(Loss) income before income tax
(benefit) provision, minority
interest and discontinued operations ...... (8,222) 9,661 6,315 (12,375) (4,621)
Income tax (benefit) provision ................. (1,168) 1,277 1,491 -- 1,600
------- -------- -------- -------- --------
(Loss) income before minority interest
and discontinued operations ............... (7,054) 8,384 4,824 (12,375) (6,221)
Minority interest .............................. -- -- (39) -- (39)
------- -------- -------- -------- --------
(Loss) income from continuing operations .... (7,054) 8,384 4,785 (12,375) (6,260)
(Loss) income from discontinued operations ..... (30) (3,577) 2,783 -- (824)
------- -------- -------- -------- --------
Net (loss) income ........................... (7,084) 4,807 7,568 (12,375) (7,084)
Other comprehensive income:
Foreign currency translation adjustment ..... 2,810 2,810 5,166 (7,976) 2,810
Deferred gain on derivatives, net ........... 386 386 772 (1,158) 386
------- -------- -------- -------- --------
Comprehensive (loss) income ................. $(3,888) $ 8,003 $ 13,506 $(21,509) $ (3,888)
======= ======== ======== ======== ========
13
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
12. Supplemental Guarantor Information - (Continued)
Condensed Consolidating Balance Sheet (Unaudited)
September 30, 2004
(In thousands)
Combined
Combined Non-
Metallurg, Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------- -------- -------- -------- --------
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 11,786 $ 953 $2,035 $14,774
Accounts receivable, net............... 29,492 25,212 46,363 $(54,517) 46,550
Inventories............................ -- 34,791 28,403 (445) 62,749
Prepaid expenses and other current
assets............................... 761 3,417 9,267 (2,994) 10,451
-------- -------- -------- --------- --------
Total current assets............... 42,039 64,373 86,068 (57,956) 134,524
Investments - intergroup.................. 53,618 2,879 32,392 (88,889) --
Property, plant and equipment, net........ 140 19,690 31,830 -- 51,660
Other assets.............................. 14,234 41,736 10,183 (40,834) 25,319
-------- -------- -------- --------- --------
Total.............................. $110,031 $128,678 $160,473 $(187,679) $211,503
======== ======== ======== ========= ========
LIABILITIES AND
SHAREHOLDER'S
(DEFICIT) EQUITY
Current Liabilities:
Short-term debt and current portion of
long-term debt....................... $12,678 $12,678
Accounts payable...................... $10,042 $45,388 28,050 $(54,517) 28,963
Accrued expenses....................... 5,084 5,970 3,359 -- 14,413
Other current liabilities.............. -- 5,444 2,247 (2,994) 4,697
-------- -------- -------- --------- --------
Total current liabilities.......... 15,126 56,802 46,334 (57,511) 60,751
-------- -------- -------- --------- --------
Long-term Liabilities:
Long-term debt......................... 118,295 -- 18,263 -- 136,558
Accrued pension liabilities............ 5,434 695 22,719 -- 28,848
Environmental liabilities, net........ - 20,398 41 -- 20,439
Other liabilities...................... 8,300 -- 34,025 (40,834) 1,491
-------- -------- -------- --------- --------
Total long-term liabilities....... 132,029 21,093 75,048 (40,834) 187,336
-------- -------- -------- --------- --------
Total liabilities.................. 147,155 77,895 121,382 (98,345) 248,087
-------- -------- -------- --------- --------
Minority Interest......................... -- -- 540 -- 540
-------- -------- -------- --------- --------
Shareholder's (Deficit) Equity:
Common stock........................... 50 1,217 109,133 (110,350) 50
Due from parent company................ (1,494) -- -- -- (1,494)
Additional paid-in capital............. 45,619 127,457 7,076 (134,533) 45,619
Accumulated other comprehensive loss... (22,451) (18,962) (35,109) 54,071 (22,451)
Accumulated deficit.................... (58,848) (58,929) (42,549) 101,478 (58,848)
-------- -------- -------- --------- --------
Total shareholder's (deficit)
equity............................. (37,124) 50,783 38,551 (89,334) (37,124)
-------- -------- -------- --------- --------
Total.............................. $110,031 $128,678 $160,473 $(187,679) $211,503
======== ======== ======== ========= ========
14
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
12. Supplemental Guarantor Information - (Continued)
Condensed Consolidating Statement of Cash Flows (Unaudited)
Three Quarters Ended September 30, 2004
(In thousands)
Combined
Combined Non-
