<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 1-7170
IMCO Recycling Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
75-2008280
(I.R.S. Employer Identification No.)
5215 North O'Connor Blvd., Suite 1500
Central Tower at Williams Square
Irving, Texas 75039
(Address of principal executive offices) (Zip Code)
(972) 401-7200
(Registrant's telephone number, including area code)
5215 North O'Connor Blvd., Suite 940
Central Tower at Williams Square
Irving, Texas 75039
(Former address, if changed from last report)
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 X No
--- ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on July 31, 2000.
Common Stock, $0.10 par value, 15,326,267
-----------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-------
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------ -------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3,714 $ 2,578
Accounts receivable, net of allowance of $801 and $1,950 at
June 30, 2000 and December 31, 1999, respectively 137,162 125,917
Inventories 54,671 74,568
Deferred income taxes 3,447 3,008
Other current assets 12,043 9,228
------------------ -------------------
Total Current Assets 211,037 215,299
Property and equipment, net 182,591 189,987
Excess of acquisition cost over the fair value of net assets acquired,
net of accumulated amortization of $13,287 and $11,149 at
June 30, 2000 and December 31, 1999, respectively 120,057 117,861
Investments in joint ventures 15,319 13,901
Other assets, net 7,529 6,589
------------------ -------------------
$536,533 $543,637
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 86,967 $101,458
Accrued liabilities 14,261 7,164
Long-term debt temporarily reclassifed as current 207,000 -
Current maturities of long-term debt 133 181
------------------ -------------------
Total Current Liabilities 308,361 108,803
Long-term debt 14,960 214,993
Deferred income taxes 15,284 15,104
Other long-term liabilities 9,812 9,081
STOCKHOLDERS' EQUITY
Preferred stock; par value $.10; 8,000,000 shares authorized;
none issued - -
Common stock; par value $.10; 40,000,000 shares authorized;
17,116,620 issued at June 30, 2000; 17,110,620 issued
at December 31, 1999 1,712 1,711
Additional paid-in capital 106,558 106,549
Retained earnings 106,349 104,079
Accumulated other comprehensive loss from foreign currency
translation adjustments (4,139) (3,131)
Treasury stock, at cost; 1,847,592 shares at June 30, 2000;
1,083,406 shares at December 31, 1999 (22,364) (13,552)
------------------ -------------------
Total Stockholders' Equity 188,116 195,656
------------------ -------------------
$536,533 $543,637
================== ===================
</TABLE>
Page 2
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IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months For the six months ended
ended June 30, June 30,
------------------------------------ --------------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $225,819 $182,302 $449,078 $355,080
Cost of sales 212,288 164,622 419,445 320,201
-------------- --------------- -------------- --------------
Gross profits 13,531 17,680 29,633 34,879
Selling, general and administrative expense 6,417 5,812 13,604 11,175
Amortization expense 1,270 1,204 2,552 2,258
Interest expense 4,629 2,945 8,943 5,925
Interest and other income (189) (566) (248) (723)
Equity in net earnings of affiliates (898) (542) (1,568) (1,020)
-------------- --------------- -------------- --------------
Earnings before provision for income
taxes and minority interests 2,302 8,827 6,350 17,264
Provision for income taxes 608 3,269 1,996 6,463
-------------- --------------- -------------- --------------
Earnings before minority interests 1,694 5,558 4,354 10,801
Minority interests, net of provision
for income taxes 157 85 253 187
-------------- --------------- -------------- --------------
Net earnings $ 1,537 $ 5,473 $ 4,101 $ 10,614
============== =============== ============== ==============
Net earnings per common share:
Basic $ 0.10 $ 0.33 $ 0.27 $ 0.64
Diluted $ 0.10 $ 0.33 $ 0.27 $ 0.64
Weighted average shares outstanding:
Basic 15,267 16,475 15,382 16,486
Diluted 15,334 16,653 15,422 16,601
Dividends declared per common share $0.06 $0.06 $0.12 $0.12
</TABLE>
Page 3
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IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30,
---------------------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 4,101 $ 10,614
Depreciation and amortization 14,444 13,030
(Benefit) Provision for deferred income taxes (260) 287
Equity in earnings of affiliates (1,579) (1,020)
Other non-cash charges 3,079 1,153
Changes in operating assets and liabilities:
Accounts receivable (12,123) (18,574)
Inventories 19,767 1,568
Other current assets (2,967) 237
Accounts payable and accrued liabilities (4,360) 3,243
-------------- ----------------
Net cash from operating activities 20,102 10,538
INVESTING ACTIVITIES
Payments for property and equipment (14,476) (12,507)
Acquisitions, net of cash acquired - (21,619)
Other (653) (208)
-------------- ----------------
Net cash used by investing activities (15,129) (34,334)
FINANCING ACTIVITIES
Net proceeds from long-term revolving credit facility 7,000 33,000
Proceeds from issuance of long-term debt - 679
Principal payments of long-term debt (68) (3,523)
Dividends paid (1,832) (1,971)
Purchases of treasury stock (9,136) (649)
Other 324 (117)
-------------- ----------------
Net cash (used by) from financing activities (3,712) 27,419
-------------- ----------------
Effect of exchange rate differences on cash and cash equivalents (125) (129)
Net increase in cash and cash equivalents 1,136 3,494
Cash and cash equivalents at January 1 2,578 6,075
-------------- ----------------
Cash and cash equivalents at June 30 $ 3,714 $ 9,569
============== ================
SUPPLEMENTARY INFORMATION
Cash payments for interest $ 9,001 $ 5,759
Cash payments for income taxes $ 458 $ 7,258
</TABLE>
Page 4
<PAGE>
IMCO RECYCLING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
(dollars in tables are in thousands, except per share data)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and six month periods
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. The accompanying financial
statements include the accounts of IMCO Recycling Inc. and all of its
subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Certain reclassifications have been made to prior period statements to conform
to the current period presentation.
