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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 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 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
November 10, 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 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
Signature Page.................................................................................... 26
1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
METALLURG HOLDINGS, 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 9,652 7,305 24,829 22,910
Restructuring charges, net .................. 129 2,659 726 2,659
------- ------- -------- --------
Total operating costs and expenses .......... 86,242 74,190 246,950 217,039
------- ------- -------- --------
Operating income (loss) ..................... 2,688 (5,693) 5,638 (7,293)
Other income (expense):
Other income, net ........................... 4 25 91 67
Interest expense, net ....................... (5,427) (4,530) (14,510) (13,571)
------- ------- -------- --------
Loss before income tax provision (benefit),
minority interest and discontinued
operations................................. (2,735) (10,198) (8,781) (20,797)
Income tax provision (benefit) ............... 814 (954) 1,600 (960)
------- ------- -------- --------
Loss before minority interest and
discontinued operations ................... (3,549) (9,244) (10,381) (19,837)
Minority interest ............................ (41) (10) (39) (43)
------- ------- -------- --------
Loss from continuing operations ............. (3,590) (9,254) (10,420) (19,880)
Income (loss) from discontinued operations ... -- 115 (824) 1,175
------- ------- -------- --------
Net loss .................................... (3,590) (9,139) (11,244) (18,705)
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 .......................... $(3,904) $(9,088) $ (8,048) $(17,329)
======= ======= ======== ========
See notes to unaudited condensed consolidated financial statements.
2
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2004 2003
--------- ---------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ........................... $ 15,138 $ 18,557
Accounts receivable, net ............................ 46,471 37,771
Inventories ......................................... 62,749 44,457
Prepaid expenses and other current assets ........... 10,451 8,107
Discontinued operations - current assets ............ -- 14,738
--------- ---------
Total current assets .............................. 134,809 123,630
Property, plant and equipment, net .................... 51,660 54,324
Other assets .......................................... 25,833 20,333
Discontinued operations - non-current assets .......... -- 1,948
--------- ---------
Total ............................................. $ 212,302 $ 200,235
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Short-term debt and current portion of long-term debt $ 12,678 $ 8,315
Accounts payable .................................... 29,010 25,808
Accrued expenses .................................... 15,820 12,946
Other current liabilities ........................... 4,705 3,340
Discontinued operations - current liabilities ....... -- 9,843
--------- ---------
Total current liabilities ......................... 62,213 60,252
--------- ---------
Long-term Liabilities:
Long-term debt ...................................... 180,888 160,357
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 ....................... 231,666 213,796
--------- ---------
Total liabilities ................................. 293,879 274,048
--------- ---------
Minority Interest ..................................... 540 256
--------- ---------
Shareholders' Deficit:
Additional paid-in capital .......................... 59,911 59,911
Accumulated other comprehensive loss ................ (22,048) (25,244)
Accumulated deficit ................................. (119,980) (108,736)
--------- ---------
Total shareholders' deficit ....................... (82,117) (74,069)
--------- ---------
Total ............................................. $ 212,302 $ 200,235
========= =========
See notes to unaudited condensed consolidated financial statements.
3
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In thousands)
Three Quarters Ended
September 30,
-------------------------
2004 2003
-------- --------
Cash Flows from Operating Activities:
Net loss .................................................................................. $(11,244) $(18,705)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................................... 5,836 5,980
Deferred income taxes .................................................................. (455) (1,399)
Restructuring charges .................................................................. 726 2,659
Interest accretion on Senior Discount Notes ............................................ -- 2,611
Loss on sale of discontinued operations ................................................ 1,162 --
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable ............................................ (8,598) 1,549
(Increase) decrease in inventories .................................................... (18,222) 1,265
Increase in other current assets ...................................................... (1,743) (1,315)
Increase (decrease) in accounts payable and accrued expenses .......................... 11,119 (841)
Environmental remediation payments .................................................... (2,746) (1,686)
Restructuring payments ................................................................ (2,282) (1,060)
Other assets and liabilities, net ..................................................... (4,517) 1,256
Discontinued operations - operating activities ............................................ (719) (1,381)
-------- --------
Net cash used in operating activities ............................................... (31,683) (11,067)
-------- --------
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 ............................................ 17,644 (30)
Borrowings of short-term debt, net ........................................................ 4,486 1,800
Capital contributions ..................................................................... -- 10,000
Discontinued operations - financing activities ............................................ 1,139 1,977
-------- --------
Net cash provided by financing activities ........................................... 23,269 13,747
-------- --------
Effects of exchange rate changes on cash and cash equivalents ............................. 158 341
-------- --------
Net (decrease) increase in cash and cash equivalents ...................................... (3,419) 1,704
Cash and cash equivalents - beginning of period ........................................... 18,557 24,256
-------- --------
Cash and cash equivalents - end of period ................................................. $ 15,138 $ 25,960
======== ========
See notes to unaudited condensed consolidated financial statements.