Metallurg, Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
-------- ------- -------- --------
Cash Flows from Operating Activities.............. $(11,861) $(8,873) $(7,835) $(28,569)
-------- ------- -------- --------
Cash Flows from Investing Activities:
Additions to property, plant and equipment..... (78) (432) (1,591) (2,101)
Other, net..................................... -- -- 6,938 6,938
-------- ------- -------- --------
Net cash (used in) provided by investing
activities................................. (78) (432) 5,347 4,837
-------- ------- -------- --------
Cash Flows from Financing Activities:
Intergroup (repayments) borrowings............. (7,200) 17,243 (10,043) --
Borrowings (repayment) of long-term debt, net.. 18,000 -- (2,031) 15,969
Borrowings of short-term debt, net............. -- -- 4,486 4,486
Dividends received (paid)...................... 8,000 (7,730) (270) --
Other, net..................................... (1,484) -- 1,139 (345)
-------- ------- -------- --------
Net cash provided by (used in)
financing activities.................... 17,316 9,513 (6,719) 20,110
-------- ------- -------- --------
Effects of exchange rate changes on cash and cash
equivalents.................................... -- -- 158 158
-------- ------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 5,377 208 (9,049) (3,464)
Cash and cash equivalents -
beginning of period............................ 6,409 745 11,084 18,238
-------- ------- -------- --------
Cash and cash equivalents -
end of period.................................. $ 11,786 $ 953 $ 2,035 $ 14,774
======== ======= ======== ========
13. Subsequent Events
On November 10, 2004, the new financing agreement with MHR due August 31,
2007 was amended. An additional $5 million was added to the term loan under the
same terms and conditions. The additional amount will be used for general
corporate purposes.
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Certain matters discussed under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Quarterly 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 Metallurg'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 that may cause the actual
results, performance and achievements of Metallurg to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements.
Factors that may cause Metallurg'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 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 ability of Metallurg Holdings to meet its debt service
requirements.
- The availability of raw materials.
- The impact of worldwide competition.
- The economic strength of Metallurg's markets generally and
particularly the strength of the demand for aluminum, iron, steel,
superalloys and titanium alloys 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.
- 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.
Metallurg 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 Metallurg,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Critical Accounting Estimates" beginning on page 21 of
Metallurg's annual report on Form 10-K for the year ended December 31, 2003. The
critical accounting estimates affecting Metallurg have not changed since
December 31, 2003.
16
Overview
Metallurg 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, carbon and specialty steels,
superalloys and certain non-metallic materials for various applications in the
aerospace, power supply, automotive, petrochemical processing, capital equipment
and construction industries. Metallurg operates production facilities in the
U.K., the U.S. and Brazil. Metallurg'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 has been 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 three quarters
of 2004 due to higher economic activity in Europe, the Americas and especially
China. 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
have continued throughout 2004, as the industry still faces overcapacity and
significant price competition. During 2004, Metallurg announced the closure of
its master alloy facility in Norway to reduce excess capacity in the industry.
At the end of the third quarter, the closure process was complete. Customers
will continue to be served from our facilities in the U.K. and Brazil. As a
result of this closure and higher demand within the aluminum industry pricing
for products has improved slightly during the quarter. Metallurg continues to
seek higher prices for its major products and to implement cost reduction
initiatives to enhance operating performance.
