UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q(1)
(Mark One)
<checked-box>[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
METALLURG, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-1661467
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6 EAST 43RD STREET
NEW YORK, NEW YORK 10017
(Address of Principal Executive Offices)
(Zip Code)
(212) 835-0200
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ ] No <checked-box> [ X ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes <checked-box>X No
The number of shares of common stock, $0.01 par value, issued and outstanding
as of December 15, 1997 was 4,956,406 and on a fully diluted basis was
5,016,073, which includes options exercisable within 60 days of such date.
(1) As of the date hereof, the Company is not required by law under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") to file this
form with the Securities and Exchange Commission (the "SEC"). However,
pursuant to Section 4.02 of the Indenture, dated as of November 25, 1997, by
and among the Company, certain of its subsidiaries and IBJ Schroder Bank &
Trust Company, as trustee, the Company is required to file with the SEC such
information, documents and other reports as are specified under Section 13 and
15(d) of the Exchange Act. The Company has chosen to fulfill its obligations
under such Indenture by filing this report on form 10-Q with the SEC.
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
Part I. FINANCIAL INFORMATION: Page No.
Item 1 - Financial Statements (Unaudited)
Condensed Statements of Consolidated Operations
for the Quarter and the Two Quarters Ended October 31, 1997,
the Quarter Ended March 31, 1997 and the Three Months and
the Nine Months Ended September 30, 1996 3
Condensed Consolidated Balance Sheets at October 31, 1997,
March 31, 1997 and December 31, 1996 4
Condensed Statements of Consolidated Cash Flows for the
Two Quarters Ended October 31, 1997, the Quarter Ended
March 31, 1997 and the Nine Months Ended September 30, 1996 5
Notes to Condensed Unaudited Consolidated Financial
Statements 6 - 11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 17
Part II. OTHER INFORMATION
Item 6. (a) EXHIBITS 18
6. (b) REPORT ON FORM 8-K
Signature Page 19
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Predecessor
Reorganized Company Company Predecessor Company
-------------------------- ----------- ---------------------------
Quarter Two Quarters Quarter Three Months Nine Months
Ended Ended Ended Ended Ended
October 31, October 31, March 31, September 30, September 30,
1997 1997 1997 1996 1996
----------- ------------ ---------- ----------- ------------
Total revenue $148,325 $315,204 $155,587 $149,079 $480,834
Operating costs and -------- -------- -------- -------- ---------
expenses:
Cost of sales 127,276 269,411 134,060 129,029 417,704
Selling, general and
administrative
expenses 13,560 27,987 15,046 13,913 41,288
Other operating
expenses - - - 596 1,756
-------- -------- --------- -------- ---------
Total operating costs
and expenses 140,836 297,398 149,106 143,538 460,748
------- ------- ------- ------- -------
Operating income 7,489 17,806 6,481 5,541 20,086
Other income (expense):
Other income, net 1,074 998 3,179 140 3,560
Interest income
(expense), net (1,332) (2,811) (245) 535 782
Reorganization
expense - - (2,663) (980) (2,410)
Fresh-start
revaluation - - 5,107 - -
-------- -------- --------- -------- ---------
Income before income
tax provision and
extraordinary item 7,231 15,993 11,859 5,236 22,018
Income tax provision
(benefit) 5,517 10,628 (3,063) 2,080 7,424
-------- -------- --------- -------- ---------
Net income before
extraordinary item 1,714 5,365 14,922 3,156 14,594
Extraordinary item - - 43,032 - -
-------- -------- --------- -------- ---------
Net income $1,714 $5,365 $57,954 $3,156 $14,594
======== ======== ========= ======== =========
Common shares and
common share
equivalents
(actual and
pro forma) 4,956 4,956 4,956 4,956 4,956
Earnings per
common share
(actual and
pro forma):
Income before
extraordinary
item $0.35 $1.08 $ 3.01 $0.64 $2.94
Extraordinary item - - 8.68 - -
-------- -------- --------- -------- ---------
Net income $0.35 $1.08 $11.69 $0.64 $2.94
======== ======== ========= ======== =========
See notes to condensed unaudited consolidated financial statements
3
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
Reorganized
Company Predecessor Company
----------- ----------------------------
October 31, March 31, December 31,
1997 1997 1996
----------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $25,618 $30,340 $63,274
Accounts and notes receivable, net 83,298 94,150 88,595
Inventories 126,776 109,258 106,363
Other assets 12,280 17,492 16,158
-------- -------- --------
Total current assets 247,972 251,240 274,390
