<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 APRIL 30, 1998
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 NUMBER 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 June 5, 1998:
COMMON STOCK, NO PAR VALUE 1,000 SHARES
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FORM 10-Q
RENCO METALS, INC.
QUARTER ENDED APRIL 30, 1998
TABLE OF CONTENTS
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TABLE OF CONTENTS 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS - APRIL 30, 1998 AND
OCTOBER 31, 1997 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - SIX MONTHS AND
THREE MONTHS ENDED APRIL 30, 1998 AND 1997 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - SIX MONTHS
ENDED APRIL 30, 1998 AND 1997 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
ITEM 5 OTHER INFORMATION 10
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
</TABLE>
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<TABLE>
<CAPTION>
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
APRIL 30, October 31,
1998 1997
ASSETS (UNAUDITED) (Audited)
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,455 $ 26,607
Accounts receivable, less allowance for doubtful accounts of
$589 in 1998 and $514 in 1997 24,614 27,480
Inventories, net (note 2) 33,408 24,744
Prepaid expenses and other current assets 2,461 3,209
---------- ----------
Total current assets 87,938 82,040
---------- ----------
Property, plant, and equipment, net 35,041 37,715
Other assets, net 6,109 6,632
---------- ----------
$ 129,088 $ 126,387
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 6,855 $ 8,262
Accrued expenses 17,663 19,451
Other current liabilities 358 248
---------- ----------
Total current liabilities 24,876 27,961
---------- ----------
Long-term debt 156,906 155,165
Other liabilities 11,781 12,127
---------- ----------
Total liabilities 193,563 195,253
---------- ----------
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 (64,976) (69,367)
---------- ----------
Total stockholder's deficit (64,475) (68,866)
---------- ----------
Commitments and contingencies ---------- ----------
$ 129,088 $ 126,387
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<TABLE>
<CAPTION>
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS THREE MONTHS
ENDED APRIL 30, ENDED APRIL 30,
-------------------------- --------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 94,964 $ 94,601 $ 47,545 $ 48,815
Costs and expenses:
Cost of sales 60,540 59,740 29,606 32,440
Depreciation, depletion, and amortization 4,406 3,923 2,130 1,956
Selling, general, and administrative expenses 12,042 11,167 6,876 5,226
--------- --------- --------- ---------
Total costs and expenses 76,988 74,830 38,612 39,622
--------- --------- --------- ---------
Income from operations 17,976 19,771 8,933 9,193
Other income (expense):
Interest income 585 518 269 272
Interest expense (9,450) (9,293) (4,730) (4,696)
--------- --------- --------- ---------
Total other income (expense) (8,865) (8,775) (4,461) (4,424)
Income before income taxes 9,111 10,996 4,472 4,769
Provision for income taxes 2,720 4,165 1,358 1,814
--------- --------- --------- ---------
Net income $ 6,391 $ 6,831 $ 3,114 $ 2,955
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<TABLE>
<CAPTION>
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS
ENDED APRIL 30,
---------------------------
1998 1997
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Net cash provided by operating activities $ 2,875 $ 8,729
-------- --------
Cash flows from investing activities -
Capital expenditures, net (1,769) (2,091)
-------- --------
Net cash used in investing activities (1,769) (2,091)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements 1,752 939
Repayment of long-term debt (10) (9)
Dividends (2,000) -
-------- --------
Net cash provided by (used in) financing activities (258) 930
-------- --------
Decrease in cash and cash equivalents 848 7,568
Cash and cash equivalents, beginning of period 26,607 20,779
-------- --------
Cash and cash equivalents, end of period $ 27,455 $ 28,347
-------- --------
-------- --------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 8,956 $ 8,799
Cash paid during the period for income taxes $ 3,016 $ 2,146
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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:
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SUMMARIZED COMBINED GUARANTOR FINANCIAL INFORMATION
---------------------------------------------------
Six months Three months
Ended April 30, Ended April 30,
(Unaudited) (Unaudited)
--------------------------- ----------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Statement of operations data:
Net sales $ 94,964 $ 94,601 $ 47,545 $ 48,815
Cost of sales $ 60,540 $ 59,740 $ 29,606 $ 32,440