NOTE B - INVENTORIES
The components of inventories are:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------- -------------------
<S> <C> <C>
Finished goods $28,367 $35,130
Raw materials 23,849 36,768
Supplies 2,455 2,670
------------------- -------------------
$54,671 $74,568
=================== ===================
</TABLE>
NOTE C - LONG-TERM DEBT
As of June 30, 2000, the Company had $207,000,000 of indebtedness outstanding
under the Second Amended and Restated Credit Agreement and had approximately
$41,500,000 available for borrowing. At that time the Company was in compliance
with the terms of the Credit Agreement after obtaining a waiver for
non-compliance with the interest coverage financial covenant. This
non-compliance with the financial covenant was primarily caused by the capital
expenditures made in connection with the construction of the new Saginaw
facility combined with lower than expected earnings. However, it appears likely
that the Company will not be in compliance with such financial covenant in the
near future unless the Credit Agreement is amended. The Company expects, in the
near future, to be able to amend the Credit Agreement to help insure future
compliance with its terms of Credit Agreement, and certain lenders under the
facility have expressed their willingness to work with management to amend the
Credit Agreement. However, because of the accounting requirements set forth in
Emerging Issues Task Force Issue No. 86-30, "Classification of Obligations When
a Violation is Waived by the Creditor," the Company has temporarily classified
the notes outstanding under the Credit Agreement as a current liability as of
June 30, 2000. While no guarantees can be made, management believes it will be
successful during the third quarter of 2000 in its efforts to amend the Credit
Agreement to ensure that the amounts due under the Credit Agreement will qualify
under the accounting rules to be classified as long-term liabilities as of
September 30, 2000.
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NOTE D - NET EARNINGS PER SHARE
The following table sets forth the reconciliation between weighted average
shares used for calculating basic and diluted earnings per share (EPS):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
for basic earnings per share 15,267 16,475 15,382 16,486
Effect of equity forward contract 64 - 32 -
Effect of employee stock options 3 178 8 115
-------------- -------------- -------------- --------------
Weighted average shares outstanding
for diluted earnings per share 15,334 16,653 15,422 16,601
============== ============== ============== ==============
</TABLE>
In May 2000, the Company entered into a forward share repurchase agreement. The
contract, which must be settled by May 2001, provides at the Company's option
for the Company to purchase up to 644,500 of the Company's shares from a
financial institution. However, the Company, at its option, may also elect to
settle the contract on a net share basis in lieu of a cash payment. As of June
30, 2000, 644,500 shares had been committed to the contract at an average price
of $7.67 per share. The effect of this purchase agreement has been included in
determining diluted EPS.
NOTE E - OPERATIONS
The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances. These laws
and regulations (1) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (2) impose liability
for costs of cleaning up, and certain damages resulting from past spills,
disposals or other releases of hazardous substances. It can be anticipated that
more rigorous environmental laws will be enacted that could require the Company
to make substantial expenditures in addition to those described in this Form 10-
Q.
Page 6
<PAGE>
From time to time, operations of the Company have resulted, or may result, in
certain noncompliance with applicable requirements under environmental laws.
However, the Company believes that any such noncompliance under such
environmental laws would not have a material adverse effect on the Company's
financial position or results of operations.
In 1997, the Illinois Environmental Protection Agency ("IEPA") notified the
Company that two of the Company's zinc subsidiaries are potentially responsible
parties ("PRP") pursuant to the Illinois Environmental Protection Act for the
cleanup of contamination at a site in Marion County, Illinois to which these
subsidiaries, among others, in the past sent zinc oxide for processing and
resale. These subsidiaries have joined a group of PRPs that is planning to
negotiate with the IEPA regarding the cleanup of the site. The site has not
been fully investigated and final cleanup costs have not yet been determined.
