<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JULY 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 _______
COMMISSION FILE NUMBERS 033-68230, 333-4513
RENCO METALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3724916
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
238 NORTH 2200 WEST
SALT LAKE CITY, UTAH 84116
(Address of principal executive offices) (Zip Code)
(801) 532-2043
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 proceeding 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.
[X] YES [ ] NO
Number of shares outstanding of each of the registrant's classes of common
stock, as of September 5, 1997:
COMMON STOCK, NO PAR VALUE 1,000 SHARES
<PAGE>
FORM 10-Q
RENCO METALS, INC.
QUARTER ENDED JULY 31, 1997
TABLE OF CONTENTS
PAGE NO.
--------
TABLE OF CONTENTS 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS - JULY 31, 1997
AND OCTOBER 31, 1996 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - NINE AND
THREE MONTHS ENDED JULY 31, 1997 AND 1996 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - NINE
MONTHS ENDED JULY 31, 1997 AND 1996 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION
ITEM 5 OTHER INFORMATION 10
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
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<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JULY 31, October 31,
1997 1996
Assets (UNAUDITED) (Audited)
------ ------------ ----------
Current assets:
Cash and cash equivalents $ 19,559 $ 20,779
Accounts receivable, less allowance for doubtful
accounts of $567 in 1997 and $514 in 1996 21,778 24,864
Inventories, net (note 2) 27,759 26,447
Prepaid expenses and other current assets 4,564 3,130
------------- -----------
Total current assets 73,660 75,220
------------- -----------
Property, plant, and equipment, net 35,464 36,613
Other assets, net 6,124 6,825
------------- -----------
$ 115,248 $ 118,658
------------- -----------
------------- -----------
Liabilities and Stockholder's Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 5,563 $ 7,794
Accrued expenses 13,236 19,486
Other current liabilities 752 263
------------- -----------
Total current liabilities 19,551 27,543
------------- -----------
Long-term debt 155,308 154,132
Other liabilities 11,649 11,017
------------- -----------
Total liabilities 186,508 192,692
------------- -----------
Stockholder's deficit:
Common stock, no par value. Authorized,
issued, and outstanding 1,000 shares 1 1
Additional paid-in capital 500 500
Accumulated deficit (71,761) (74,535)
------------- -----------
Total stockholder's deficit (71,260) (74,034)
------------- -----------
Commitments and contingencies
------------- -----------
$ 115,248 $ 118,658
------------- -----------
------------- -----------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
<TABLE>
<CAPTION>
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS THREE MONTHS
ENDED JULY 31, ENDED JULY 31,
------------------------------ ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Sales $ 140,960 $ 147,125 $ 46,359 $ 48,015
Costs and expenses:
Cost of sales 91,145 84,512 31,405 28,274
Depreciation, depletion, and amortization 5,759 4,986 1,836 1,617
Selling, general, and administrative expenses 16,077 17,488 4,910 8,521
----------- ----------- ----------- ----------
Total costs and expenses 112,981 106,986 38,151 38,412
----------- ----------- ----------- ----------
Income from operations 27,979 40,139 8,208 9,603
Other income (expense):
Interest income 845 1,157 327 327
Interest expense (13,993) (8,348) (4,700) (3,314)
----------- ----------- ----------- ----------
Total other income (expense) (13,148) (7,191) (4,373) (2,987)
Income before income taxes
and extraordinary item 14,831 32,948 3,835 6,616
Provision for income taxes 5,457 11,735 1,292 2,288
----------- ----------- ----------- ----------
Income before extraordinary item 9,374 21,213 2,543 4,328
Extraordinary item (less applicable
income tax benefit of $4,559) - (7,284) - (7,284)
----------- ----------- ----------- ----------
Net income (loss) $ 9,374 $ 13,929 $ 2,543 $ (2,956)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine months
Ended July 31,
----------------------
1997 1996
--------- ---------
Net cash provided by operating activities $ 8,813 $ 15,583
--------- ---------
Cash flows from investing activities -
Capital expenditures, net (4,610) (7,994)
--------- ---------
Net cash used in investing activities (4,610) (7,994)
--------- ---------
Cash flows from financing activities:
Net borrowings under revolving credit agreements 1,190 46
Repayment of long-term debt (13) (73,512)
Payment of debt origination and financing fees - (6,680)
Borrowings of long-term debt - 150,000
Redemption of preferred stock - (8,500)
Dividends (6,600) (88,950)
--------- ---------
Net cash used in financing activities (5,423) (27,596)
--------- ---------
Decrease in cash and cash equivalents (1,220) (20,007)
Cash and cash equivalents, beginning of period 20,779 30,091
--------- ---------
Cash and cash equivalents, end of period $ 19,559 $ 10,084
--------- ---------
--------- ---------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 17,609 $ 8,943
Cash paid during the period for income taxes $ 3,530 $ 9,210
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared from the accounting records of Renco Metals, Inc. (Renco Metals)
and its subsidiaries, Magnesium Corporation of America (Magcorp), and Sabel
Industries, Inc. (Sabel), without audit (except where presented data is
specifically identified as audited) pursuant to the rules and regulations
of the Securities and Exchange Commission. Renco Metals is a 100 percent
owned subsidiary of The Renco Group, Inc. (Group). The financial
statements reflect all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented. The results of
operations for the interim periods presented are not necessarily indicative
of the results to be expected for the full year.