4
METALLURG HOLDINGS, 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
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 the interest payment 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 expected cash portion of the
interest payment due January 15, 2005. See "Note 8. Borrowings". The Company
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 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.
2. Basis of Presentation
The accompanying unaudited condensed 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 majority-owned subsidiaries (collectively,
"Metallurg") and its Senior Discount Notes.
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 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 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):
Three Quarters Ended
September 30,
---------------------------
2004 2003
-------- --------
Net loss, as reported.......................... $(11,244) $(18,705)
Less: compensation expense for option awards
determined by the fair value based method,
net of related tax effects .................. 31 29
-------- --------
Pro forma net loss......................... $(11,275) $(18,734)
======== ========
4. Discontinued Operations
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 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 HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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. 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 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 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 (1,253) (4,547) (3,590)
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) -- 196 -- (954)
Net loss .......................... (2,248) (1,279) (67) (13,523) 7,978 (9,139)
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 (3,749) (12,375) (11,244)
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) -- 799 -- (960)
Net loss........................... (2,060) (1,628) (109) (19,731) 4,823 (18,705)
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 HOLDINGS, 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 HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
8. Borrowings
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, 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.
Facility A with Metallurg - The 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 for Facility A 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. Facility A 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 Facility
A is $10.1 million in loans and $20.8 million in letters of credit at September
30, 2004.
Facility B with Metallurg Holdings - The financing agreement also provided
Metallurg Holdings with two term loans. The first term loan in the amount of
$1,675,000 was made on the closing date and 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, subject to certain conditions, by January 15, 2005 to
pay a portion of the interest due on that date on the Senior Discount Notes.
Transaction costs for Facility B of $75,000 were capitalized and are being
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
at a rate of 20% per annum on all outstanding balances is 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
balance. Voluntary repayments may be made beginning July 31, 2005 along with
prepayment penalties. Facility B is fully guaranteed by Metallurg, Inc. The
total amount outstanding under Facility B is $1.7 million at September 30, 2004.
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
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
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 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
A related party bought $1,077,000 notes, on each of January 15, 2004 and
August 13, 2004, from Metallurg Holdings with the proceeds of the interest
payment due to them as a holder of Senior Discount Notes. These notes are
classified as long-term debt and are 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 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.
11
METALLURG HOLDINGS, 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.
Metallurg, Inc. and its Consolidated Subsidiaries
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 HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
12. Supplemental Guarantor Information - (Continued)
Metallurg, Inc. and its Consolidated Subsidiaries
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 HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
12. Supplemental Guarantor Information - (Continued)
Metallurg, Inc. and its Consolidated Subsidiaries
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) .... (37,124) 50,783 38,551 (89,334) (37,124)
equity
-------- -------- -------- --------- --------
Total ............................ $110,031 $128,678 $160,473 $(187,679) $211,503
======== ======== ======== ========= ========
14
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
12. Supplemental Guarantor Information - (Continued)
Metallurg, Inc. and its Consolidated Subsidiaries
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 Facility A 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
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.
- 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.