Although no assurances can be made, based on current cost estimates and
information regarding the amount and type of materials sent to the site by the
subsidiaries, the Company does not believe that its potential liability at this
site, if any, will have a material adverse effect on its financial position or
results of operations.
NOTE F - OTHER COMPREHENSIVE INCOME
As of June 30, 2000 the Company's foreign currency translation adjustment
increased to $4,139,000 from $3,131,000 as of December 31, 1999. Total
comprehensive income for the three months ended June 30, 2000 and June 30, 1999
was approximately $1,844,000 and $3,639,000, respectively. For the six months
ended June 30, 2000 and June 30, 1999 total comprehensive income was
approximately $3,093,000 and $8,357,000, respectively.
NOTE G - NEW ACCOUNTING PRONOUNCEMENTS
In July 1999, the Financial Accounting Standards Board delayed the effective
date of Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," for one year to fiscal years beginning after June 15, 2000. The
Company plans to adopt the statement effective January 1, 2001. The Company has
evaluated the impact of Statement No. 133 and believes the impact will not have
a material adverse effect upon the Company's future operating results.
NOTE H - SEGMENT REPORTING
The Company has two reportable segments: aluminum and zinc. The aluminum
segment represents all of the Company's aluminum melting, processing, alloying,
brokering and salt cake recovery activities, including investments in joint
ventures. In addition, this segment includes magnesium melting activities which
represent less than 1% of
Page 7
<PAGE>
consolidated revenues and production. The Company's zinc segment represents all
of the Company's zinc melting, processing and brokering activities.
There has been no material change in the Company's segment classifications
during 2000.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Aluminum $157,850 $134,229 $325,169 $266,586
Zinc 67,969 48,073 123,909 88,494
-------------- -------------- -------------- --------------
Total revenues $225,819 $182,302 $449,078 $355,080
============== ============== ============== ==============
</TABLE>
Page 8
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCOME:
Aluminum $ 7,061 $13,653 $16,547 $27,360
Zinc 4,284 2,803 8,407 5,101
-------------- -------------- -------------- --------------
Total segment income 11,345 16,456 24,954 32,461
Unallocated amounts:
General and administrative expense (3,360) (3,853) (7,420) (7,506)
Amortization expense (1,270) (1,204) (2,552) (2,258)
Interest expense (4,629) (2,945) (8,942) (5,925)
Interest and other income 216 373 310 492
-------------- -------------- -------------- --------------
Income before provision for income
taxes and minority interests $ 2,302 $ 8,827 $ 6,350 $17,264
============== ============== ============== ==============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------
AND RESULTS OF OPERATIONS
A majority of the Company's processing consists of aluminum tolled for its
customers. Tolling revenues reflect only the processing cost and the Company's
profit margin. The Company's processing activities also consist of the
processing, recovery and specialty alloying of aluminum and zinc metal and the
production of other value-added zinc products for sale by the Company. The
revenues from these sales transactions include the cost of the metal, as well as
the processing cost and the Company's profit margin. Accordingly, tolling
business produces lower revenues and costs of sales than does the product sales
business. Variations in the mix between these two types of transactions could
cause revenue amounts to change significantly from period to period. As a
result, the Company has traditionally considered processing volume to be a more
important determinant of performance than revenues.
Page 9
<PAGE>
The following table shows total pounds processed, the percentage of total pounds
processed represented by tolled metals, total revenues and total gross profits
(in thousands, except percentages):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------- -------------------------------------
2000 1999 2000 1999
--------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Pounds processed 724,374 697,242 1,485,535 1,397,426
Percentage of pounds tolled 57% 59% 57% 60%
Revenues $225,819 $182,302 $ 449,078 $ 355,080
Gross profits $ 13,531 $ 17,680 $ 29,633 $ 34,879
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999,
AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
PRODUCTION. For the three month period ended June 30, 2000, the Company melted
-----------
724.4 million pounds, four percent more metal compared to 697.2 million pounds
during the same period in 1999. For the six month period ended June 30, 2000
the Company melted 1.49 billion pounds, up six percent compared to 1.40 billion
pounds during the first half of 1999. The aluminum and zinc segments accounted
for 90% and 10%, respectively, of the overall production increase for the three
month period. For the six month period ending June 30, 2000, the aluminum and
zinc segments accounted for 84% and 16% of the overall production increase
respectively. Tolling activity for the three month period ended June 30, 2000
represented 57% of total pounds processed, compared to 59% for the same period
in 1999. For the six months ended June 30, 2000, tolling represented 57% of
total pounds processed compared to 60% for the first six months of 1999.