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 changed as several
producers closed operations due to very low price levels and other factors. Due
to a shortage of raw materials, Metallurg was forced to significantly cut
production rates at its processing facility in Ohio, adding to a reduction of
ferrovanadium units in North America. Also, a labor strike at this facility
during the fourth quarter of 2003 and the first quarter of 2004 impacted overall
production rates. Demand for ferrovanadium has improved during 2004, 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 becoming a net importer of material instead of a net
exporter. As a result, prices for ferrovanadium steadily increased in 2003 and
2004. 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 improve profitability during 2004.
The superalloy industry is rebounding from the low production levels of
2002 and 2003. The increased activity is driven by higher military spending and
improving commercial airliner production levels. During the first three quarters
of 2004, prices for titanium in particular, increased significantly due to
higher demand and perceived supply shortages.
17
On August 13, 2004, Metallurg entered into a new financing agreement to
replace the existing facility with Fleet National Bank. Metallurg believes that
the new financing agreement, along with anticipated improved operations after
recent restructuring efforts, will provide adequate liquidity for Metallurg to
meet its obligations as they come due over the next year. In addition, on August
13, 2004, Metallurg Holdings obtained financing, the proceeds of which will
enable it to make the interest payments on its Senior Discount Notes due January
15, 2004, subject to certain conditions.
During 2003 and continuing in 2004, Metallurg continued to restructure its
businesses. Metallurg 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, Metallurg 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, Metallurg
reached an agreement to sell its South African sales office. This sale was
completed in March 2004. See "Note 4. Discontinued Operation" to Metallurg's
Consolidated Financial Statements.
Results of Operations - The Quarter Ended September 30, 2004 Compared to the
Quarter Ended September 30, 2003
Metallurg operates in one significant industry segment, the manufacture and
sale of performance-enhancing additives mainly for the metallurgical industry.
Metallurg is organized around its major production facilities in the U.K., the
U.S. and Brazil. In addition to its own products, Metallurg distributes products
manufactured by third parties.
Summarized financial information concerning Metallurg'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. Metallurg 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 September 30, 2004
Total revenue.......................... $50,736 $34,081 $13,503 $4,718 $(14,108) $88,930
Gross profit........................... 5,806 4,420 1,383 530 330 12,469
SG&A................................... 3,939 2,402 631 2,654 -- 9,626
Restructuring charges and asset
impairment........................... 129 -- -- -- -- 129
Operating income (loss)................ 1,738 2,018 752 (2,124) 330 2,714
Interest expense, net.................. (444) (423) (280) (2,846) -- (3,993)
Income tax provision (benefit)......... 479 303 351 (319) -- 814
Net income (loss)...................... 797 1,292 121 207 (4,547) (2,130)
Quarter Ended September 30, 2003
Total revenue.......................... $39,331 $24,457 $9,698 $7,554 $(12,543) $68,497
Gross profit........................... 2,799 326 628 744 (226) 4,271
SG&A................................... 3,338 1,769 499 1,675 -- 7,281
Restructuring charges and asset
impairment........................... 2,256 -- -- 403 -- 2,659
Operating (loss) income................ (2,795) (1,443) 129 (1,334) (226) (5,669)
Interest expense, net.................. (328) (126) (196) (2,579) -- (3,229)
Income tax (benefit) provision......... (860) (290) -- 195 -- (955)
Net loss............................... (2,248) (1,279) (67) (12,197) 7,978 (7,813)
18
Total Revenue
Consolidated total revenue increased by $20.4 million (30%) in the quarter
ended September 30, 2004.
LSM revenue was $11.4 million (29%) higher than the quarter ended
September 30, 2003. Sales of aluminum powder increased by $2.2 million as a
result of a 36% increase in sales volume and a 9% increase in selling prices.