Net income $ 6,379 $ 6,824 $ 3,103 $ 2,945
APRIL 30, October 31,
1998 1997
(UNAUDITED) (Audited)
----------- -----------
(dollars in thousands)
Balance sheet data:
Current assets $ 84,601 $ 78,793
Noncurrent assets $ 41,150 $ 44,347
Current liabilities $ 18,173 $ 21,336
Noncurrent liabilities $ 17,187 $ 15,792
</TABLE>
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(2) INVENTORIES
Inventories consist of the following:
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<CAPTION>
APRIL 30, October 31,
1998 1997
(UNAUDITED) (Audited)
----------- -----------
(dollars in thousands)
<S> <C> <C>
Finished goods $ 24,225 $ 16,264
Brine in ponds 1,288 1,400
Spare parts and supplies 8,001 7,683
Raw materials and work-in-process 657 760
---------- ----------
34,171 26,107
Less LIFO reserve 763 1,363
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$ 33,408 $ 24,744
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</TABLE>
(3) ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
The Company is and will continue to be subject to numerous federal and
state environmental laws and regulations governing, among other things, air
emissions, waste water discharge and solid and hazardous waste disposal.
The Company believes that it has made and intends to continue to make the
necessary expenditures for compliance with environmental laws and
regulations. Environmental laws and regulations have changed rapidly in
recent years, and the Company may be subject to more stringent
environmental laws and regulations in the future. The Company cannot
currently assess the impact of more stringent standards on its results of
operations or financial condition.
Magcorp's most significant long-term environmental issue is compliance with
the Clean Air Act. Title III of the Clean Air Act will establish, on a
published schedule, new emission standards for previously unregulated air
toxins. These national emission standards for hazardous air pollutants
("NESHAPS") will be technology based and will be designed to achieve the
maximum control as determined by a comparison of installations at similar
facilities in specific industry categories. Representatives from the
Environmental Protection Agency have visited Magcorp's facility in
preparation for the process of establishing NESHAPS for control of chlorine
and hydrogen chloride emissions.
It is expected that Magcorp will be required to make substantial reductions
in chlorine and hydrogen chloride emissions to meet NESHAPS for primary
magnesium refineries that will be promulgated in November 2000, with a
typical three to five year timetable for compliance to follow. In response
to the anticipated regulations imposed under amendments to the Clean Air
Act, Magcorp has embarked on a program to acquire new electrolytic cell
technology that will reduce chlorine emissions at the source. The new cells
are also expected to significantly reduce costs since they have much higher
throughput and are more energy efficient. Assuming the successful
completion of prototype work by the end of fiscal year 1998 or early in
fiscal year 1999, the conversion of the remaining cells is expected to be
completed over a period of approximately two years. With respect to
hydrogen chloride, Magcorp has installed scrubbers to reduce emissions that
are considered to use maximum available control technology on the pertinent
sources of emissions. Magcorp plans to spend a minimum of $40 million of
its capital budget, including the capital required for the prototype cell,
for fiscal years 1998, 1999, and 2000, directly or indirectly to meet
environmental regulatory requirements, primarily for NESHAPS, and for
anticipated other future requirements. There can be no assurance that
Magcorp's cell conversion program will be successful, and to the extent it
is not successful, it could have a material adverse effect on the Company's
financial condition and results of operations.
Representatives of the Utah State Division of Environmental Quality
Division of Solid and Hazardous Waste have visited Magcorp regarding the
issue of whether piles of material generated in the electrolytic
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process, which cover an extensive land area at Magcorp's Rowley facility,
can be classified as a hazardous or solid waste, and if so classified, what
measures might be required to investigate and address these piles. No
similar material has been classified by the State. The State and the
Company agreed that the piles are not hazardous and no remediation or
action by the Company was necessary. If the nature of these wastes
changes, they could become subject to State regulation, and corrective
action could be required. The costs of such compliance, if any, could be
material; however, such costs cannot be assessed at this time.
