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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
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)
Commission file number: 333-60077
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 May
2, 2005, 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 Income
(Loss) for the Quarter Ended March 31, 2005 and 2004 ...................... 2
Condensed Consolidated Balance Sheets at March 31, 2005 and
December 31, 2004 ......................................................... 3
Condensed Consolidated Statements of Cash Flows for the Quarter Ended
March 31, 2005 and 2004 ................................................... 4
Notes to Unaudited Condensed Consolidated Financial Statements ............ 5-14
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations ............................................................. 15-21
Item 3 - Quantitative and Qualitative Disclosure of Market Risk .................... 22
Item 4 - Controls and Procedures ................................................... 22
Part II. OTHER INFORMATION:
Item 5 - Other information ......................................................... 22
Item 6 - Exhibits .................................................................. 22
Signature Page ..................................................................... 23
1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)
Quarters Ended
March 31,
------------------
2005 2004
-------- -------
Total revenue ................................................. $122,196 $75,550
-------- -------
Operating costs and expenses:
Cost of sales .............................................. 95,361 68,234
Selling, general and administrative expenses ............... 9,214 6,967
Restructuring charges ...................................... -- 97
-------- -------
Total operating costs and expenses ......................... 104,575 75,298
-------- -------
Operating income ........................................ 17,621 252
Other income (expense):
Other income, net .......................................... 16 48
Interest expense, net ...................................... (6,104) (4,236)
-------- -------
Income (loss) before income tax provision, minority interest
and discontinued operations ................................ 11,533 (3,936)
Income tax provision .......................................... (2,662) (96)
Minority interest ............................................. (18) 39
-------- -------
Income (loss) from continuing operations ................ 8,853 (3,993)
-------- -------
Income from discontinued operations, net of tax of $171 ....... -- 338
Loss on sale of discontinued operations, net of tax of $0 ..... -- (1,162)
-------- -------
Discontinued operations ................................. -- (824)
-------- -------
Net income (loss) ....................................... 8,853 (4,817)
Other comprehensive income (loss):
Foreign currency translation adjustment .................... (88) 3,113
Deferred gain on derivatives, net .......................... 399 867
-------- -------
Comprehensive income (loss) ............................. $ 9,164 $ (837)
======== =======
See notes to unaudited condensed consolidated financial statements.
2
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2005 2004
----------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ................................ $ 15,674 $ 23,426
Accounts receivable, less allowance for doubtful accounts ... 67,549 45,944
Inventories .............................................. 74,656 62,551
Prepaid expenses and other current assets ................ 12,868 12,432
--------- ---------
Total current assets .................................. 170,747 144,353
Property, plant and equipment, net .......................... 51,449 52,502
Other assets ................................................ 21,149 22,475
--------- ---------
Total ................................................. $ 243,345 $ 219,330
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Short-term debt and current portion of long-term debt .... $ 13,546 $ 11,870
Accounts payable ......................................... 41,113 32,411
Other current liabilities ................................ 25,023 19,496
--------- ---------
Total current liabilities ............................. 79,682 63,777
--------- ---------
Long-term Liabilities:
Long-term debt ........................................... 186,761 186,138
Accrued pension liabilities .............................. 24,369 24,523
Environmental liabilities, net ........................... 16,917 19,202
Other liabilities ........................................ 2,120 2,041
--------- ---------
Total long-term liabilities ........................... 230,167 231,904
--------- ---------
Total liabilities ..................................... 309,849 295,681
--------- ---------
Commitments and Contingencies
Minority Interest ........................................... 635 652
--------- ---------
Shareholders' Deficit:
Additional paid-in capital ............................... 60,611 59,911
Accumulated other comprehensive loss ..................... (16,254) (16,565)
Accumulated deficit ...................................... (111,496) (120,349)
--------- ---------
Total shareholders' deficit ........................... (67,139) (77,003)
--------- ---------
Total ................................................. $ 243,345 $ 219,330
========= =========
See notes to unaudited condensed consolidated financial statements.