Sales of chrome products increased by $1.6 million as a result of a 16% increase
in sales volume. Sales of nickel products rose by $1.1 million due to both
higher sales volume and prices. Sales of ferrotitanium were $6.4 million higher,
due to a 133% increase in average unit selling prices.
SMC revenue was $9.6 million (39%) higher than the quarter ended September
30, 2003. Sales of aluminum products increased by $1.9 million as a result of a
23% increase in selling prices. Sales of vanadium products, produced in SMC's
Ohio plant, increased by $6.1 million primarily as a result of an increase in
selling prices.
CIF revenue was $3.8 million (39%) higher than the quarter ended September
30, 2003. Sales of aluminum master alloys increased by $2.8 million, primarily
as a result of increases in both prices and volumes. Sales of niobium products
rose by $0.7 million, due to an increase in demand.
Gross Profit
Consolidated gross profit increased to $12.5 million (14.0% of total
revenue) for the quarter ended September 30, 2004 from $4.3 million (6.2% of
total revenue) for the quarter ended September 30, 2003.
LSM gross profit was $3.0 million (107%) higher than the quarter ended
September 30, 2003. Gross profits from aluminum products increased by $1.8
million, due to higher selling prices partially offset by increased unit costs.
Gross profit from ferrotitanium improved by $1.1 million as a result of higher
prices.
SMC gross profit was $4.1 million (1,256%) higher than the quarter ended
September 30, 2003. Gross profit from vanadium products improved by $3.8 million
as a result of an increase in sales volume and average selling prices, partially
offset by an increase in unit costs.
CIF gross profit increased by $0.8 million (120%) from the quarter ended
September 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 $9.6 million for the quarter ended September 30, 2004
compared to $7.3 million for the quarter ended September 30, 2003. The increase
was due to higher professional fees and bank charges, including those associated
with refinancing activities, and one-time costs associated with the termination
of certain employees. For the quarter ended September 30, 2004, SG&A represented
10.8% of total revenue compared to 10.6% for the quarter ended September 30,
2003.
Operating Income (Loss)
Operating income was $2.7 million for the quarter ended September 30, 2004
compared to an operating loss of $5.7 million for the quarter ended September
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
September 30,
-------------------
2004 2003
-------- --------
Interest income .......... $ 231 $ 210
Interest expense ......... (4,224) (3,439)
------- -------
Interest expense, net $(3,993) $(3,229)
======= =======
The increase in interest expense, net for the quarter ended September 30,
2003 is due to the higher debt levels and the amortization of debt issue costs
associated with the MHR financing.
Income Tax Provision, Net
Income tax provision, net of tax benefits, was as follows (in thousands):
Quarters Ended
September 30,
-------------------
2004 2003
-------- --------
Total current ................ $ 848 $(143)
Total deferred ............... (34) (812)
----- -----
Income tax provision, net $ 814 $(955)
===== =====
The difference between the statutory federal income tax rate and
Metallurg's effective rate for the quarter ended September 30, 2004, is
principally due to: (i) taxes paid on foreign dividends; (ii) 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; and (iii) the excess of foreign tax rates
over the statutory federal income tax rate.
Net Loss
Metallurg had a net loss of $2.1 million for the quarter ended September
30, 2004 compared to a net loss of $7.8 million for the quarter ended September
30, 2003. Net loss for the quarter ended September 30, 2004 also included $0.1
million of restructing charges. Net loss for the quarter ended September 30,
2003 also included restructuring and asset impairment charges of $2.7 million
and income from discontinued operations of $0.1 million. See "Note 4.
Discontinued Operations" to Metallurg's Consolidated Financial Statements.