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<PAGE>
The following table shows the total pounds processed and the percentage tolled
for the aluminum and zinc segments (in thousands, except percentages):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------- -----------------------------
2000 1999 2000 1999
------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
Pounds Processed:
Aluminum 652,124 627,808 1,344,438 1,270,865
Zinc 72,250 69,434 141,097 126,561
------------- ---------------- ------------- ------------
Total Pounds Processed 724,374 697,242 1,485,535 1,397,426
============= ================ ============= ============
Percentage Tolled:
Aluminum 63% 65% 62% 66%
Zinc 3% 5% 4% 5%
Total Percentage Tolled 57% 59% 57% 60%
</TABLE>
ALUMINUM PRODUCTION: For the three month period ended June 30, 2000, the
Company melted four percent more aluminum than it did during the same period in
1999. For the six month period ended June 30, 2000, the Company melted six
percent more aluminum than in the first six months of 1999. The increase in
aluminum production for the three and six month periods was primarily due to a
significant increase at the Shelbyville, Tennessee facility (acquired in
February 1999 and increases in production at the Uhrichsville, Ohio facility.
The increase in the Ohio facility is the result of adding two new reverberatory
furnaces in late 1999. The decrease in aluminum percentage tolled compared to
the three and six month periods ending June 30, 1999 is primarily due to the
Shelbyville, Tennessee facility, the production of which is dedicated primarily
for product sales serving the transportation market, and an increase in product
sales volume at the Post Falls, Idaho facility.
ZINC PRODUCTION: For the three and six month periods ended June 30, 2000, the
Company melted 4% and 11% more zinc, respectively, than it did during the same
periods in 1999. The February 1999 acquisition of the Clarksville, Tennessee
facility accounted for most of the increase in zinc production. In addition,
production increased due to the strong demand for value-added products,
especially zinc oxide from the Company's U.S. Zinc subsidiary.
REVENUES. For the three month period ended June 30, 2000, the Company's
---------
consolidated revenues increased 24% to $225,819,000 compared to $182,302,000 for
the same period in 1999. For the six month period ended June 30, 2000, revenues
increased 26% to $449,078,000 compared to $355,080,000 for the first half of
1999. The aluminum and zinc segments accounted for 54% and 46%, respectively, of
the overall revenue increase for the three month period and 62% and 38%,
respectively, for the six month period.
Page 11
<PAGE>
Increased product sales relative to tolling transactions expose the Company to a
greater degree of market risk because of fluctuations in the price of scrap
metal which the Company must buy as raw material, and fluctuations in the then-
prevailing aluminum and zinc market prices at which the Company sells the
resulting processed metal. The Company's aluminum specialty alloying
activities, which serve the transportation market, and the Company's zinc
segment operations primarily consist of product sales business.
The following table shows the total revenues for the aluminum and zinc segments
(in thousands) (See NOTE H - SEGMENT REPORTING):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------- -----------------------------
2000 1999 2000 1999
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Aluminum $157,850 $134,229 $325,169 $266,586
Zinc 67,969 48,073 123,909 88,494
------------- -------------- ------------- -------------
Total Revenues $225,819 $182,302 $449,078 $355,080
============= ============== ============= =============
</TABLE>
ALUMINUM REVENUES: For the three and six month periods ended June 30, 2000, the
Company's aluminum revenues increased 18% and 22%, respectively, compared to the
same periods in 1999. Aluminum revenues increased due to the combination of (1)
higher prevailing aluminum product sale prices, (2) higher aluminum production
volumes, as discussed previously, and (3) a decrease in the relative proportion
of volumes from tolling versus product sales (see "ALUMINUM PRODUCTION" above).
As discussed above, increased product sales generally result in a higher
increase in revenues than a similar increase in tolling business.
ZINC REVENUES: For the three and six month periods ended June 30, 2000, the
Company's zinc revenues increased 41% and 40%, respectively, compared to the
same periods in 1999. Zinc revenues increased due to higher volumes resulting
from the acquisition of the Clarksville, Tennessee facility in February 1999,
higher prevailing selling prices of zinc metal in 2000 and an increase in zinc
trading activities.
GROSS PROFITS. For the three month period ended June 30, 2000, the Company's
--------------
consolidated gross profits decreased 23% to $13,531,000 compared to $17,680,000
in the same period in 1999. For the six month period, consolidated gross
profits decreased 15% to $29,633,000 compared to $34,879,000 in the first six
months of 1999.