Renco Metals' senior notes are unconditionally and fully guaranteed,
jointly and severally, by both of its subsidiaries, Magcorp and Sabel (the
Guarantors), each of which is wholly-owned. Separate financial statements
of the Guarantors are not presented because, in management's opinion, such
financial statements would not be material to investors because Renco
Metals is a holding company with no independent operations and its only
assets are cash and its investment in Magcorp and Sabel. Summarized
financial information on the combined Guarantors is presented below:
SUMMARIZED COMBINED GUARANTOR FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Nine months Three months
Ended July 31, Ended July 31,
(Unaudited) (Unaudited)
------------------------------- ------------------------------
1997 1996 1997 1996
------------- ---------------- ------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Statement of operations data:
Net sales $ 140,960 $ 147,125 $ 46,359 $ 48,015
Cost of sales $ 91,145 $ 84,512 $ 31,405 $ 28,274
Income before extraordinary item $ 9,354 $ 21,102 $ 2,530 $ 4,285
Net income (loss) $ 9,354 $ 13,818 $ 2,530 $ (2,999)
<CAPTION>
July 31, October 31,
1997 1996
(Unaudited) (Audited)
------------ -----------
(dollars in thousands)
<S> <C> <C>
Balance sheet data:
Current assets $ 70,688 $ 71,982
Noncurrent assets $ 41,588 $ 43,438
Current liabilities $ 17,213 $ 20,907
Noncurrent liabilities $ 15,457 $ 13,649
</TABLE>
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<PAGE>
(2) INVENTORIES
Inventories consist of the following:
July 31, October 31,
1997 1996
(Unaudited) (Audited)
------------- -----------
(dollars in thousands)
Finished goods $ 18,955 $ 17,293
Brine in ponds 1,487 1,942
Spare parts and supplies 7,368 6,937
Raw materials and work-in-process 920 855
--------- ---------
28,730 27,027
Less LIFO reserve 971 580
--------- ---------
$ 27,759 $ 26,447
--------- ---------
--------- ---------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS - NINE MONTHS ENDED JULY 31, 1997 COMPARED TO NINE MONTHS
ENDED JULY 31, 1996
SALES for the nine month period ended July 31, 1997 decreased 4.2 percent over
the prior period. The decrease was attributable to a 5.6 percent decrease in
Magcorp's revenues, offset by a 0.6 percent increase in Sabel's revenues.
Magnesium shipments increased 3.6 percent while Magcorp's average selling price
for magnesium decreased 8.7 percent. Selling prices were impacted by lower
magnesium list prices. Effective January 1, 1997, Magcorp reduced its list
price by 6.7 percent, and other manufacturers announced similar reductions.
Competition from primarily Chinese and Russian producers continues to put
pressure on prices. Magnesium volumes improved due to stronger demand across
most market segments. According to International Magnesium Association (IMA)
statistics, estimated worldwide market shipments for the first six months of
calendar 1997 were up 7.5 percent over the comparable period in 1996. Magnesium
pricing and volume are dependent on the overall market supply and demand, and
there is no assurance that current trends will continue. Sabel's sales increase
was primarily due to higher prices in the steel service center markets, together
with slightly higher volumes.
COST OF SALES for the nine month period ended July 31, 1997 increased 7.8
percent on a consolidated basis. Magcorp's cost of sales increased 10.0 percent
due to increased volume noted above and due to increases in certain energy costs
when compared to the corresponding period in 1996. Magcorp's cost of sales is
highly sensitive to acquired energy costs and levels of production. The cost of
sales at Sabel increased 1.9 percent, reflecting increasing prices and volumes
in primarily the steel service center markets during the nine month period.