Results of Operations - The Three Quarters Ended September 30, 2004 Compared to
the Three Quarters Ended September 30, 2003
Intersegment
(In thousands) LSM SMC CIF Other Eliminations Consolidated
------- ------- ------- ------- ------------ ------------
Three Quarters Ended
September 30, 2004
Total revenue.......................... $143,783 $101,166 $34,499 $15,500 $(42,360) $252,588
Gross profit........................... 14,706 11,171 3,712 1,868 (264) 31,193
SG&A................................... 10,123 6,420 1,720 6,531 -- 24,794
Restructuring charges and asset
impairment.......................... 736 -- -- (10) -- 726
Operating income (loss)................ 3,847 4,751 1,992 (4,653) (264) 5,673
Interest expense, net.................. (1,159) (1,058) (757) (7,411) -- (10,385)
Income tax provision (benefit)......... 1,111 1,155 522 (1,188) -- 1,600
Net income (loss)...................... 1,629 2,538 713 411 (12,375) (7,084)
20
Intersegment
(In thousands) LSM SMC CIF Other Eliminations Consolidated
------- ------- ------- ------- ------------ ------------
Three Quarters Ended
September 30, 2003
Total revenue.......................... $126,736 $71,982 $24,541 $21,812 $(35,325) $209,746
Gross profit........................... 11,425 2,869 1,872 2,532 (422) 18,276
SG&A................................... 10,827 5,222 1,383 5,409 -- 22,841
Restructuring charges and asset
impairment.......................... 2,256 -- -- 403 -- 2,659
Operating (loss) income................ (1,658) (2,353) 489 (3,280) (422) (7,224)
Interest expense, net.................. (1,135) (325) (598) (7,746) -- (9,804)
Income tax (benefit) provision......... (709) (1,050) -- 796 -- (963)
Net loss .............................. (2,060) (1,628) (109) (15,892) 4,823 (14,866)
Total Revenue
Consolidated total revenue increased by $42.8 million (20%) in the three
quarters ended September 30, 2004.
LSM revenue was $17.0 million (13%) higher than the three quarters ended
September 30, 2003. Sales of aluminum powder increased by $0.5 million as a
result of a 11% increase in sales prices partially offset by a 10% decrease in
sales volumes. Sales of chrome products increased by $2.3 million as a result of
increased sales price and volume. Sales of nickel products rose by $3.5 million
due to both higher sales volume and prices. Sales of ferrotitanium were $12.8
million higher, due to a 97% increase in average unit selling prices.
SMC revenue was $29.2 million (41%) higher than the three quarters ended
September 30, 2003. Sales of aluminum products increased by $7.0 million as a
result of a 13% increase in shipments and 15% increase in selling prices. Sales
of vanadium products, produced in SMC's Ohio plant, increased by $16.5 million
as a result of increased average selling prices.
CIF revenue was $10.0 million (41%) higher than the three quarters ended
September 30, 2003. Sales of aluminum master alloys increased by $6.6 million,
primarily as a result of a 31% increase in selling volumes. Sales of niobium
products rose by $2.9 million, due to an increase in demand.
Gross Profit
Consolidated gross profit increased to $31.2 million (12.3% of total
revenue) for the three quarters ended September 30, 2004 from $18.3 million
(8.7% of total revenue) for the three quarters ended September 30, 2003.
LSM gross profit was $3.3 million (29%) higher than the three quarters
ended September 30, 2003. Gross profits from aluminum products decreased by $1.0
million, despite higher selling prices, due to decreased volumes and higher unit
costs. Gross profit from ferrotitanium improved by $2.2 million as a result of
higher prices.
SMC gross profit was $8.3 million (289%) higher than the three quarters
ended September 30, 2003. Gross profit from vanadium products improved by $7.3
million as a result of an increase in sales volume and average selling prices,
partially offset by an increase in unit costs. Gross profit from aluminum
products rose by $0.4 million, due to increased shipments.
CIF gross profit increased by $1.8 million (98%) from the three quarters
ended September 30, 2003 as most of their major product lines improved from the
prior year.
Selling, General and Administrative Expenses
SG&A increased to $24.8 million for the three quarters ended September 30,
2004 compared to $22.8 million for the three quarters ended September 30, 2003.