Page 12
<PAGE>
The following table shows the total income for the aluminum and zinc segments
and a reconciliation of segment income to the Company's consolidated gross
profits (in thousands) (See NOTE H - SEGMENT REPORTING):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------- ------------------------------
2000 1999 2000 1999
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Segment Income:
Aluminum $ 7,061 $13,653 $16,547 $27,360
Zinc 4,284 2,803 8,407 5,101
-------------- --------------- ------------- -------------
Total segment income 11,345 16,456 24,954 32,461
Items not included in gross profits:
Plant selling expense 1,294 521 2,729 1,099
Management SG&A expense 1,764 1,379 3,455 2,511
Equity in earnings of affiliates (898) (542) (1,568) (1,020)
Other income 26 (134) 63 (172)
-------------- --------------- ------------- -------------
Gross Profits $13,531 $17,680 $29,633 $34,879
============== =============== ============= =============
</TABLE>
ALUMINUM INCOME: For the three and six month periods ended June 30, 2000, the
Company's aluminum income decreased 48% and 40%, respectively, compared to the
same periods in 1999. The aluminum alloys business was the major contributor to
this decline. This condition resulted from both higher raw material costs and
weaker selling prices for aluminum alloys. Recent capacity increases in the
aluminum alloys business resulted in heightened competition for available scrap
metal units which the Company uses as raw material in its aluminum alloys
production. This, in turn, produced more intense competition for metal units,
causing higher purchase costs and lower selling prices for the Company. Second
quarter natural gas prices were a major contributor as well to the overall
decline in aluminum income. While second quarter Nymex gas prices rose 62% from
the level of the same period of 1999, the total energy costs at the aluminum
facilities rose only 25% due to offsets with hedging activities. The results
from the quarter were also affected by a decline in customer demand at the Post
Falls, Idaho and Rockwood, Tennessee facilities, which serve the packaging
market. The aluminum income decreased despite the increase in aluminum
processing volumes, principally due to the reasons discussed above.
ZINC INCOME: For the three and six month periods ended June 30, 2000, the
Company's zinc income increased 53% and 65%, respectively, compared to the same
periods in 1999. The increase was primarily due to the higher overall zinc
production volumes (see "ZINC PRODUCTION" above). In addition, the relative
increase in zinc income was greater than the increase in zinc processing volumes
due to higher zinc
Page 13
<PAGE>
product sale prices and cost savings benefits from integrating the Company's
previously owned zinc business with the U.S. Zinc and Clarksville, Tennessee
facilities.
SG&A EXPENSES. Selling, general and administrative expenses for the three month
--------------
periods ended June 30, 2000 and 1999 were $6,417,000 and $5,812,000,
respectively, an increase of 10%. For the six month period ended June 30, 2000
selling, general and administrative expenses increased 22% to $13,604,000,
compared to $11,175,000 for the first six months of 1999. The increases in
these periods is primarily due to the operation of more production facilities
and costs associated with the Company's investment in its new Enterprise
Resource Planning system.
AMORTIZATION EXPENSE. Amortization expense for the three month periods ended
---------------------
June 30, 2000 and 1999 was $1,270,000 and $1,204,000, respectively, an increase
of 5%. For the six month periods ended June 30, 2000 and 1999, amortization
expense was $2,552,000 and $2,258,000, respectively, an increase of 13%. The
increase, especially in the six month period, is due almost entirely to
amortization of additional goodwill recorded as a result of the Shelbyville and
Clarksville, Tennessee acquisitions in February 1999.
INTEREST EXPENSE. Interest expense for the three month periods ended June 30,
-----------------
2000 and 1999 was $4,629,000 and $2,945,000, respectively, representing an
increase of 57% in 2000 compared to the first six months of 1999. For the first
six months of 2000, interest expense increased 51% to $8,943,000 compared to
$5,925,000 for the first six months of 1999. The increases in these periods is
the result of increased interest rates and higher amounts of debt outstanding in
2000 compared to 1999, primarily due to the Company's additional working capital
requirements.
NET EARNINGS. Net earnings decreased 72% to $1,537,000 for the three month
-------------
period ended June 30, 2000 compared to $5,473,000 for the same period in 1999.
For the six month period ended June 30, 2000, net earnings decreased 61% to
$4,101,000 compared to $10,614,000 for the same period in 1999. The decrease in
these periods was primarily the result of lower profits in the aluminum business
(see "ALUMINUM INCOME" above). In addition, increases in interest expense,
amortization expense and selling, general and administration expense, as
discussed above, reduced net earnings. The Company is focusing on many cost
reduction initiatives to improve net earnings. In the aluminum alloys business,
the Company is working to improve margins by revising contract terms with
suppliers and customers where possible. The Company has reduced headcount by 7%
from the beginning of the year and is focused on reducing employee discretionary
spending. The Company has also developed a modification for existing furnaces
and an improved design for new furnaces that are expected to reduce fuel
consumption by 15% and 35%, respectively. Measures have also been taken to
reduce total debt by lowering working capital through exercising stronger
control over inventory and receivable levels.