DEPRECIATION, DEPLETION, AND AMORTIZATION for the nine month period ended July
31, 1997 increased due to increased depreciation of plant and equipment as the
result of recent capital equipment additions.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES for the nine month period ended
July 31, 1997 decreased primarily due to decreased compensation expense, offset
by increased development and legal costs when compared to the corresponding
period in 1996. As disclosed in the Company's October 31, 1996 Annual Report on
Form 10-K, a $3.85 million one-time charge was incurred in 1996 related to
contractual compensation payments made to certain executives of Magcorp in
connection with the dividend paid in July 1996 in conjunction with the issuance
of $150 million of 11 1/2 percent Notes. Development costs increased $1.9
million in 1997 due to magnesium process enhancement piloting at Magcorp.
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<PAGE>
INTEREST INCOME for the nine month period ended July 31, 1997 decreased $312,000
due to cash and cash equivalent balances on hand that decreased to a month-end
average of $23.3 million in the current period from a month-end average of
$29.1 million in the corresponding prior period.
INTEREST EXPENSE for the nine month period ended July 31, 1997 increased
$5.6 million primarily as a result of the issuance of the 11 1/2 percent Notes
on July 3, 1996, which increased long-term debt by $76.5 million.
INCOME TAXES are estimated at statutory rates, including estimates of available
credits, for both periods presented.
EXTRAORDINARY ITEM expense incurred in 1996 is described in the Company's
October 31, 1996 Annual Report on Form 10-K.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JULY 31, 1997 COMPARED TO THREE
MONTHS ENDED JULY 31, 1996
SALES for the three month period ended July 31, 1997 decreased 3.4 percent over
the prior period. The decrease was attributable to a 5.4 percent decrease in
Magcorp's revenues, offset by a 3.3 percent increase in Sabel's revenues.
Magnesium shipments increased 6.0 percent while Magcorp's average selling price
for magnesium decreased 10.8 percent. Selling prices were impacted by lower
magnesium list prices. Effective January 1, 1997, Magcorp reduced its list
price by 6.7 percent, and other manufacturers announced similar reductions.
Competition from primarily Chinese and Russian producers continues to put
pressure on prices. Magnesium volumes improved due to stronger demand across all
market segments. According to IMA statistics, estimated worldwide market
shipments for the 1997 second calendar quarter were up 8.7 percent over the
comparable period in 1996. Magnesium pricing and volume are dependent on the
overall market supply and demand, and there is no assurance that current trends
will continue. Sabel's sales increase was due to an increase in prices and
volume in the steel service center markets during the three month period ended
July 31, 1997.
COST OF SALES for the three month period ended July 31, 1997 increased 11.1
percent. Magcorp's cost of sales increased 13.3 percent due to increased volume
noted above and due to increases in certain energy costs when compared to the
corresponding period in 1996. Magcorp's cost of sales is highly sensitive to
acquired energy costs and levels of production. Cost of sales at Sabel
increased 4.7 percent, reflecting increasing prices and volume in the steel
service center markets during the three month period.
DEPRECIATION, DEPLETION, AND AMORTIZATION for the three month period ended July
31, 1997 increased due to increased depreciation of plant and equipment as the
result of recent capital equipment additions.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES for the three month period ended
July 31, 1997 decreased primarily due to decreased compensation expense. As
disclosed in the Company's October 31, 1996 Annual Report on Form 10-K, a $3.85
million one-time charge was incurred in 1996 related to contractual compensation
payments made to certain executives of Magcorp in connection with the dividend
paid in July 1996 in conjunction with the issuance of the 11 1/2 percent Notes.
INTEREST INCOME for the three month period ended July 31, 1997 was consistent
with the corresponding prior period due to cash and cash equivalent balances on
hand that were comparable.
INTEREST EXPENSE for the three month period ended July 31, 1997 increased
$1.4 million primarily as a result of the issuance of the 11 1/2 percent Notes
on July 3, 1996, which increased long-term debt by $76.5 million.
INCOME TAXES are estimated at statutory rates, including estimates of available
credits, for both periods presented.
EXTRAORDINARY ITEM expense incurred in 1996 is described in the Company's
October 31, 1996 Annual Report on Form 10-K.
-8-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements, capital
investments, interest payment obligations, and to a lesser extent due to their
discretionary nature, dividend payments. The Company's primary available source
of liquidity is from cash provided by operating activities. The Company's
liquidity was reduced and its debt service requirements increased as a result of
the issuance of the 11 1/2 percent Notes in July 1996, which increased long-term
debt by $76.5 million. The Company's liquidity has also been reduced by average
selling prices for magnesium that are down notably from record 1996 levels,
reducing gross profit, net income, and cash provided by operating activities.
Magnesium pricing and volume are dependent on the overall market supply and
demand, and there is no assurance that current trends will continue.