3
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Quarters Ended
March 31,
--------------------
2005 2004
--------- --------
Cash Flows from Operating Activities:
Net income (loss) ...................................................... $ 8,853 $ (4,817)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ....................................... 2,271 1,962
Deferred income taxes ............................................... 855 (222)
Interest expense paid-in-kind ....................................... 1,864 1,107
Restructuring charges ............................................... -- 97
Loss on sale of discontinued operations ............................. -- 1,162
Change in operating assets and liabilities:
Increase in accounts receivable .................................. (21,618) (6,262)
Increase in inventories .......................................... (12,104) (11,472)
Increase in other current assets ................................. (151) (1,213)
Increase in accounts payable and other current liabilities ....... 14,420 7,511
Environmental payments ........................................... (1,881) (1,046)
Restructuring payments ........................................... (113) (1,196)
Other assets and liabilities, net ................................ (215) 523
Discontinued operations - operating activities ......................... -- (719)
-------- --------
Net cash used in operating activities ......................... (7,819) (14,585)
-------- --------
Cash Flows from Investing Activities:
Additions to property, plant and equipment ............................. (766) (289)
Proceeds from sale of discontinued operations .......................... -- 8,275
Other, net ............................................................. 474 (1,370)
Discontinued operations - investing activities ......................... -- 33
-------- --------
Net cash (used in) provided by investing activities ........... (292) 6,649
-------- --------
Cash Flows from Financing Activities:
Repayment of long-term debt, net ....................................... (327) (90)
Borrowings of short-term debt, net ..................................... 761 8,441
Payment for deferred financing fees .................................... (38) --
Restricted cash deposited to collateralize revolving credit facility ... -- (7,000)
Discontinued operations - financing activities ......................... -- 1,139
-------- --------
Net cash provided by financing activities ..................... 396 2,490
-------- --------
Effects of exchange rate changes on cash and cash equivalents .......... (37) 180
-------- --------
Net decrease in cash and cash equivalents .............................. (7,752) (5,266)
Cash and cash equivalents - beginning of period ........................ 23,426 18,557
-------- --------
Cash and cash equivalents - end of period .............................. $ 15,674 $ 13,291
======== ========
See notes to unaudited condensed consolidated financial statements.
4
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. 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 and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
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, 2004 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,
2004.
The Company is wholly owned by a group of investors led by and including
Safeguard International Fund, L.P. ("Safeguard International"), an international
private equity fund that invests primarily in equity securities of companies in
process industries.
Earnings per share is not presented since Metallurg Holdings is wholly
owned by a group of private investors led by and including Safeguard
International.
2. 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 on the Company if Metallurg had
applied the fair value measurement and recognition methods prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" to record expense for stock option compensation (in
thousands):
Quarters Ended March 31,
------------------------
2005 2004
------ -------
Net income (loss), as reported................... $8,853 $(4,817)
Less: compensation expense for option awards
determined by the fair value based method,
net of related tax effects.................... 8 10
------ -------
Pro forma net income (loss).............. $8,845 $(4,827)
====== =======
Beginning January 1, 2006, the Company will record compensation expense for
all new grants in accordance with SFAS 123R.
3. 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 quarter ended March 31, 2004 included $9,140,000 of revenue and
$509,000 of income before income tax provision related to these discontinued
operations.
5
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
4. 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 into three reportable segments centered
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 consists 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 ferrotitanium and other
specialty ferroalloys for the steel and superalloy industries and aluminum
powder for various metal powder-consuming industries. On January 1, 2005, LSM
changed its functional currency from U.K. pounds sterling to U.S. dollars.
Shieldalloy Metallurgical Corporation ("SMC") - This unit consists 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 consists 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.
6
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
4. Segments and Related Information - (Continued)
Intersegment Consolidated
LSM SMC CIF Other Eliminations Totals
------- ------- ------- ------- ------------ ------------
Quarter Ended March 31, 2005
Revenue from external customers.... $52,191 $54,597 $14,345 $ 1,063 $122,196
Intergroup revenue................. 6,782 541 2,857 2,041 $(12,221) --
Net income......................... 1,557 9,779 387 12,321 (15,191) 8,853
Quarter Ended March 31, 2004
Revenue from external customers.... $35,434 $29,183 $ 6,938 $ 3,995 $ 75,550
Intergroup revenue................. 7,583 1,269 2,902 2,028 $(13,782) --
Net income (loss).................. 313 (263) 214 (1,386) (3,695) (4,817)
5. Inventories
Inventories consist of the following (in thousands):
March 31, December 31,
2005 2004
--------- ------------
Raw materials.................. $30,646 $19,973
Work in process................ 932 787
Finished goods................. 41,531 40,474
Other.......................... 1,547 1,317
------- -------
Total....................... $74,656 $62,551
======= =======
6. 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.
7
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
7. Retirement Plans
Metallurg maintains defined benefit plans for its employees in the U.S.
and the U.K. Net pension cost for these plans consisted of the following for the
quarters ended March 31, 2005 and 2004 (in thousands):
U.S. Plans Non-U.S. Plans
Quarters ended March 31, Quarters ended March 31,
------------------------ ------------------------
2005 2004 2005 2004
----- ----- ------- --------
Components of net periodic benefit cost:
Service cost.............................. $ 132 $ 123 $ 758 $ 705
Interest cost............................. 332 330 1,658 1,545
Expected return on plan assets............ (369) (349) (1,797) (1,528)
Net amortization and deferral............. 72 71 531 588
----- ----- ------- -------
Total net periodic benefit cost........ $ 167 $ 175 $ 1,150 $ 1,310
===== ===== ======= =======
As of March 31, 2005, $55,000 of contributions have been made for U.S.
plans and $1,379,000 of contributions have been made for non-U.S. plans.
Metallurg presently anticipates contributing an additional $270,000 to fund its
U.S. plans and $4,341,000 to fund its non-U.S. plans in 2005.