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The Company recorded an effective tax rate of 26% and 31% for the three and six
month periods ended June 30, 2000 compared to 37% for both comparable periods in
1999. The decrease in the effective rate during these periods is due to a
greater percentage of the Company's income derived from the VAW-IMCO venture
which is reported on an after-tax basis.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS. Operations provided $20,102,000 and $10,538,000 of
--------------------------
cash during the first six months of 2000 and 1999, respectively. Changes in
operating assets and liabilities provided $317,000 of cash for the first six
months of 2000 compared to a net use of cash of $13,526,000 for the same period
in 1999. The extent of the change in operating assets and liabilities was
primarily due to a decrease in inventory levels of $19,767,000 in the first six
months of 2000, compared to a decrease of $1,568,000 in the first six months of
1999. In addition to a reduction in inventory levels, higher depreciation and
amortization of $14,444,000 in 2000 compared to $13,030,000 in 1999 helped
contribute to the increase in cash provided from operating activities. Overall,
the increase had the effect of offsetting the lower net earnings in 2000. The
increase in accounts receivable for the six months ended June 30, 2000, of
$12,123,000 was due to a greater volume of product sales, as previously
discussed.
CASH FLOWS FROM INVESTING ACTIVITIES. During the six months ended June 30,
------------------------------------
2000, net cash used by investing activities was $15,129,000 compared to
$34,334,000 for the same period in 1999. The difference in these two periods is
primarily due to the acquisition of the Shelbyville and Clarksville, Tennessee
facilities during the first quarter of 1999. The Company spent approximately
$21,619,000 (net of cash acquired) in the acquisitions of these two facilities
during this comparable 1999 period. The Company's total payments for property,
plant and equipment in the first six months of 2000 increased to $14,476,000,
compared to $12,507,000 spent in the first half of 1999. Capital expenditures
for property, plant and equipment in 2000 are now expected to approximate
$35,000,000. Major 2000 projects include further installation of the Company's
Enterprise Resource Planning (ERP) software system, installation of new furnaces
at the Millington, Tennessee facility and the construction of a new aluminum
alloying facility near Saginaw, Michigan.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash used by financing activities was
------------------------------------
$3,712,000 for the six months ended June 30, 2000, compared to net cash from
financing of $27,419,000 for the same period of 1999. In the first six months
of 2000, the Company had net borrowings of $7,000,000 under its revolving credit
facility, most of which was used to finance its additional working capital
requirements. In the six month period ended June 30, 1999 the Company had net
borrowings of $33,000,000 on its long-term revolving credit facility, the
majority of which was used to fund the acquisitions of the Shelbyville and
Clarksville, Tennessee facilities. At June 30, 2000 the Company had
$207,000,000 in indebtedness outstanding under its long-term revolving
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credit facility. In addition, there were standby letters of credit outstanding
with several banks totaling $2,583,000.
Financing activities also included cash payments of $1,832,000 in dividends for
the first six months of 2000 compared to $1,971,000 for the same period in
1999.For the six months ended June 30, 2000 and 1999, $9,136,000 and $649,000,
respectively, were expended to purchase 790,100 and 55,000, respectively, shares
of the Company's common stock in open market transactions.
As of August 1, 2000, the Company had $215,000,000 of indebtedness outstanding
under the Second Amended and Restated Credit Agreement and had approximately
$33,500,000 available for borrowing. As of June 30, 2000, the Company was in
compliance with the terms of the Credit Agreement after obtaining a waiver for
non-compliance with the interest coverage financial covenant. This non-
compliance with the financial covenant was primarily caused by the capital
expenditures made in connection with the construction of the new Saginaw
facility combined with lower than expected earnings. However, it appears likely
that the Company will not be in compliance with such financial covenant in the
future unless the Credit Agreement is amended. The Company expects, in the near
future, to be able to amend the Credit Agreement to help insure future
compliance with its terms of the Credit Agreement, and certain lenders under the
facility have expressed their willingness to work with management to amend the
Credit Agreement. However, because of the accounting requirements set forth in
Emerging Issues Task Force Issue No. 86-30, "Classification of Obligations When
a Violation is Waived by the Creditor," the Company has temporarily classified
the notes outstanding under the Credit Agreement as a current liability as of
June 30, 2000. While no guarantees can be made, management believes it will be
successful during the third quarter of 2000 in its efforts to amend the Credit
Agreement to ensure that the amounts due under the Credit Agreement will qualify
under the accounting rules to be classified as long-term liabilities as of
September 30, 2000.