The Company also has available $40.0 million in revolving credit facilities that
provide for advances by the lender based on specified percentages of eligible
accounts receivable, supplies inventories, and finished goods inventories to a
maximum of $33.0 million for Magcorp and $7.0 million for Sabel, net of
outstanding letters of credit. As of July 31, 1997, the unused amounts
available to Magcorp and Sabel were approximately $22.1 million and
$3.6 million, respectively. During the nine month period ended July 31, 1997,
Sabel had net borrowings of $1.2 million under their revolving credit facility
to fund working capital requirements. Magcorp has not borrowed cash under its
revolving credit facility since November 1994.
Cash provided by operating activities was $8.8 million for the nine months ended
July 31, 1997 compared to $15.6 million for the corresponding 1996 period. The
decrease in operating cash flow in 1997 compared to 1996 resulted from a
decrease in net income and changes in primarily inventories, income taxes, and
accrued expenses during the 1997 period.
Capital expenditures were $4.6 million during the first nine months of fiscal
1997. Capital expenditures are budgeted at approximately $3 million over the
remaining three months of the fiscal year, and at $24 million for 1998,
$24 million for 1999, and $8 million for 2000. An estimated $40 million of
estimated capital expenditures for 1997, 1998, and 1999 is related to magnesium
process enhancements that will also improve environmental compliance.
During the nine-month period ended July 31, 1997, the Board of Directors
declared dividends totaling $6.6 million which were paid on all outstanding
shares to the Company's sole shareholder. The declaration and payment of
dividends by the Company are restricted by the Company's long-term debt
agreements, which generally allow dividends on a cumulative basis up to
50 percent of consolidated net income earned since the issuance of the 11 1/2
percent Notes. Based on profitability and after taking into account the
Company's prospects and liquidity needs, the Company plans to pay quarterly
dividends to the extent allowed by the Company's long-term debt agreements. At
July 31, 1997, approximately $870,000 of additional dividends would be allowed
under the long-term debt provisions. Management anticipates that existing cash
balances and cash generated from operations and available revolving credit
facilities will be sufficient to finance the Company's liquidity needs for the
foreseeable future.
The Company's long-term debt agreements contain numerous covenants and
prohibitions that limit the financial activities of the Company, including
requirements that the Company satisfy certain financial ratios and limitations
on additional indebtedness. The ability of the Company to meet its debt service
requirements and to comply with such covenants will be dependent upon future
operating performance and financial results of the Company, which will be
subject to financial, economic, political, competitive, and other factors
affecting the Company, many of which are beyond its control.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements," within the meaning of the
Private Securities Litigation Reform Act of 1995, which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
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<PAGE>
industry capacity; demand; industry trends; competition; currency fluctuations;
the loss of any significant customers; availability of qualified personnel; and
major equipment failures.
PART II- OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
COLLECTIVE BARGAINING AGREEMENTS
On August 27, 1997, a new four year collective bargaining agreement was entered
into between Magcorp and its hourly employees represented by the United
Steelworkers of America. The new contract expires August 31, 2001. Effective
June 21, 1997 a new three year collective bargaining agreement was entered into
between Sabel and its hourly employees represented by the United Steelworkers of
America. Sabel's new contract expires June 30, 2000.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this Report on Form
10-Q is set forth in the "Exhibit Index" which immediately precedes
such exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which this
report is filed.
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<PAGE>
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.
RENCO METALS, INC.
(Registrant)
September 5, 1997 /s/ Ira Leon Rennert
- -------------------------- -----------------------------
Date Ira Leon Rennert
Chairman of the Board and
Principal Executive Officer
September 5, 1997 /s/ Roger L. Fay
- -------------------------- -----------------------------
Date Roger L. Fay
Vice President - Finance
Principal Financial and
Accounting Officer
-11-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 19,559
<SECURITIES> 0
<RECEIVABLES> 22,346
<ALLOWANCES> 567
<INVENTORY> 27,759
<CURRENT-ASSETS> 73,660
<PP&E> 77,982
<DEPRECIATION> 42,518
<TOTAL-ASSETS> 115,248
<CURRENT-LIABILITIES> 19,551
<BONDS> 155,308
0
0
<COMMON> 1
<OTHER-SE> (71,261)
<TOTAL-LIABILITY-AND-EQUITY> 115,248
<SALES> 140,960
<TOTAL-REVENUES> 140,960
<CGS> 91,145
<TOTAL-COSTS> 112,981
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 111
<INTEREST-EXPENSE> 13,993
<INCOME-PRETAX> 14,831
<INCOME-TAX> 5,457
<INCOME-CONTINUING> 9,374
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,374
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