In addition to the above matters, the Company is contingently liable with
respect to lawsuits and other claims incidental to the ordinary course of
its operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS - SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO SIX MONTHS
ENDED APRIL 30, 1997
SALES for the six month period ended April 30, 1998 increased 0.4 percent over
the prior period. The increase was attributable to an 11.1 percent increase in
Sabel's revenues, offset by a 2.8 percent decrease in Magcorp's revenues.
Magnesium shipments decreased 1.9 percent and Magcorp's average selling price
for magnesium decreased 2.9 percent compared to the corresponding period in
1997. Foreign import competition is putting pressure on magnesium volumes and
pricing, particularly in the steel desulfurization segment of the magnesium
business. Magnesium pricing and volume are dependent on overall market supply
and demand, and there is no certainty that current trends will not continue.
Sabel's sales increase was primarily due to the opening of a new steel service
center in Newnan, Georgia in November 1997.
COST OF SALES for the six month period ended April 30, 1998 increased 1.3
percent on a consolidated basis. Sabel's cost of sales increased 11.9 percent
and Magcorp's decreased 2.2 percent, which values are consistent with changes in
sales volumes discussed above.
DEPRECIATION, DEPLETION, AND AMORTIZATION for the six month period ended April
30, 1998 increased due to increased depreciation of plant and equipment as the
result of recent capital equipment additions.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES for the six month period ended
April 30, 1998 increased due in large part to increased costs associated with
the new steel service center at Sabel and increased computer software consulting
costs at Magcorp, offset by decreased development costs when compared to the
corresponding period in 1997.
INTEREST INCOME for the six month period ended April 30, 1998 increased $67,000
due to cash and cash equivalent balances on hand that increased to a month-end
average of $26.2 million in the current period from a month-end average of
$21.8 million in the corresponding prior period.
INTEREST EXPENSE for the six month period ended April 30, 1998 was higher than
that of the corresponding prior period due primarily to higher revolving credit
borrowings at Sabel in 1998.
INCOME TAXES are estimated at statutory rates, including estimates of available
credits, for both periods presented.
RESULTS OF OPERATIONS - THREE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE
MONTHS ENDED APRIL 30, 1997
SALES for the three month period ended April 30, 1998 decreased 2.6 percent over
the prior period. The decrease was attributable to a 7.5 percent decrease in
Magcorp's revenues offset by a 12.6 percent increase in Sabel's revenues.
Magnesium shipments decreased 9.3 percent and Magcorp's average selling price
for magnesium decreased 0.7 percent. Foreign import competition is putting
pressure on magnesium volumes and pricing, particularly in the steel
desulfurization segment of the magnesium business. Magnesium pricing and volume
are dependent on overall market supply and demand, and there is no certainty
that current trends will not continue.
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Sabel's sales increase was primarily due to the opening of a new steel service
center in Newnan, Georgia in November 1997.
COST OF SALES for the three month period ended April 30, 1998 decreased 8.7
percent on a consolidated basis. Magcorp's cost of sales decreased 16.1
percent, offset by an increase of 12.8 percent at Sabel. Cost of sales trends
are consistent with changes in sales volumes discussed above.
DEPRECIATION, DEPLETION, AND AMORTIZATION for the three month period ended April
30, 1998 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
April 30, 1998 increased due in large part to increased costs associated with
the new steel service center at Sabel, together with increased computer software
consulting costs and magnesium process enhancement piloting costs at Magcorp.
INTEREST EXPENSE for the three month period ended April 30, 1998 was higher than
that of the corresponding prior period due to higher revolving credit borrowings
at Sabel in 1998.