- 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, 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. 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 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, the Company 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. The Company
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, the Company 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, 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 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, 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 September 30, 2004 Compared to the
Quarter Ended September 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 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 2,680 -- 9,652
Restructuring charges and asset
impairment.......................... 129 -- -- -- -- 129
Operating income (loss)................ 1,738 2,018 752 (2,150) 330 2,688
Interest expense, net.................. (444) (423) (280) (4,280) -- (5,427)
Income tax provision (benefit)......... 479 303 351 (319) -- 814
Net income (loss)...................... 797 1,292 121 (1,253) (4,547) (3,590)
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 1,699 -- 7,305
Restructuring charges and asset
impairment.......................... 2,256 -- -- 403 -- 2,659
Operating (loss) income................ (2,795) (1,443) 129 (1,358) (226) (5,693)
Interest expense, net.................. (328) (126) (196) (3,880) -- (4,530)
Income tax (benefit) provision......... (860) (290) -- 196 -- (954)
Net loss .............................. (2,248) (1,279) (67) (13,523) 7,978 (9,139)
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 $9.7 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
10.9% of total revenue compared to 10.7% 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................................... $ 232 $ 211
Interest expense.................................. (5,659) (4,741)
---------------- ---------------
Interest expense, net........................ $(5,427) $(4,530)
================ ===============
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 $(142)
Total deferred.................................... (34) (812)
--------------- ---------------
Income tax provision, net.................... $814 $(954)
=============== ===============
The difference between the statutory federal income tax rate and the
Company'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
The Company had a net loss of $3.6 million for the quarter ended September
30, 2004 compared to a net loss of $9.1 million for the quarter ended September
30, 2003. Net loss for the quarter ended September 30, 2004 also included
$0.1 million of restructuring 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 the Company'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 6,566 -- 24,829
Restructuring charges and asset
impairment.......................... 736 -- -- (10) -- 726
Operating income (loss)................ 3,847 4,751 1,992 (4,688) (264) 5,638
Interest expense, net.................. (1,159) (1,058) (757) (11,536) -- (14,510)
Income tax provision (benefit)......... 1,111 1,155 522 (1,188) -- 1,600
Net income (loss)...................... 1,629 2,538 713 (3,749) (12,375) (11,244)
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 5,478 -- 22,910
Restructuring charges and asset
impairment.......................... 2,256 -- -- 403 -- 2,659
Operating (loss) income................ (1,658) (2,353) 489 (3,349) (422) (7,293)
Interest expense, net.................. (1,135) (325) (598) (11,513) -- (13,571)
Income tax (benefit) provision......... (709) (1,050) -- 799 -- (960)
Net loss .............................. (2,060) (1,628) (109) (19,731) 4,823 (18,705)
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 $22.9 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 $5.6 million for the three quarters ended September
30, 2004 compared to an operating loss of $7.3 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................................... $ 1,111 $ 738
Interest expense.................................. (15,621) (14,309)
-------- ---------
Interest expense, net........................ $(14,510) $ (13,571)
======== =========
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 $ 439
Total deferred.................................... (455) (1,399)
------ ------
Income tax provision, net.................... $1,600 $ (960)
====== ======
The difference between the statutory federal income tax rate and the
Company'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
The Company had a net loss of $11.2 million for the three quarters ended
September 30, 2004 compared to a net loss of $18.7 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 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 September 30,
2004, the Company had $15.1 million in cash and cash equivalents and working
capital of $72.6 million as compared to $18.6 million and $63.4 million,
respectively, at December 31, 2003.
22
Cash Flow Information
Cash Flows from Operating Activities - Cash used in operating activities
was $31.7 million for the three quarters ended September 30, 2004 compared to
$11.1 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 $23.3 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, the Company refinanced its
revolving credit facility with Fleet National Bank into a new financing
agreement with MHR maturing on August 31, 2007. Facility A under the 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 for Facility A, 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. Facility A 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 Facility A is $10.1 million in loans
and $20.8 million in letters of credit at September 30, 2004. On November 10,
2004, the Facility A term loan was increased to $15 million. The additional
amount will be used for general corporate purposes. Facility B, under the
financing agreement, provided Metallurg Holdings with two term loans. The first
term loan in the amount of $1,675,000 was made on the closing date and 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, subject to
certain conditions, by January 15, 2005 to pay a portion of the interest due on
that date on the Senior Discount Notes. Transaction costs for Facility B of
$75,000 were capitalized and are being 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 at a rate of 20% per annum on all
outstanding balances is 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 balance. Voluntary repayments may be made
beginning July 31, 2005 along with prepayment penalties. Facility B is fully
guaranteed by Metallurg, Inc. The total amount outstanding under Facility B is
$1.7 million at September 30, 2004. 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 ($72.5 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 the Company's Annual Report on Form 10-K dated December 31,
2003, the Company is obligated to make future payments under various contracts,
such as debt and lease agreements. As described in Notes 8 and 11 to the
Company's Consolidated Financial Statements at September 30, 2004, the Company
entered into four 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 $1.3 million in the fourth quarter of
2004, $4.0 million in 2005, $6.6 million in 2006, $24.1 million in 2007 and $3.7
million in 2008.
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 the Company's
annual report on Form 10-K for the year ended December 31, 2003, which is
incorporated by reference herein.
ITEM 4 - CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision of its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
of the Securities and Exchange Act of 1934 (the "Exchange Act")) 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.
PART II - OTHER INFORMATION
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.
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 (incorporated herein by reference to Exhibit 10.1 to Metallurg,
Inc.'s Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 10, 2004 (File No. 333-42141)).
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 HOLDINGS, INC.
By: /s/ Arthur R. Spector
----------------------------
Arthur R. Spector
Executive Vice President
(Principal Financial Officer and
Principal Accounting Officer)
26
STATEMENT OF DIFFERENCES
The British pound sterling sign shall be expressed as................... 'L'