8. Income Taxes
The American Jobs Creation Act (the "AJCA"), which was signed into law on
October 22, 2004, created a special one-time 85% tax deduction for certain
repatriated foreign earnings that are reinvested in qualifying domestic
activities, as defined in the AJCA. The Company may elect to apply this
provision to qualifying earnings repatriations in the year ending December 31,
2005. The Company is in the process of evaluating the effects of the
repatriation provision and expects to complete its evaluation after its
assessment of clarifying guidance published by Congress or the Treasury
Department. As of December 31, 2004, the maximum amount the Company is
eligible to repatriate under the AJCA is approximately $44,700,000. The
estimated tax provision that would be required on this amount would be
approximately $2,400,000. If any amount is repatriated, it would likely be
less than the maximum, with a proportional reduction in the estimated provision
for income taxes.
9. Related Party Transactions
On January 15, 2005, a related party bought a $1,077,000 note from
Metallurg Holdings with the proceeds of the interest payment due to them as a
holder of Senior Discount Notes. 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.
8
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
10. Supplemental Guarantor Information
In November 1997, Metallurg, Inc. issued $100 million principal amount of
its 11% Senior Notes due 2007. Under the terms of the Senior Notes, SMC,
Metallurg Holdings Corporation, Metallurg Services, Inc., Metallurg
International Resources, LLC ("MIR, LLC") and MIR (China), Inc. (collectively,
the "Guarantors"), wholly owned subsidiaries of Metallurg, Inc., have fully and
unconditionally guaranteed on a joint and several basis Metallurg, Inc.'s
obligations to pay principal, premium and interest relative to the Senior Notes.
Management has determined that separate, full financial statements of the
Guarantors would not be material to potential investors and, accordingly, such
financial statements are not provided. Supplemental financial information of the
Guarantors is presented below.
Metallurg, Inc. and its Consolidated Subsidiaries
Condensed Consolidating Statement of Operations (Unaudited)
Quarter Ended March 31, 2005
(In thousands)
Combined
Combined Non-
Guarantor Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Total revenue............................... $55,138 $78,627 $(11,569) $122,196
------- ------- -------- --------
Operating costs and expenses:
Cost of sales............................ 36,380 70,241 (11,260) 95,361
Selling, general and administrative
expenses.............................. $ 1,777 3,376 4,052 -- 9,205
------- ------- ------- -------- --------
Total operating costs and expenses.... 1,777 39,756 74,293 (11,260) 104,566
------- ------- ------- -------- --------
Operating (loss) income............... (1,777) 15,382 4,334 (309) 17,630
Other:
Other income, net........................ -- -- 16 -- 16
Interest expense, net.................... (3,387) (212) (949) -- (4,548)
Equity in earnings of subsidiaries....... 11,477 1,461 1,944 (14,882) --
------- ------- ------- -------- --------
Income before income tax benefit
(provision) and minority interest.. 6,313 16,631 5,345 (15,191) 13,098
Income tax benefit (provision) ............. 4,105 (5,140) (1,627) -- (2,662)
Minority interest........................... -- -- (18) -- (18)
------- ------- ------- -------- --------
Net income............................ $10,418 $11,491 $ 3,700 $(15,191) $ 10,418
======= ======= ======= ======== ========
9
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
10. Supplemental Guarantor Information - (Continued)
Metallurg, Inc. and its Consolidated Subsidiaries
Condensed Consolidating Statement of Operations (Unaudited)
Quarter Ended March 31, 2004
(In thousands)
Combined
Combined Non-
Guarantor Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Total revenue............................... $32,734 $55,636 $(12,820) $75,550
------- ------- -------- -------
Operating costs and expenses:
Cost of sales............................ 30,229 50,406 (12,401) 68,234
Selling, general and administrative
expenses.............................. $ 1,293 1,827 3,844 -- 6,964
Restructuring charges.................... -- -- 97 -- 97
------- ------- ------- -------- -------
Total operating costs and expenses.... 1,293 32,056 54,347 (12,401) 75,295
------- ------- ------- -------- -------
Operating (loss) income............... (1,293) 678 1,289 (419) 255
Other:
Other income, net........................ -- -- 48 -- 48
Interest expense, net.................... (2,193) 134 (862) -- (2,921)
Equity in earnings of subsidiaries....... (441) 2,852 865 (3,276) --
------- ------- ------- -------- -------
(Loss) income before income tax
benefit (provision), minority
interest and discontinued
operations......................... (3,927) 3,664 1,340 (3,695) (2,618)
Income tax benefit (provision).............. 458 (496) (58) -- (96)
Minority interest........................... -- -- 39 -- 39
------- ------- ------- -------- -------
(Loss) income from continuing
operations......................... (3,469) 3,168 1,321 (3,695) (2,675)
Discontinued operations..................... (30) (3,577) 2,783 -- (824)
------- ------- ------- -------- -------
Net (loss) income..................... $(3,499) $(409) $ 4,104 $ (3,695) $(3,499)
======= ======= ======= ======== =======
10
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
10. Supplemental Guarantor Information - (Continued)