The increase was due to higher professional fees and bank charges, including
those associated with refinancing activities, and one-time costs associated with
the termination of certain employees. For the three quarters ended September 30,
2004, SG&A represented 9.8% of total revenue compared to 10.9% for the three
quarters ended September 30, 2003.
21
Operating Income (Loss)
Operating income was $5.7 million for the three quarters ended September
30, 2004 compared to an operating loss of $7.2 million for the three quarters
ended September 30, 2003 due primarily to the increase in gross profit as
discussed above.
Interest Expense, Net
Interest expense, net, was as follows (in thousands):
Three Quarters Ended
September 30,
---------------------
2004 2003
-------- ---------
Interest income ............. $ 1,109 $ 736
Interest expense ............ (11,494) (10,540)
-------- --------
Interest expense, net... $(10,385) $ (9,804)
======== ========
The increase in interest expense, net from the three quarters ended
September 30, 2003 is due to the higher debt levels and the amortization of debt
issue costs associated with the MHR financing.
Income Tax Provision, Net
Income tax provision, net of tax benefits, was as follows (in thousands):
Three Quarters Ended
September 30,
---------------------
2004 2003
-------- ---------
Total current ................... $ 2,055 $ 436
Total deferred .................. (455) (1,399)
------- -------
Income tax provision, net... $ 1,600 $ (963)
======= =======
The difference between the statutory federal income tax rate and
Metallurg's effective rate for the three quarters ended September 30, 2004 is
principally due to: (i) taxes paid on foreign dividends; (ii) 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; and (iii) the excess of foreign tax rates
over the statutory federal income tax rate.
Net Loss
Metallurg had a net loss of $7.1 million for the three quarters ended
September 30, 2004 compared to a net loss of $14.9 million for the three
quarters ended September 30, 2003. The net loss also included income from
discontinued operations of $0.3 million and $1.2 million for the three quarters
ended September 30, 2004 and 2003 respectively and a loss on sale of
discontinued operations of $1.2 million in the three quarters ended September
30, 2004. See "Note 4. Discontinued Operations" to Metallurg's Consolidated
Financial Statements.
Liquidity and Financial Resources
General
Metallurg's sources of liquidity include cash and cash equivalents, cash
from operations and amounts available under credit facilities. At September 30,
2004, Metallurg had $14.8 million in cash and cash equivalents and working
capital of $73.8 million as compared to $18.2 million and $65.8 million,
respectively, at December 31, 2003.
22
Cash Flow Information
Cash Flows from Operating Activities - Cash used in operating activities
was $28.6 million for the three quarters ended September 30, 2004 compared to
$11.4 million for the three quarters ended September 30, 2003. In 2004, an
increase in working capital and payments for environmental liabilities,
restructuring charges and financing fees contributed to the cash used in
operating activities.
Cash Flows from Investing Activities - Net cash provided by investing
activities was $4.8 million for the three quarters ended September 30, 2004,
compared to net cash used by investing activities of $1.3 million for the three
quarters ended September 30, 2003. The net cash received from the sale of
discontinued operations was $8.3 million in the three quarters ended September
30, 2004.
Cash Flows from Financing Activities - Cash provided by financing
activities was $20.1 million for the three quarters ended September 30, 2004,
compared to $13.7 million for the three quarters ended September 30, 2003.
Metallurg received new financing of $10.0 million and a loan of $8.0 million
from related parties to facilitate the purchase of raw material for the vanadium
plant in the three quarters ended September 30, 2004. During the three quarters
ended September 30, 2003, Metallurg received $10.0 million for the sale of
subsidiaries in Germany and Turkey.