Property, plant and equipment, net 39,783 38,907 47,885
Other assets 14,956 15,557 9,351
-------- -------- --------
TOTAL $302,711 $305,704 $331,626
======== ======== ========
LIABILITIES
Current liabilities:
Short-term debt and current portion
of long-term debt $14,269 $14,777 $14,820
Trade payables 53,604 55,947 48,264
Accrued expenses 26,010 25,351 21,599
Other current liabilities 11,410 11,849 15,973
-------- -------- --------
Total current liabilities 105,293 107,924 100,656
-------- -------- -------
Long-term debt 50,695 51,711 5,049
Accrued pension liabilities 39,530 41,090 42,773
Environmental liabilities, net 42,067 42,865 34,637
Other liabilities 6,462 12,114 10,793
-------- -------- --------
Total long-term liabilities 138,754 147,780 93,252
-------- -------- --------
LIABILITIES SUBJECT TO COMPROMISE - - 179,897
-------- -------- --------
Total liabilities 244,047 255,704 373,805
-------- -------- --------
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock 50 50 20
Additional paid-in capital 52,561 49,950 -
Cumulative foreign currency translation adjustment 688 - 15,755
Retained earnings (deficit) 5,365 - (57,954)
-------- -------- --------
Total shareholders' equity (deficit) 58,664 50,000 (42,179)
-------- -------- --------
TOTAL $302,711 $305,704 $331,626
======== ======== ========
See notes to condensed unaudited consolidated financial statements.
4
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(In thousands)
Reorganized Predecessor Predecessor
Company Company Company
------------ --------- -------------
Two Quarters Quarter Nine Months
Ended Ended Ended
October 31, March 31, September 30,
1997 1997 1996
------------ --------- -------------
Cash Flows from Operating Activities:
Net income $5,365 $57,954 $14,594
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Executive stock awards 875 500 -
Extraordinary item - (43,032) -
Fresh-start revaluation - (5,107) -
Depreciation and amortization 3,494 2,143 7,304
Gain on sale of assets (2,183) (3,266) (3,929)
Reorganization expense, net of payments (4,051) 1,538 1,168
Deferred income taxes 4,798 (3,767) -
Provision for doubtful accounts 1,242 162 349
Provision for environmental costs, net of payments (927) (256) (36)
Other, net 3,419 3,057 3,140
------- ------- -------
Total 12,032 9,926 22,590
Change in operating assets and liabilities:
Decrease (increase) in trade receivables 8,363 (20,272) 5,074
(Increase) decrease in inventories (20,081) (6,120) 10,707
Decrease (increase) in other current assets 1,931 (355) (274)
(Decrease) increase in trade payables and accrued
expenses (1,482) 18,895 1,373
Decrease in prepetition liabilities - (39) (140)
Receipt from environmental trust, net - 5,928 -
Other assets and liabilities, net (2,993) (1,547) (4,142)
------- ------- -------
Net cash (used in) provided by operating activities (2,230) 6,416 35,188
------- ------- -------
Cash Flows from Investing Activities:
Additions to property, plant and equipment, net (5,493) (2,774) (4,897)
Proceeds from asset sales 3,812 4,966 4,514
Other, net 39 (25) (854)
------- ------- -------
Net cash (used in) provided by investing activities (1,642) 2,167 (1,237)
------- ------- -------
Cash Flows from Financing and Reorganization
Activities:
Cash distribution pursuant to plan of reorganization - (59,366) -
Drawdown of prepetition letters of credit - 9,700 -
Proceeds from long-term debt, net - 8,100 -
Net borrowing (repayment) of short-term debt (57) 1,062 (14,453)
Repayment of long-term debt (576) (487) (1,223)
------- -------- --------
Net cash used in financing and reorganization
activities (633) (40,991) (15,676)
------- ------- -------
Effects of exchange rate changes on cash and cash
equivalents (217) (526) (231)
------- -------- --------
Net (decrease) increase in cash and cash equivalents (4,722) (32,934) 18,044
Cash and cash equivalents - beginning of period 30,340 63,274 36,828
-------- -------- --------
Cash and cash equivalents - end of period $25,618 $30,340 $54,872
======== ======== ========
See notes to condensed unaudited consolidated financial statements
5
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
- ---------------------------------------------
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed unaudited consolidated financial statements include
the accounts of Metallurg, Inc. ("Metallurg") and its majority-owned
subsidiaries (collectively, the "Company"). 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, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The condensed consolidated balance sheets as of March 31, 1997
and December 31, 1996 and the related condensed statements of consolidated
operations and of consolidated cash flows for the quarter ended March 31, 1997
were 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.