Metallurg, Inc. and its Consolidated Subsidiaries
Condensed Consolidating Balance Sheet (Unaudited)
March 31, 2005
(In thousands)
Combined
Combined Non-
Guarantor Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents................... $ 12,872 $ 263 $ 2,172 $ 15,307
Accounts receivable, net.................... 25,575 31,086 55,172 $ (44,204) 67,629
Inventories................................. -- 42,615 33,118 (1,077) 74,656
Prepaid expenses and other current assets .. 512 6,603 11,529 (5,776) 12,868
-------- -------- -------- --------- --------
Total current assets..................... 38,959 80,567 101,991 (51,057) 170,460
Investments - intergroup....................... 70,174 12,971 43,348 (126,493) -
Property, plant and equipment, net............. 119 19,021 32,309 -- 51,449
Other assets................................... 12,334 32,203 8,660 (32,525) 20,672
-------- -------- -------- --------- --------
Total.................................... $121,586 $144,762 $186,308 $(210,075) $242,581
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDER'S (DEFICIT)
EQUITY
Current Liabilities:
Short-term debt and current portion of
long-term debt........................... $ 2,000 $ 11,546 $ 13,546
Accounts payable............................ 4,657 $ 44,504 36,109 $ (44,204) 41,066
Other current liabilities................... 6,439 15,345 7,577 (5,776) 23,585
-------- -------- -------- --------- --------
Total current liabilities................ 13,096 59,849 55,232 (49,980) 78,197
-------- -------- -------- --------- --------
Long-term Liabilities:
Long-term debt.............................. 122,345 -- 17,764 -- 140,109
Accrued pension liabilities................. 5,211 709 18,449 -- 24,369
Environmental liabilities, net.............. -- 16,917 -- -- 16,917
Other liabilities........................... 700 -- 33,945 (32,525) 2,120
-------- -------- -------- --------- --------
Total long-term liabilities.............. 128,256 17,626 70,158 (32,525) 183,515
-------- -------- -------- --------- --------
Total liabilities........................ 141,352 77,475 125,390 (82,505) 261,712
-------- -------- -------- --------- --------
Minority interest.............................. -- -- 635 -- 635
Shareholder's (Deficit) Equity:
Common stock................................ 50 1,217 109,133 (110,350) 50
Due from parent company..................... (2,238) -- -- -- (2,238)
Additional paid-in capital.................. 46,319 123,864 7,076 (130,940) 46,319
Accumulated other comprehensive loss........ (16,657) (13,572) (24,407) 37,979 (16,657)
Accumulated deficit......................... (47,240) (44,222) (31,519) 75,741 (47,240)
-------- -------- -------- --------- --------
Total shareholder's (deficit) equity..... (19,766) 67,287 60,283 (127,570) (19,766)
-------- -------- -------- --------- --------
Total.................................... $121,586 $144,762 $186,308 $(210,075) $242,581
======== ======== ======== ========= ========
11
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
10. Supplemental Guarantor Information - (Continued)
Metallurg, Inc. and its Consolidated Subsidiaries
Condensed Consolidating Balance Sheet (Unaudited)
December 31, 2004
(In thousands)
Combined
Combined Non-
Guarantor Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............... $ 19,384 $ 1,498 $ 2,179 $ 23,061
Accounts receivable, net ................ 22,169 20,357 45,934 $ (42,436) 46,024
Inventories ............................. -- 31,708 31,611 (768) 62,551
Prepaid expenses and other current
assets ............................... 2,372 5,850 11,095 (6,885) 12,432
-------- -------- -------- --------- --------
Total current assets ................. 43,925 59,413 90,819 (50,089) 144,068
Investments - intergroup ................... 58,161 11,199 41,058 (110,418) --
Property, plant and equipment, net ......... 128 19,438 32,936 -- 52,502
Other assets ............................... 12,635 39,885 9,732 (40,256) 21,996
-------- -------- -------- --------- --------
Total ................................ $114,849 $129,935 $174,545 $(200,763) $218,566
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDER'S (DEFICIT)
EQUITY
Current Liabilities:
Short-term debt and current portion of
long-term debt ....................... $ 1,000 $ 10,870 $ 11,870
Accounts payable ......................... 4,939 $ 41,525 28,336 $ (42,436) 32,364
Accrued expenses ......................... 3,151 4,479 5,368 -- 12,998
Other current liabilities ................ -- 8,785 1,883 (6,885) 3,783
-------- -------- -------- --------- --------
Total current liabilities ............ 9,090 54,789 46,457 (49,321) 61,015
-------- -------- -------- --------- --------
Long-term Liabilities:
Long-term debt .......................... 122,792 -- 18,792 -- 141,584
Accrued pension liabilities ............. 5,118 684 18,721 -- 24,523
Environmental liabilities, net .......... -- 19,202 -- -- 19,202
Other liabilities ....................... 8,300 -- 33,997 (40,256) 2,041
-------- -------- -------- --------- --------
Total long-term liabilities .......... 136,210 19,886 71,510 (40,256) 187,350
-------- -------- -------- --------- --------
Total liabilities .................... 145,300 74,675 117,967 (89,577) 248,365
-------- -------- -------- --------- --------
Minority interest .......................... -- -- 652 -- 652
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 .... (16,968) (13,883) (25,064) 38,947 (16,968)
Accumulated deficit ..................... (57,658) (59,531) (35,219) 94,750 (57,658)