While the Company believes that its cash on hand, the availability of funds
under its credit facility and its anticipated internally generated funds will be
sufficient to fund its current needs, including its expected capital spending
plans, additional financing will probably be necessary for the Company to
continue its growth rate of recent years. The Company has experienced and
expects to continue to experience higher working capital requirements and
substantial capital funding requirements for its new facilities, for potential
acquisitions and for capital and environmental improvement programs.
ENVIRONMENTAL
The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances. These laws
and regulations (1) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (2) impose liability
for costs of cleaning up, and certain damages resulting from past spills,
disposals or other releases of hazardous substances. It can be anticipated that
more rigorous environmental laws will be enacted that could require the Company
to make substantial expenditures in addition to those described in this Form 10-
Q and in other filings made by the Company.
From time to time, operations of the Company have resulted, or may result, in
certain noncompliance with applicable requirements under such environmental
laws. However, the Company believes that any such noncompliance under such
environmental laws would not have a material adverse effect on the Company's
financial position or results of operations.
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In 1997, the Illinois Environmental Protection Agency ("IEPA") notified the
Company that two of the Company's zinc subsidiaries are potentially responsible
parties ("PRP") pursuant to the Illinois Environmental Protection Act for the
cleanup of contamination at a site in Marion County, Illinois to which these
subsidiaries, among others, in the past sent zinc oxide for processing and
resale. These subsidiaries have joined a group of PRPs that is planning to
negotiate with the IEPA regarding the cleanup of the site. The site has not
been fully investigated and final cleanup costs have not yet been determined.
Although no assurances can be made, based on current cost estimates and
information regarding the amount and type of materials sent to the site by the
subsidiaries, the Company does not believe that its potential liability at this
site, if any, will have a material adverse effect on its financial position or
results of operations.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in ITEM 2. "MANAGEMENT'S DISCUSSION AND ANALYSIS
-------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" (as well as certain oral
statements made by or on behalf of the Company) may be deemed to be forward-
looking statements within the meaning of The Private Securities Litigation
Reform Act of 1995 and are subject to the "Safe Harbor" provisions in that
enacted legislation. This information includes, without limitation, statements
concerning future profit margins, plant capacity, volumes, revenues, earnings,
costs, energy costs, and expenses (including capital expenditures); future
prices for metals; anticipated results of the Company's cost reduction program;
the ability of the Company to be able to continue to grow its domestic and
foreign business through expansion, acquisition or partnering; anticipated
amendments to the Company's Credit Agreement; access to adequate energy supplies
at advantageous rates; anticipated cost savings from new and modified furnace
designs; the expected effects of strikes, work stoppages or production shutdowns
at Company or customer facilities; future acquisitions or corporate
combinations; expected effects of recent acquisitions; projected completion
dates and anticipated technological advances; future (or extensions of existing)
long-term supply contracts with its customers; anticipated environmental control
measures; the outcome of and any liabilities resulting from any claims,
investigations or proceedings against the Company or its subsidiaries; future
levels of dividends (if any); potential affects of the Company's metals
brokerage activities; the future mix of business (product sales vs. tolling);
future costs and asset recoveries; future operations, demand and industry
conditions; future sources of capital and future financial condition. When used
in or incorporated by reference into this Quarterly Report on Form 10-Q, the
words "anticipate," "estimate," "expect," "may," "project" and similar
expressions are intended to be among the statements that identify forward-
looking statements.
These forward-looking statements are based on current expectations and involve a
number of risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct. Important
factors that could affect the Company's actual results and cause actual results
to differ materially from those results
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that might be projected, forecasted, estimated or budgeted by the Company in
these forward-looking statements include, but are not limited to, the following:
competition for raw materials costs and pricing pressures from competitors;
fluctuations in operating levels at the Company's facilities; fluctuations in
demand from the construction and packaging markets, which are more subject to
cyclical pressures; the mix of product sales business as opposed to tolling
business; unforeseen difficulties in the operation or performance of the
Company's new ERP software system, and the Company's other operations and
reporting systems; retention and financial condition of major customers; effects
of future energy prices and related fuel costs; collectibility of receivables;
the inherent unpredictability of adversarial or administrative proceedings;
effects of environmental and other governmental regulations; currency exchange
rate fluctuations; trends in the Company's key markets and the price of and
supply and demand for aluminum and zinc (and their derivatives) on world
markets; the effects of shortages and oversupply in used aluminum beverage
containers and can scrap at facilities; the continuation of reduced spreads
between primary aluminum prices and aluminum scrap prices; business conditions
and growth in the aluminum and zinc industries and recycling industries; and
future levels and timing of capital expenditures.