On February 26, 1997, the Fourth Amended and Restated Joint Plan of
Reorganization (the "Plan") of Metallurg and one of its subsidiaries,
Shieldalloy Metallurgical Corporation ("Shieldalloy"), was confirmed by the
U.S. Bankruptcy Court for the Southern District of New York. Transactions
contemplated by the Plan were consummated on April 14, 1997 (the "Effective
Date"). For financial reporting purposes, the Company has reflected the
effects of the Plan consummation as of March 31, 1997. As a result of the
consummation of the Plan and the adoption of fresh-start reporting under the
American Institute of Certified Public Accountants' Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code", the Company was required to report its financial results for the
period ending October 31, 1997 in two separate periods. One period contains
financial statements for the quarter ended March 31, 1997, which includes the
effects of the adoption of fresh-start reporting and consummation of the Plan
and is referred to as the "Predecessor Company". The other period contains
financial statements for the two quarters ended October 31, 1997 for the
reorganized Company. The financial statements of the Company after
consummation of the Plan are not comparable to the Company's financial state-
ments of prior periods.
For further information, see the financial statements and footnotes thereto
included in the Company's audited consolidated financial statements for the
quarter ended March 31, 1997 and the year ended December 31, 1996.
Effective April 1, 1997, the Company changed the reporting period of Metallurg
from a calendar year ending December 31 to a fiscal year ending January 31 and
began reporting the results of its operating subsidiaries on a one-month lag.
Accordingly, the two quarters ended October 31, 1997 include six months of
worldwide operating results plus, in this transitional period, an additional
month of operating results of Metallurg, the parent holding company, in the
amount of an $852,000 loss.
6
2. Inventories
Inventories, net of reserves, consist of the following (in thousands):
October 31, December 31,
1997 1996
----------- ------------
Raw materials......................... $28,685 $25,181
Work in process....................... 2,874 2,237
Finished goods ....................... 90,778 75,478
Other ................................ 4,439 3,467
-------- --------
Total.............................. $126,776 $106,363
======== ========
3. Commitments and Contingencies
The Company continues defending 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 litigation will not have a material adverse effect on the
Company's consolidated financial statements.
4. Earnings Per Common Share
The computation of earnings per share for all periods presented prior to April
1, 1997 is based on 4,956,406 common shares and common stock equivalents which
were outstanding as of the Effective Date.
5. Supplemental Guarantor Information
In November 1997, the Company sold $100 million principal amount of 11% senior
notes due 2007 (the "Senior Notes"). Under the terms of the Senior Notes,
Shieldalloy, Metallurg Holdings Corporation, Metallurg Services, Inc. and MIR
(China), Inc. (collectively, the "Guarantors"), wholly-owned subsidiaries of
the Company, will fully and unconditionally guarantee on a joint and several
basis the Company'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 and, accordingly,
such financial statements are not provided. Supplemental financial
information of the Guarantors is presented below.