-------- -------- -------- --------- --------
Total shareholder's (deficit)
equity ............................ (30,451) 55,260 55,926 (111,186) (30,451)
-------- -------- -------- --------- --------
Total ................................ $114,849 $129,935 $174,545 $(200,763) $218,566
======== ======== ======== ========= ========
12
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
10. Supplemental Guarantor Information - (Continued)
Metallurg, Inc. and its Consolidated Subsidiaries
Condensed Consolidating Statement of Cash Flows (Unaudited)
Quarter Ended March 31, 2005
(In thousands)
Combined
Combined Non-
Guarantor Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Consolidated
--------------- ------------ ------------ ------------
Cash Flows from Operating Activities ....... $(3,112) $(3,955) $ 739 $(6,328)
------- ------- ------- -------
Cash Flows from Investing Activities:
Additions to property, plant and
equipment ............................... (4) (19) (743) (766)
Other, net ................................. -- -- 474 474
------- ------- ------- -------
Net cash used in investing activities ... (4) (19) (269) (292)
------- ------- ------- -------
Cash Flows from Financing Activities:
Intergroup (repayments) borrowings ......... (3,127) 3,214 (87) --
Repayment of long-term debt ................ -- -- (1,114) (1,114)
Net short-term borrowings .................. -- -- 761 761
Loan to parent company ..................... (744) -- -- (744)
Intergroup dividends received (paid) ....... 475 (475) -- --
------- ------- ------- -------
Net cash (used in) provided by
financing activities ................. (3,396) 2,739 (440) (1,097)
------- ------- ------- -------
Effects of exchange rate changes on
cash and cash equivalents ............... -- -- (37) (37)
------- ------- ------- -------
Net decrease in cash and cash equivalents .. (6,512) (1,235) (7) (7,754)
Cash and cash equivalents - beginning of
period .................................. 19,384 1,498 2,179 23,061
------- ------- ------- -------
Cash and cash equivalents - end of period .. $12,872 $ 263 $ 2,172 $15,307
======= ======= ======= =======
13
METALLURG HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - (Continued)
10. Supplemental Guarantor Information - (Continued)
Metallurg, Inc. and its Consolidated Subsidiaries
Condensed Consolidating Statement of Cash Flows (Unaudited)
Quarter Ended March 31, 2004
(In thousands)
Combined
Combined Non-
Guarantor Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Consolidated
--------------- ------------ ------------ ------------
Cash Flows from Operating Activities ....... $ (601) $(11,053) $(1,436) $(13,090)
------- -------- ------- --------
Cash Flows from Investing Activities:
Additions to property, plant and
equipment ............................... (2) (97) (190) (289)
Other, net ................................. -- -- 6,938 6,938
------- -------- ------- --------
Net cash used in investing activities ... (2) (97) 6,748 6,649
------- -------- ------- --------
Cash Flows from Financing Activities:
Intergroup (repayments) borrowings ......... (8,312) 18,199 (9,887) --
Repayment of long-term debt ................ -- -- (90) (90)
Net short-term borrowings .................. 8,000 -- 441 8,441
Loan to parent company ..................... (1,494) -- -- (1,494)
Restricted cash deposited to collateralize
revolving credit facility ............... (7,000) -- -- (7,000)
Other, net ................................. -- -- 1,139 1,139
Intergroup dividends received (paid) ....... 7,819 (7,730) (89) --
------- -------- ------- --------
Net cash (used in) provided by
financing activities ................. (987) 10,469 (8,486) 996
------- -------- ------- --------
Effects of exchange rate changes on
cash and cash equivalents ............... -- -- 180 180
------- -------- ------- --------
Net decrease in cash and cash equivalents .. (1,590) (681) (2,994) (5,265)
Cash and cash equivalents - beginning of
period .................................. 6,409 745 11,084 18,238
------- -------- ------- --------
Cash and cash equivalents - end of period .. $ 4,819 $ 64 $ 8,909 $ 12,973
======= ======== ======= ========
14
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 "plan", "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:
o The cyclical nature of the Company's business.
o 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.
o The impact of changes of the prices of raw materials and our products.
o 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.
o The ability to complete a refinancing of the financing agreement with
MHR on favorable terms, if at all.
o The ability to meet debt service requirements.
o The availability of raw materials.
o The impact of worldwide competition.
o The economic strength of the Company's markets generally and
particularly the strength of the demand for aluminum, iron, steel,
superalloys and titanium alloys in those markets.
o The impact of changes in the business of our end users.
o The impact of changes in technology and methods of marketing.
o The accuracy of the Company's estimates of the costs of environmental
remediation.
o The extension or expiration of existing anti-dumping duties.
o The performance of world financial markets and its effect on the
pension expense of the Company's defined benefit plans.
o 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 22 of the Company's annual report on Form 10-K for the year ended
December 31, 2004. The critical accounting estimates affecting the Company have
not changed since December 31, 2004.