Credit Facilities and Other Financing Arrangements
MHR Credit Facility - On August 13, 2004, Metallurg refinanced its
revolving credit facility with Fleet National Bank into a new financing
agreement with MHR maturing on August 31, 2007. This financing agreement
initially provided Metallurg, Inc. a $10 million term loan for working capital
and a $21 million letter of credit facility. It allows for $15 million of the
letter of credit facility to be converted to a term loan with the proceeds being
used by SMC to settle certain environmental remediation obligations at its
Newfield facility. Transaction costs of $4.4 million were capitalized and are
being amortized over three years. Interest accrues on outstanding balances at a
rate of 20% per annum of which one-half is paid monthly in arrears and one-half
is paid-in-kind by being added to the outstanding principal balances on a
monthly basis. In addition, Metallurg pays 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. The financing agreement
is fully collateralized by all of the assets of Metallurg, Inc. and SMC, fully
guaranteed by 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. The financing agreement also requires
Metallurg to maintain a minimum borrowing base and achieve minimum Consolidated
EBITDA, as defined. Metallurg anticipates that it will seek to refinance this
agreement on more favorable terms provided its operating results continue to
improve and such financing is available. The total amount outstanding under this
agreement is $10.1 million in loans and $20.8 million in letters of credit at
September 30, 2004. On November 10, 2004, the term loan was increased to $15
million. The additional amount will be used for general corporate purposes.
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 ($72.5 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 September 30,
2004, there were 'L'1.9 million ($3.4 million) of borrowings outstanding
under these facilities. The Norwegian credit facility was fully repaid as of
September 30, 2004 upon the closure of the Norwegian plant.
Other - CIF maintains short-term secured borrowing arrangements with
various banks with interest rates ranging from 6.5% per annum to 22.8% per
annum. Borrowings under these arrangements totaled $6.8 million at September 30,
2004.
Contractual Cash Obligations
As reported in Metallurg's Annual Report on Form 10-K dated December 31,
2003, Metallurg is obligated to make future payments under various contracts,
such as debt and lease agreements. As described in Notes 8 and 11 to Metallurg's
Consolidated Financial Statements at September 30, 2004, Metallurg entered into
two new significant financing obligations. As a result of these agreements,
Metallurg's contractual cash obligations at September 30, 2004 (not including
the $15 million additional term loan to settle certain environmental remediation
obligations) increased by $1.2 million in the fourth quarter of 2004, $3.9
million in 2005, $6.6 million in 2006 and $19.4 million in 2007.
Capital Expenditures
Metallurg invested $2.1 million in capital projects during the three
quarters ended September 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 between $3 million and $4 million
for the year ended December 31, 2004, and between $4 million and $5 million for
the year ended December 31, 2005. Metallurg believes approximately half of these
capital expenditures 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 in the periods noted above,
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 future periods. 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
three quarters ended September 30, 2004, Metallurg paid $2.7 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 September 30,
2004, had an estimated net cost of completion of $22.8 million. Of this amount,
Metallurg expects to spend $1.8 million in the remaining quarter of 2004 and
$17.8 million in 2005 (including the settlement by SMC of certain environmental
remediation obligations at its Newfield facility). 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.
24
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 Metallurg'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
Metallurg 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, Metallurg'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 Metallurg'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, Metallurg's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
Metallurg 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.
ITEM 6 - EXHIBITS
10.1 Financing Agreement, dated as of August 13, 2004, by and among
Metallurg, Inc. and Shieldalloy Metallurgical Corporation, as A
Borrowers, Metallurg Holdings, Inc., as B Borrower, each subsidiary
listed therein, as A Guarantors, Metallurg, Inc., as B Guarantor, the
financial institutions from time to time party hereto, as lenders, MHR
Institutional Partners II LP, as collateral agent and as
administrative agent.
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.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on November 10, 2004 on its
behalf by the undersigned thereunto duly authorized.
METALLURG, INC.
By: /s/ Barry C. Nuss
----------------------------
Barry C. Nuss
Senior Vice President and
Chief Financial Officer
26
STATEMENT OF DIFFERENCES
The British pound sterling sign shall be expressed as..................... 'L'