7
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED OCTOBER 31, 1997
(In thousands)
Combined Combined
Guarantor Non-Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---------------- ------------- ------------- ------------ ------------
Total revenue.......... $14,197 $49,954 $114,072 $(29,898) $148,325
------- -------- ---------- -------- ---------
Operating costs and
expenses:
Cost of sales......... 13,204 44,391 99,579 (29,898) 127,276
Selling, general and
administrative
expenses ............ 1,949 2,770 8,841 13,560
---------------- ------------- ------------- ------------ ------------
Total operating costs
and expenses......... 15,153 47,161 108,420 (29,898) 140,836
---------------- ------------- ------------- ------------ ------------
Operating income (loss) (956) 2,793 5,652 7,489
Other income (expense):
Other income
(expense), net..... 71 (10) 1,013 1,074
Interest income
(expense), net..... (1,109) 226 (449) (1,332)
Equity in earnings
of subsidiaries.... 3,315 1,666 (4,981)
---------------- ------------- ------------- ------------ ------------
Income before income
tax provision ..... 1,321 4,675 6,216 (4,981) 7,231
Income tax provision
(benefit).......... (393) 1,905 4,005 5,517
---------------- ------------- ------------- ------------ ------------
Net income............. $ 1,714 $ 2,770 $ 2,211 $ (4,981) $ 1,714
================ ============= ============= ============ ============
8
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWO QUARTERS ENDED OCTOBER 31, 1997
(In thousands)
Combined Combined
Guarantor Non-Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------- ------------- ------------ ------------
Total revenue.......... $32,937 $101,960 $241,531 $(61,224) $315,204
--------- ---------- ---------- ----------- ---------
Operating costs and
expenses:
Cost of sales......... 30,667 91,095 207,803 (60,154) 269,411
Selling, general and
administrative
expenses ............ 4,501 5,222 18,264 27,987
---------------- ------------- ------------- ------------ ------------
Total operating costs
and expenses......... 35,168 96,317 226,067 (60,154) 297,398
---------------- ------------- ------------- ------------ ------------
Operating income (loss) (2,231) 5,643 15,464 (1,070) 17,806
Other income (expense):
Other income
(expense), net..... 94 (27) 931 998
Interest income
(expense), net..... (2,536) 527 (802) (2,811)
Equity in earnings
of subsidiaries.... 9,070 3,546 (12,616)
---------------- ------------- ------------- ------------ ------------
Income before income
tax provision ..... 4,397 9,689 15,593 (13,686) 15,993
Income tax provision
(benefit).......... (968) 2,986 8,610 10,628
---------------- ------------- ------------- ------------ ------------
Net income............. $ 5,365 $ 6,703 $ 6,983 $(13,686) $ 5,365
================ ============= ============= ============ ============
9
CONDENSED CONSOLIDATING BALANCE SHEET AT OCTOBER 31, 1997
(In thousands)
Combined Combined
Guarantor Non-Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---------------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents... $ 995 $ 2,639 $21,984 $25,618
Accounts and notes receivable, net 22,240 41,072 71,172 $(51,186) 83,298
Inventories 4,360 43,069 83,092 (3,745) 126,776
Other assets 4,718 646 6,916 12,280
------- ------- ------- --------- -------
Total current assets 32,313 87,426 183,164 (54,931) 247,972
Investments-intergroup 92,919 50,305 (1,504) (141,720)
Investments - other 244 1,299 1,543
Property, plant and equipment, net 1,026 6,690 32,067 39,783
Other assets (3,763) 1,586 15,640 (50) 13,413
-------- -------- -------- ---------- --------
TOTAL $122,739 $146,007 $230,666 $(196,701) $302,711
======== ======== ======== ========== ========
LIABILITIES
Current liabilities:
Short-term debt and current portion
of long-term debt $14,269 $14,269
Trade payables $ 997 $ 22,246 52,281 $(21,920) 53,604
Accrued expenses 3,290 4,806 17,914 26,010
Loans payable - intergroup 17,175 3,981 18,109 (39,265)
Other current liabilities 1,328 5,202 4,880 11,410
-------- -------- -------- ---------- --------
Total current liabilities 22,790 36,235 107,453 (61,185) 105,293
-------- -------- -------- ---------- --------
Long-term liabilities:
Long-term debt 39,461 11,234 50,695
Accrued pension liabilities 429 1,678 37,423 39,530
Environmental liabilities, net 36,292 5,775 42,067
Other liabilities 1,395 5,118 (51) 6,462
-------- -------- -------- ---------- --------
Total long-term liabilities 41,285 37,970 59,550 (51) 138,754
-------- -------- -------- ---------- --------
Total liabilities 64,075 74,205 167,003 (61,236) 244,047
-------- -------- -------- ---------- --------
SHAREHOLDERS' EQUITY:
Common stock outstanding 50 1,227 80,226 (81,453) 50
Additional paid-in capital 52,561 90,867 222 (91,089) 52,561
Cumulative foreign currency translation
adjustment 688 265 21,756 (22,021) 688
Retained earnings (deficit) 5,365 (20,557) (38,541) 59,098 5,365
-------- -------- -------- ---------- --------
Total shareholders' equity 58,664 71,802 63,663 (135,465) 58,664
-------- -------- -------- ---------- --------
TOTAL $122,739 $146,007 $230,666 $(196,701) $302,711
======== ======== ======== ========== ========
10
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWO QUARTERS ENDED OCTOBER 31, 1997
(In thousands)
Combined Combined
Guarantor Non-Guarantor