15
Overview
The Company is one of the world's leading developers, manufacturers and
marketers of highly engineered and technologically advanced metal alloying
additives. Its products are essential to the production of high performance
aluminum and titanium alloys, superalloys, and specialty steels that are used in
mission critical applications across a range of end markets, including the
electronics, aerospace, automotive, chemical processing, energy and construction
industries. Through its focus on manufacturing and sourcing efficiencies, the
Company believes that it is the low cost producer for many of the products that
it sells. The Company operates production facilities in the U.K., the U.S. and
Brazil. The Company's products are primarily sold to one of three major market
sectors: the aluminum industry, the steel industry and the superalloy industry.
Overall operating conditions in each of these sectors have improved over
the last year due to a rebound in general economic conditions worldwide and
important changes in consumption patterns in China. The improved market
conditions have contributed, along with certain production capacity reductions,
to a tighter supply and demand balance for several of the Company's products.
Additionally, a declining U.S. dollar caused prices for some of our products to
rise as foreign competitors increased prices to offset the negative effect of
the declining U.S. dollar. 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 continued to improve from the low levels
experienced in recent years, coinciding with increased global economic activity.
On the supply side, a significant amount of excess and idle capacity exists in
the aluminum master alloy industry. In the third quarter of 2004, Metallurg
closed its master alloy facility in Norway to reduce excess capacity in the
industry. Customers 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 our products have shown some improvement. 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 and world steel production continues to grow at levels in excess
of world GDP growth. Demand for ferrovanadium improved during 2004 and continues
to be strong in 2005, driven by increasing world specialty steel production and
increasing use of vanadium-bearing specialty steels in China, particularly for
use in construction. The global supply/demand outlook for ferrovanadium has
changed over the last few years, with Asia becoming a net importer of material
instead of a net exporter. In the first quarter of 2004, we were successful in
securing a significant long-term source of vanadium to improve capacity
utilization and profitability. In April 2004, a labor strike affecting the
ferrovanadium production facility in Cambridge, Ohio was settled with the
ratification of a new three-year contract. The effects of securing new long-term
raw materials arrangements, settling the labor strike and increased demand and
pricing for ferrovanadium have improved profitability throughout 2004 and into
2005. During the fourth quarter of 2004 and the first quarter of 2005, market
prices have moved significantly higher. We expect demand for ferrovanadium to
remain strong and prices to remain well above long-term historical trend levels
throughout 2005. We expect that raw material costs, for the production of
ferrovanadium, to rise in 2006, as some of our raw material contracts are
referenced to historical market prices.
The superalloy industry has rebounded from the low production levels of
recent years. This increase is driven by higher military spending, increased
applications for energy related projects and improving commercial airliner
production build rates. Titanium prices have increased significantly throughout
2004 and into 2005 due to higher demand, primarily in aerospace applications. We
expect these strong market fundamentals to continue throughout 2005.
16
Results of Operations - The Quarter Ended March 31, 2005 Compared to the Quarter
Ended March 31, 2004
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 into three reportable segments centered
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 the financial statement presentation nor in segment assets from the
amounts disclosed in the last annual report.
Intersegment
LSM SMC CIF Other Eliminations Consolidated
------- ------- ------- ------- ------------ ------------
(In thousands)
Quarter Ended March 31, 2005
Total revenue ...................... $58,973 $55,138 $17,202 $ 3,104 $(12,221) $122,196
Gross profit ....................... 5,717 18,758 2,183 486 (309) 26,835
SG&A ............................... 2,895 3,393 750 2,176 -- 9,214
Operating income (loss) ............ 2,822 15,365 1,433 (1,690) (309) 17,621
Interest expense, net .............. (323) (576) (310) (4,895) -- (6,104)
Income tax provision (benefit) ..... 940 5,010 736 (4,024) -- 2,662
Net income ......................... 1,557 9,779 387 12,321 (15,191) 8,853
Intersegment
LSM SMC CIF Other Eliminations Consolidated
------- ------- ------ ------- ------------ ------------
(In thousands)
Quarter Ended March 31, 2004
Total revenue ...................... $43,017 $30,452 $9,840 $ 6,023 $(13,782) $75,550
Gross profit ....................... 3,650 2,178 980 927 (419) 7,316
SG&A ............................... 2,883 1,804 526 1,754 -- 6,967
Operating income (loss) ............ 670 374 454 (827) (419) 252
Interest expense, net .............. (355) (235) (205) (3,441) -- (4,236)
Income tax provision (benefit) ..... 89 402 35 (430) -- 96
Net income (loss) .................. 313 (263) 214 (1,386) (3,695) (4,817)
17
Total Revenue
Consolidated total revenue increased by $46.6 million (62%) in the quarter
ended March 31, 2005.
LSM revenue for the quarter ended March 31, 2005 was $16.0 million (37%)
higher than the quarter ended March 31, 2004. Sales of aluminum master alloys
and compacted products increased by $4.5 million as a result of a 29% increase
in selling prices. Sales of aluminum powder increased by $3.6 million as a
result of a 39% increase in sales volume and a 19% increase in selling prices.