These statements are further qualified by the following:
* Any estimates of future operating rates at the Company's plants are based on
current expectations by management of the Company of future levels of volumes
and prices for the Company's services or metal, and are subject to
fluctuations in customer demand for the Company's services and prevailing
conditions in the metal markets, as well as certain components of the
Company's cost of operations, including energy and labor costs. Many of the
factors affecting revenues and costs are outside of the control of the
Company, including energy commodity prices, weather conditions, general
economic and financial market conditions; work stoppages, maintenance
programs and other production shutdowns at customer facilities; and
governmental regulation and factors involved in administrative and other
proceedings. The future mix of product sales vs. tolling business is
dependent on customers' needs and overall demand, world and U.S. market
conditions then prevailing in the respective metal markets, and the operating
levels at the Company's various facilities at the relevant time.
* Future Company results of operations will affect the credit terms that the
Company can secure under its credit facilities.
* The price of primary aluminum, zinc and other metals is subject to worldwide
market forces of supply and demand and other influences. An increase in
demand for raw materials can and has adversely affected profit margins for
the Company's product sales business. Prices can be volatile, which could
affect the Company's product sales business. The Company's use of contractual
arrangements, including long-term agreements and forward contracts, may
reduce the Company's exposure to this volatility but does not eliminate it.
Lower market prices for primary metals may adversely affect the demand for
the Company's recycling services and recycled metals.
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* The markets for most aluminum and zinc products are highly competitive. The
major primary aluminum producers are larger than the Company in terms of
total assets and operations and have greater financial resources. In
addition, aluminum competes with other materials such as steel, vinyl,
plastics and glass, among others, for various applications in the Company's
key markets. Unanticipated actions or developments by or affecting the
Company's competitors and/or willingness of customers to accept substitutions
for aluminum products could affect the Company's financial position and
results of operations.
* Fluctuations in the costs of fuels, raw materials and labor can materially
affect the Company's financial position and results of operations from period
to period.
* The Company's key transportation market is cyclical, and sales within that
market in particular can be influenced by economic conditions. Strikes and
work stoppages by automotive customers of the Company may have a material
adverse effect on the Company's financial condition and results of
operations.
* The Company spends substantial capital and operating sums on an ongoing basis
to comply with environmental laws. In addition, the Company is involved in
certain investigations and actions in connection with environmental
compliance and past disposals of solid waste. Estimating future environmental
compliance and remediation costs is imprecise due to the continuing evolution
of environmental laws and regulatory requirements and uncertainties about
their application to the Company's operations, the availability and
applicability of technology and the allocation of costs among principally
responsible parties. Unanticipated material legal proceedings or
investigations could affect the Company's financial position and results of
operations.
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REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Ernst & Young LLP, have reviewed the
Company's consolidated financial statements at June 30, 2000, and for the three
and six month periods then ended prior to filing, and their report is included
herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------
In May 2000, the Company entered into a forward share repurchase agreement. The
contract, which must be settled by May 2001, provides at the Company's option
for the Company to purchase up to 644,500 of the Company's shares from a
financial institution. However, the Company, at its option, may also elect to
settle the contract on a net share basis in lieu of a cash payment. As of June
30, 2000, 644,500 shares had been committed to the contract at an average price
of $7.67 per share. The effect of this purchase agreement has been included in
determining diluted EPS. See Note D of Notes to Consolidated Financial
Statements. Other than this transaction, there have been no material changes
regarding market risk and the Company's derivative instruments during the second
quarter of 2000.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------
The Annual Meeting of Stockholders of the Company was held on May 10, 2000, at
which the election of three Class II Directors, adoption of the Company's
Performance Share Unit Plan and ratification of the appointment of Ernst & Young
LLP as the Company's independent public accountants for 2000 were considered.
John J. Fleming was elected as a director and received 12,218,755 votes for his
election, with 767,438 votes withheld. Jeb Hensarling was elected as a director
and received 12,279,167 votes for his election, with 707,026 votes withheld.
Don Navarro was elected as a director and received 12,129,718 votes for his
election, with 856,475 votes withheld. The following directors continued in
office: Don V. Ingram, Steve Bartlett, William Warshauer and Hugh G. Robinson.
The adoption of the Company's Performance Share Unit Plan was approved with
12,195,367 votes in favor of its adoption, 688,432 votes against and 102,394
votes abstaining. Ernst & Young LLP was ratified as independent public
accountants for the Company for 2000 and received 12,882,644 votes for their
ratification, 87,658 votes against and 15,891 votes abstaining.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) The following exhibits are included herein:
15.1 Acknowledgment letter regarding unaudited financial information from
Ernst & Young LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the quarter ended June 30,
2000.
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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.
IMCO Recycling Inc.
(Registrant)
Date: August 11, 2000 By: /s/ Robert R. Holian
-------------------------------------
Robert R. Holian
Senior Vice President
Controller and Chief Accounting Officer
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