Metallurg, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---------------- ------------- ------------- ------------ ------------
Net Cash Flows from
Operating Activities... $(7,792) $ 139 $ 5,712 $ (289) $ (2,230)
-------- -------- -------- --------- ---------
Cash Flows from Investing
Activities:
Additions to property,
plant and equipment,
net................... (288) (571) (4,634) (5,493)
Proceeds from asset
sales................ 10 48 3,754 3,812
Other, net........... 49 (10) 39
-------- -------- -------- --------- ---------
Net cash used in investing
activities........... (229) (523) (890) (1,642)
-------- -------- -------- --------- ---------
Cash Flows from Financing
Activities:
Intergroup borrowings
(repayments)......... (1,985) 1,378 318 289
Net repayment of short-
term debt............ (57) (57)
Repayment of long-term
debt................ (576) (576)
Dividends received (paid) 2,638 (2,638)
-------- -------- -------- --------- ---------
Net cash provided by (used
in) financing activities 653 1,378 (2,953) 289 (633)
-------- -------- -------- --------- ---------
Effects of exchange rate
changes on cash and cash
equivalents.......... (217) (217)
-------- -------- -------- --------- ---------
Net (decrease) increase
in cash and cash
equivalents.......... (7,368) 994 1,652 (4,722)
Cash and cash equivalents -
beginning of period.. 8,363 1,645 20,332 30,340
--------- -------- ---------- --------- ---------
Cash and cash equivalents -
end of period........ $ 995 $ 2,639 $ 21,984 $ 25,618
========= ======== ========== ========= =========
11
METALLURG, INC. AND CONSOLIDATED SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Effective March 31, 1997, the Company implemented fresh-start reporting
relating to its emergence from bankruptcy. Accordingly, all assets and
liabilities were restated to reflect their respective fair values and the
consolidated financial statements subsequent to that date include the related
amortization of credits associated with the fair value adjustments. The
consolidated financial statements after that date are those of a new reporting
entity and are not comparable to the pre-confirmation periods. However, for
purposes of the discussion below of the Company's results of operations for
the first three quarters of 1997 compared to the first nine months of 1996,
the quarter ended March 31, 1997 (pre-confirmation) was combined with the two
quarters ended October 31, 1997 (post-confirmation) and then compared to
1996. Significant differences between periods due to fresh-start reporting
adjustments are explained below where necessary.
In addition, as a result of Metallurg's change in its fiscal year from a
calendar year to January 31 (beginning with the 1997 fiscal year) effective
as of April 1, 1997, the consolidated operating results of the Company for
the three quarters ending October 31, 1997 include the results of Metallurg,
Inc. for the ten month period ended October 31, 1997 and the results of its
operating subsidiaries (whose fiscal years remain the calendar year) for the
nine month period ended September 30, 1997, and the consolidated balance sheet
data of the Company at October 31, 1997 reflect the financial position of
Metallurg, Inc. at October 31, 1997 and of the operating subsidiaries at
September 30, 1997. Consequently, an extra month of Metallurg, Inc.'s results
are included in the Company's results of operations for the three quarter
period ended October 31, 1997.
The following table sets forth Statement of Operations data on the combined
basis described above (in thousands):
Quarter Three Months Three Quarters Nine Months
Ended Ended Ended Ended
October 31, September 30, October 31, September 30,
1997 1996 1997 1996
---------- ------------- -------------- -------------
Total revenues $148,325 $149,079 $470,791 $480,834
Cost of sales 127,276 129,029 403,471 417,704
------------ ----------- ---------- ----------
Gross margin 21,049 20,050 67,320 63,130
Selling, general and
administrative
expenses 13,560 13,913 43,033 41,288
Other operating
expenses - 596 - 1,756
------------ ----------- ---------- ----------
Operating income 7,489 5,541 24,287 20,086
Other income
(expense), net 1,074 (840) 6,621 1,150
Interest income
(expense), net (1,332) 535 (3,056) 782
Income tax provision (5,517) (2,080) (7,565) (7,424)
Extraordinary item - - 43,032 -
------------ ----------- ---------- ----------
Net income $ 1,714 $ 3,156 $ 63,319 $ 14,594
============ =========== ========== ==========
12
Results of Operations
Total Revenues
- ---------------
Total revenues for Metallurg and its subsidiaries decreased by 2.1%, from
$480.8 million in the first nine months of 1996 to $470.8 million in the first
three quarters of 1997. Sales attributable to Frankel Metal Company ("FMC"),
the Company's former titanium scrap processing subsidiary which was sold in
December 1996, accounted for $10.3 million of the decrease. In addition,
reductions in the Company's sales of manganese and silicon products, resulting
primarily from a decrease in selling prices, and a reduction in sales of the
Company's ferrochrome products manufactured by third parties, resulting
primarily from a decrease in volume, were offset by increases in the selling
prices of ferrovanadium in the United States and low carbon ferrochrome
produced by the Company.