Sales of chrome products increased by $1.0 million as a result of a 4% increase
in sales volume and a 9% increase in selling prices. Sales of ferrotitanium were
$5.5 million higher, due to a 102% increase in average unit selling prices. The
remaining increase in revenues of $1.4 million relates to other products.
SMC revenue for the quarter ended March 31, 2005 was $24.7 million (81%)
higher than the quarter ended March 31, 2004. Sales of vanadium products,
produced in SMC's Ohio plant, increased by $22.0 million as a result of a 64%
increase in sales volume and a 129% increase in selling prices. Sales of third
party produced products increased by $1.6 million as a result of an increase in
the selling price of chrome products. The remaining increase in revenues of $1.1
million relates to other products.
CIF revenue for the quarter ended March 31, 2005 was $7.4 million (75%)
higher than the quarter ended March 31, 2004. Sales of aluminum master alloys
and compacted products increased by $3.5 million (50%), as a result of a 23%
increase in sales volume and a 22% increase in selling prices. Sales of tantalum
products rose by $2.0 million (246%), due to a 94% increase in sales volume and
a 78% increase in selling prices. Sales of niobium products rose by $1.0 million
(54%), despite lower selling prices, due to a 99% increase in sales volume. The
remaining increase in revenues of $0.9 million relates to other products.
Gross Profit
Consolidated gross profit increased to $26.8 million (22.0% of total
revenue) for the quarter ended March 31, 2005 from $7.3 million (9.7% of total
revenue) for the quarter ended March 31, 2004.
LSM gross profit for the quarter ended March 31, 2005 was $2.1 million
(57%) higher than the quarter ended March 31, 2004. Gross profit from aluminum
products increased by $2.3 million, due to higher selling prices partially
offset by increased unit costs. Gross profit from chrome products decreased by
$0.4 million due to higher unit costs, despite higher selling prices. Gross
profit from ferrotitanium improved by $0.1 million as a result of higher prices
that were mostly offset by higher unit costs.
SMC gross profit for the quarter ended March 31, 2005 was $16.6 million
(761%) higher than the quarter ended March 31, 2004. Gross profit from vanadium
products improved by $16.8 million as a result of an increase in average selling
prices, partially offset by an increase in unit costs.
CIF gross profit for the quarter ended March 31, 2005 increased by $1.2
million (123%) from the quarter ended March 31, 2004. Gross profit from tantalum
products improved by $0.7 million as a result of an increase in average selling
prices, partially offset by an increase in unit costs.
Selling, General and Administrative Expenses ("SG&A")
SG&A increased to $9.2 million (7.5% of total revenue) for the quarter
ended March 31, 2005 compared to $7.0 million (9.2% of total revenue) for the
quarter ended March 31, 2004. The dollar increase was due to higher bank charges
of $0.5 million primarily associated with the MHR financing agreement, higher
professional fees of $1.1 million primarily for compliance with the
Sarbanes-Oxley Act of 2002 and additional incentive compensation costs of $1.0
million associated with improved results. The percentage decrease was due
primarily to an increase in total revenue.
Operating Income (Loss)
Operating income was $17.6 million for the quarter ended March 31, 2005
compared to $0.3 million for the quarter ended March 31, 2004 primarily due to
the increase in gross profit offset by the increase in SG&A as discussed above.
18
Interest Expense, Net
Interest expense, net, was as follows (in thousands):
Quarters Ended
March 31,
-----------------
2005 2004
------- -------
Interest income............................................ $ 277 $ 621
Interest expense........................................... (6,381) (4,857)
------- -------
Interest expense, net................................... $(6,104) $(4,236)
======= =======
The increase in interest expense, net for the quarter ended March 31, 2005
is due to the higher debt levels, higher effective interest rates 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
March 31,
--------------
2005 2004
------ -----
Total current ................................................ $1,807 $ 318
Total deferred ............................................... 855 (222)
------ -----
Income tax provision, net ................................. $2,662 $ 96
====== =====
The difference between the statutory federal income tax rate and the
Company's effective rate for the quarters ended March 31, 2005 and 2004, is
principally due to: (i) certain deductible temporary differences, principally
domestic net operating losses, which in other circumstances would have generated
a deferred tax benefit, have been fully provided for in a valuation allowance
and (ii) the excess of foreign tax rates over the statutory federal income tax
rate.
Net Income (Loss)
The Company had net income of $8.9 million for the quarter ended March 31,
2005 compared to a net loss of $4.8 million for the quarter ended March 31, 2004
due to the higher operating income discussed above, offset by higher interest
expense, net and higher provision for income taxes. Net income for the quarter
ended March 31, 2004 also included a net loss from discontinued operations of
$0.8 million. See "Note 3. Discontinued Operations" to the Company's
Consolidated Financial Statements.
Liquidity and Financial Resources
General
The Company's sources of liquidity include cash and cash equivalents, cash
from operations and amounts available under credit facilities. At March 31,
2005, the Company had $15.7 million in cash and cash equivalents and working
capital of $91.1 million as compared to $23.4 million and $80.6 million,
respectively, at December 31, 2004.