INCOME TAXES are estimated at statutory rates, including estimates of available
credits, for both periods presented.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements, capital
investments, and interest payment obligations. 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 11.5% Senior Notes in July 1996, which increased
long-term debt by $76.5 million. The Company's liquidity has also been reduced
by a decline in average selling prices for magnesium from 1997 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 not 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 and inventories to a maximum of $33.0 million for Magcorp
and $7.0 million for Sabel, net of outstanding letters of credit. As of April
30, 1998, the unused amounts available to Magcorp and Sabel were approximately
$25.7 million and $2.9 million, respectively. During the six month period ended
April 30, 1998, Sabel had net borrowings of $1.8 million under its 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 $2.9 million for six month period
ended April 30, 1998 compared to $8.7 million for the corresponding 1997 period.
The decrease in operating cash flow in the 1998 period compared to the 1997
period resulted in large part from increases in inventories, offset by decreases
in primarily accounts receivable, accounts payable, and accrued expenses. The
increase in inventories is attributable to increased production of third-party
processed secondary magnesium and to decreases in magnesium sales volumes during
the six month period ended April 30, 1998. Magcorp plans to increase inventory
levels in 1998 and early 1999 to accommodate decreases in production that are
planned to take place during the period of conversion to new electrolytic cell
technology discussed below.
Capital expenditures were $1.77 million during the six month period ended April
30, 1998. Capital expenditures are budgeted at approximately $5 million for the
remaining six months of fiscal year 1998, $24 million for fiscal 1999, and $24
million for fiscal 2000. An estimated $40 million of estimated capital
expenditures for fiscal years 1998, 1999, and 2000 is related to new
electrolytic cell technology that is expected to improve manufacturing
efficiencies and ensure compliance with future environmental standards.
Assuming the successful completion of prototype work by the end of fiscal year
1998 or early in fiscal year 1999, the conversion of the remaining cells is
expected to be completed over a period of approximately two years. As a result,
the associated cost reductions and related manufacturing efficiencies are not
expected to be realized in the Company's operating results until the end of
fiscal year 2000 or early in fiscal year 2001.
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During the six month period ended April 30, 1998, dividends totaling
$2.0 million were paid on all outstanding shares of common stock to the
Company's sole stockholder, Group. In June 1998, subsequent to the Company's
fiscal quarter end, the Company paid to Group dividends totaling $3.2 million.
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 11.5% Senior 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. 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.
As provided by the terms of the indenture governing the Company's 12% Senior
Notes due 2000, the Company plans to redeem all of the remaining $1.5 million of
the Notes at 104 percent of the principal amount on July 15, 1998, together with
accrued and unpaid interest to that date.
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;
industry capacity; demand; industry trends; competition; currency fluctuations;
the loss of any significant customers; availability of qualified personnel;
successful completion of planned installation of new technology, and major
equipment failures.
PART II- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
For information as to the environmental matters, see Part I, Note 3 to Item 1,
Financial Statements.
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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S I G N A T U R E S
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)
June 5, 1998 /s/ Ira Leon Rennert
- ------------------------------ -------------------------------
Date Ira Leon Rennert
Chairman of the Board and
Principal Executive Officer
June 5, 1998 /s/ Roger L. Fay
- ------------------------------ -------------------------------
Date Roger L. Fay
Vice President - Finance
Principal Financial and
Accounting Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<CASH> 27,455
<SECURITIES> 0
<RECEIVABLES> 25,203
<ALLOWANCES> 589
<INVENTORY> 33,408
<CURRENT-ASSETS> 87,938
<PP&E> 83,446
<DEPRECIATION> 48,405
<TOTAL-ASSETS> 129,088
<CURRENT-LIABILITIES> 24,876
<BONDS> 156,906
0
0
<COMMON> 1
<OTHER-SE> (64,476)
<TOTAL-LIABILITY-AND-EQUITY> 129,088
<SALES> 94,964
<TOTAL-REVENUES> 94,964
<CGS> 60,540
<TOTAL-COSTS> 76,988
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 72
<INTEREST-EXPENSE> 9,450
<INCOME-PRETAX> 9,111
<INCOME-TAX> 2,720
<INCOME-CONTINUING> 6,391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,391
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