Total revenues decreased by 0.5% from $149.1 million in the three months ended
September 30, 1996 to $148.3 million in the quarter ended October 31, 1997.
Sales of FMC accounted for $3.4 million of the decrease, which were partially
offset by the increased sales of ferrovanadium and low carbon ferrochrome as
described above.
Gross Margins
- --------------
Gross margins increased from $63.1 million in the first nine months of 1996 to
$67.3 million in the first three quarters of 1997, an increase of 6.6%, due
principally to the price increases in ferrovanadium and low carbon ferrochrome
discussed above. In aluminum master alloys and compacted products, increased
volumes of 15% improved production variances and significantly offset a
decrease in margins at the Company's United Kingdom operations caused by the
impact of a strong British pound. Although the Company's United Kingdom
aluminum powder producing division recorded a $2.5 million decrease in
sales in the first three quarters of 1997 compared to the first nine months of
1996, margins relating to such division increased by $1.0 million due to
a change in product mix. The values of the Company's assets were reduced
pursuant to fresh-start reporting, reducing depreciation expense in the three
quarters ended October 31, 1997 by $0.7 million and increasing gross margins
by an equal amount. Gross margins related to FMC, which was sold in 1996
however, accounted for an offsetting decrease in gross margins of $1.6 million
during this period.
Gross margins increased by 5.0% from $20.1 million in the three months ended
September 30, 1996 to $21.0 million in the quarter ended October 31, 1997 due
principally to price increases in ferrovanadium and volume increases in low
carbon ferrochrome which were partially offset by decreased margins in the
Company's sales of several products manufactured by third parties and a
decrease in gross margins attributable to FMC of $0.5 million during this
period. In addition, a reduction in depreciation expense as the result of
fresh-start reporting, as noted above, accounted for $0.4 million of the
increase.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses ("SG&A") increased from $41.3
million in the first nine months of 1996 to $43.0 million in the first three
quarters of 1997, an increase of 4.2%. For the first nine months of 1996,
SG&A represented 8.6% of the Company's sales compared to 9.1% for the first
three quarters of 1997. SG&A increased as a result of the inclusion of an
extra month of the holding company's operations, increased bonus accruals and
awards under the Stock Award and Stock Option Plan of Metallurg incurred in
connection with the consummation of the Plan, and additional costs related to
the audit of March 31, 1997 financial statements.
13
SG&A decreased from $13.9 million in the three months ended September 30, 1996
to $13.6 million in the quarter ended October 31, 1997, a decrease of 2.5%,
resulting from lower expenses incurred in the Company's research activities
which was partially offset by the stock awards described above.
Operating Income
- ----------------
Operating income increased from $20.1 million for the first nine months of
1996 to $24.3 million for the first three quarters of 1997, an increase of
20.9%, including the $0.7 million reduction in depreciation expense due to
fresh-start reporting as described above. The improvement resulted from an
increase in margins on sales of ferrovanadium, low carbon ferrochrome and
aluminum powders due to the strength of the steel, superalloy and chemical
industries, offset by a decrease in margins on aluminum master alloys and
briquettes resulting from a highly competitive marketplace. Operating income
for the first nine months of 1996 included $1.2 million of environmental
expenses related to the operation of the water remediation facility at the
Company's Newfield, NJ site. As a result of the Company's adoption of SOP
96-1, "Environmental Remediation Liabilities", operating income in the first
three quarters of 1997 does not include such water remediation expenses. In
addition, as discussed above, as a result of the change of the holding
company's fiscal year, 1997 operating income of $24.3 million included
approximately $0.5 million of expenses related to the operations of the
holding company for the month of October 1997.
Operating income increased from $5.5 million in the three months ended
September 30, 1996 to $7.5 million in the quarter ended October 31, 1997, an
increase of 35.2%. In addition to the improved margins discussed above, the
1997 results did not include operating expenses related to the Company's water
remediation facility which totaled $0.6 million in 1996.