Metallurg Holdings currently does not have sufficient cash on hand to make
the interest payments due on the Senior Discount Notes. Metallurg, Inc. does not
have the capacity to provide money to Metallurg Holdings to pay the interest on
the Senior Discount Notes. Metallurg Holdings' next interest payment to
non-related parties is due July 15, 2005 in the amount of $1.5 million. In March
2005, Metallurg Holdings received a letter of support from Safeguard
International assuring support to Metallurg Holdings in meeting its cash flow
needs through at least May 31, 2006.
19
Cash Flow Information
Cash Flows from Operating Activities - Cash used in operating activities
was $7.8 million for the quarter ended March 31, 2005 compared to $14.6 million
for the quarter ended March 31, 2004. The improvement in net income of $8.9
million in 2005 vs. a loss of $4.8 million in 2004 was offset by an increase in
components of working capital of $19.5 million due to improved operations and
higher metal prices.
Cash Flows from Investing Activities - Cash used in investing activities
was $0.3 million for the quarter ended March 31, 2005 compared to net cash
provided by investing activities of $6.6 million for the quarter ended March 31,
2004. In 2004, the sale of the South African sales office was partially offset
by a loan provided to the buyer of that sales office.
Cash Flows from Financing Activities - Cash provided by financing
activities was $0.4 million for the quarter ended March 31, 2005, compared to
$2.5 million for the quarter ended March 31, 2004. In 2004, the Company received
an $8.0 million loan from related parties to facilitate the purchase of raw
material for the vanadium plant and had to deposit $7.0 million as cash
collateral for its revolving credit facility.
Credit Facilities and Other Financing Arrangements
Senior Discount Notes - The Company has not made any changes to the terms
of its Senior Discount Notes described in its Annual Report on Form 10-K as of
December 31, 2004.
Senior Notes - The Company has not made any changes to the terms of its
Senior Notes described in its Annual Report on Form 10-K as of December 31,
2004.
MHR Credit Facility - The Company has not made any changes to the terms of
this facility described in its Annual Report on Form 10-K as of December 31,
2004. The total amount outstanding under this agreement is $15.9 million in
loans and $20.8 million in letters of credit at March 31, 2005.
LSM Revolving Credit Facilities - LSM has not made any changes to the terms
of these facilities described in Metallurg's Annual Report on Form 10-K as of
December 31, 2004. At March 31, 2005, there were $1.1 million of borrowings
outstanding under these facilities at an interest rate of 3.9% and included in
short-term debt on the consolidated balance sheet.
LSM Term Loans - In January 2005, these loans were amended to denominate
them in U.S. dollars on similar terms and conditions. The loan with Barclays
Bank plc is for $10.5 million for a term of two years and three months and bears
interest at 3-month U.S. dollar LIBOR plus 1.75%. LSM makes quarterly principal
repayments of $0.3 million plus interest. At March 31, 2005, $10.2 million
remains outstanding under this loan. The loan with HSBC Bank plc is for $10.5
million for a term of four and one-half years and bears interest at 3-month U.S.
dollar LIBOR plus 1.65%. LSM makes quarterly principal repayments of $0.4
million plus interest. At March 31, 2005, $10.1 million remains outstanding
under this loan. These term loan facilities are collateralized by the assets of
LSM and require LSM to comply with various covenants, including the maintenance
of minimum tangible net worth and interest coverage.
Other - CIF maintains short-term secured and unsecured borrowing
arrangements with various banks totaling $10.7 million. Borrowings under these
arrangements aggregated $7.7 million at March 31, 2005 at a weighted-average
interest rate of 9.6%.
20
Capital Expenditures
The Company invested $0.8 million in capital projects during the quarter
ended March 31, 2005. The Company's capital expenditures include projects
related to improving the Company's operations, productivity improvements,
replacement projects and ongoing environmental requirements (which are in
addition to expenditures discussed in "Environmental Remediation Costs" below).
Capital expenditures are projected to total approximately $5.3 million for the
year ended December 31, 2005. The Company 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 the Company has projected these items in the periods noted above, the
Company 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. The Company
believes that these projects will be funded through existing and future
internally generated cash and credit lines.
Environmental Remediation Costs
Losses associated with environmental remediation obligations are accrued
when such losses are deemed probable and reasonably estimable. Such accruals
generally are recognized no later than the completion of the remedial
feasibility study and are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental remediation
obligations are generally not discounted to their present value. During the
quarter ended March 31, 2005, Metallurg paid $1.9 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 March 31, 2005,
had an estimated net cost of completion of $19.2 million. Of this amount, the
Company expects to spend $1.4 million in the remaining three quarters of 2005
(not including the settlement by SMC of certain environmental remediation
obligations at its Newfield facility) and $3.3 million in 2006. These amounts
have been accrued for in prior years and are reflected in the Company's
consolidated balance sheet liabilities.
While its remediation obligations and other environmental costs, in the
aggregate, will reduce its liquidity, the Company 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.
21
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, 2004, 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
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.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on May 2, 2005 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)
23