Interest Income (Expense), Net
- -------------------------------
Interest income (expense), net is as follows (in thousands):
Quarter Three Months Three Quarters Nine Months
Ended Ended Ended Ended
October 31, September 30, October 31, September 30,
1997 1996 1997 1996
---------- ------------- -------------- -------------
Interest income $ 610 $1,223 $3,018 $3,215
Interest expense (1,942) (688) (6,074) (2,433)
-------- ------- ------- -------
Interest income
(expense), net $(1,332) $ 535 $(3,056) $ 782
======== ======= ======== =======
Interest expense increased significantly in 1997, as the Company accrued
interest of $1.2 million and $4.0 million on its 12% senior-secured notes for
the quarter and three quarters ended October 31, 1997, respectively. As a
result of the change in its fiscal year, the three quarters ended October 31,
1997 contain an additional month of interest expense of approximately $0.4
million. In 1996, the Company did not accrue interest on debt incurred prior
to entering Chapter 11 proceedings and therefore approximately $2.1 million,
$2.6 million and $7.7 million of contractual interest on these unsecured
obligations, which were reported as part of liabilities subject to compromise,
were not reflected in the quarter ended March 31, 1997 and the three months
and nine months ended September 30, 1996, respectively.
14
Income Tax Provision (Benefit):
- ------------------------------
Income tax provision, net of tax benefits, is as follows (in thousands):
Quarter Three Months Three Quarters Nine Months
Ended Ended Ended Ended
October 31, September 30, October 31, September 30,
1997 1996 1997 1996
---------- ------------- -------------- -------------
Total current........ $3,420 $2,082 $6,534 $7,490
Total deferred....... 2,097 (2) 1,031 (66)
------ ------- ------ -------
Income tax provision,
net................ $5,517 $2,080 $7,565 $7,424
====== ====== ====== =======
The differences between the statutory Federal income tax rate and the
Company's effective rate results primarily because of: (i) the excess of
foreign tax rates over the statutory Federal income tax rate; (ii) certain
deductible temporary differences which, in other circumstances would have
generated a deferred tax benefit, have been fully provided for in a valuation
allowance; (iii) the deferred tax effects of certain tax assets, primarily
foreign NOL's, for which the benefit had been previously recognized
approximating $1.4 million and $3.4 million in the quarter and three quarters
ended October 31, 1997, respectively; and (iv) the deferred tax effects of
certain deferred tax assets for which a corresponding credit has been recorded
to "Additional paid-in capital" approximating $0.8 million and $1.7 million in
the quarter and three quarters ended October 31, 1997, respectively. The
deferred tax expenses referred to in items (iii) and (iv) above will not
result in cash payments in future periods.
Net Income
- ----------
Net income was $63.3 million for the first three quarters of 1997 compared to
$14.6 million for the first nine months of 1996. Net income for the first
three quarters of 1997 included a loss of approximately $0.9 million related
to the operations of Metallurg, Inc. for the month of October 1997. Included
in the 1997 net income is an extraordinary item of $43.0 million representing
the cancellation of debt resulting from the consummation of the Company's
Reorganization Plan and a $5.1 million credit representing the effects of
revaluing the Company's assets and liabilities under fresh-start reporting.
Reorganization expenses for the first three quarters of 1997 and the first
nine months of 1996 were $2.7 million and $2.4 million, respectively. In the
first three quarters of 1997, other income included gains on the sales of the
Company's New York office building and of certain plant assets of one of the
Company's German subsidiaries totaling $4.7 million. A gain of $3.2
million on the sale of land in Turkey was reported in 1996.
Net income decreased from $3.2 million in the three months ended September 30,
1996 to $1.7 million in the quarter ended October 31, 1997, a decrease of
45.7%. The increase in operating income and gain of $2.0 million on the sale
of certain German plant assets were more than offset by increased interest
and tax expenses, as described above.
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. In November
1997, the Company sold $100 million principal amount of 11% senior notes due
2007, the proceeds of which were used to retire the Company's then existing
15
12% senior-secured notes (approximately $39.5 million), repay certain debt of
the UK and German subsidiaries (approximately $19.8 million) and to pay a cash
dividend (approximately $20.0 million). The balance of the net proceeds will
be used for general corporate purposes. The Company believes that these
sources are sufficient to fund the current and anticipated future requirements
of working capital, capital expenditures, pension benefits, potential
acquisitions and environmental expenditures through at least 1998.
At October 31, 1997, the Company had $25.6 million in cash and cash
equivalents, and working capital of $142.7 million, as compared to $63.3
million and $173.7 million, respectively, at December 31, 1996. For the first
three quarters ended October 31, 1997, the Company generated $4.2 million in
cash from operations. In connection with the Plan, however, the Company
distributed $59.4 million in cash, offset by a drawdown of prepetition letters
of credit of $9.7 million and proceeds from debt of the Company's UK
subsidiary of $8.1 million. Capital expenditures of $8.3 million in the first
three quarters of 1997 included approximately $3.0 million to install a new
plant for the production of chromium metal in the U.K. For the two quarter
period ended October 31, 1997, the Company expended $2.2 million in cash from
operations, resulting primarily from an increase in inventory of $20.1 million
which was offset by a decrease in trade receivables of $8.4 million. The
Company received $2.0 million in proceeds from the sale of certain plant
assets of one of the Company's German subsidiaries and $1.8 million from the
sale of other assets.
Credit Facilities and Other Financing Arrangements
- --------------------------------------------------
The Company has a credit facility with certain financial institutions led by
BankBoston, N.A. as agent (the "Revolving Credit Facility") which provides
Metallurg, Shieldalloy and certain of their subsidiaries with up to $50.0
million of financing resources at a rate per annum equal to (i) the Alternate
Base Rate plus 1.0% per annum (the Alternate Base Rate is the greater of the
Base Rate or the Federal Funds Effective Rate plus 0.5%) or (ii) the reserve
adjusted Eurodollar rate plus 2.5% for interest periods of one, two or three
months. The Revolving Credit Facility permits borrowings of up to $50.0
million for working capital requirements and general corporate purposes, up to
$30.0 million of which may be used for letters of credit in the U.S. At
October 31, 1997, there were no outstanding loans and $23.6 million of letters
of credit outstanding in the U.S. under the Revolving Credit Facility. On
October 20, 1997, BankBoston, N.A. through its Frankfurt office, made
available up to DM 20.5 million (approximately $11.7 million) of financing to
certain of its German subsidiaries (the "German Subfacility"), which is
guaranteed by Metallurg, Inc. and the other U.S. borrowers under the Revolving
Credit Facility.
In addition, several of the other foreign subsidiaries of Metallurg have
credit facility arrangements with local banking institutions to provide funds
for working capital and general corporate purposes. These local credit
facilities contain restrictions which vary from company to company. At
October 31, 1997, there were $12.8 million of outstanding loans under these
local credit facilities, which included $10.9 million of outstanding loans
which were refinanced by the German subfacility discussed above.
CAPITAL EXPENDITURES
The Company invested $8.3 million in capital expenditures during the first
three quarters of 1997. The Company anticipates capital expenditures will be
approximately $12.3 million during 1997, including approximately $3.0 million
to install a new plant for the production of chromium metal. Capital
expenditures are expected to increase significantly over 1997 levels to
approximately $24.5 million in 1998. Although the Company has budgeted these
items in 1998, the Company has not committed to complete these projects which
are contingent on senior management approval and other conditions. The
Company believes that these projects will be funded through internally
generated cash, borrowings under the Revolving Credit Facility and local
credit lines.
16
ENVIRONMENTAL REMEDIATION COSTS
In 1996, the Company elected early adoption of the American Institute of
Certified Public Accountants Statement of Position ("SOP") 96-1,
"Environmental Remediation Liabilities", which among other requirements,
states that 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 first three quarters of 1997, the Company expended $2.9 for
environmental remediation.
As part of the Plan, Shieldalloy entered into settlement agreements with
various environmental regulatory authorities with regard to all of the
significant environmental remediation liabilities of which it is aware.
Pursuant to these agreements, Shieldalloy has agreed to perform environmental
remediation which, as of October 31, 1997, had an estimated cost of completion
of $43.8 million. Of this amount, approximately $1.8 million is expected to
be expended in the fourth quarter of 1997, $4.5 million in 1998, $4.3 million
in 1999 and $8.1 million in 2000. In addition, the Company estimates it will
make expenditures of $5.8 million with respect to environmental remediation at
its foreign facilities. Of this amount, approximately $2.2 million is
expected to be expended in 1998, $0.7 million in 1999 and $0.7 million in
2000.
17
PART II OTHER INFORMATION
Item 6. (a) EXHIBITS
27 Financial Data Schedule
6. (b) REPORT ON FORM 8-K
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METALLURG, INC.
/s/ BARRY C. NUSS
---------------------
Barry C. Nuss
Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
19