<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 JANUARY 31, 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 March 13, 1998:
COMMON STOCK, NO PAR VALUE 1,000 SHARES
<PAGE>
FORM 10-Q
RENCO METALS, INC.
QUARTER ENDED JANUARY 31, 1998
TABLE OF CONTENTS
PAGE NO.
--------
TABLE OF CONTENTS 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS - JANUARY 31, 1998 AND
OCTOBER 31, 1997 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - THREE MONTHS
ENDED JANUARY 31, 1998 AND 1997 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - THREE MONTHS
ENDED JANUARY 31, 1998 AND 1997 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 9
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURES 10
-2-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
January 31, October 31,
1998 1997
Assets (Unaudited) (Audited)
------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,852 $ 26,607
Accounts receivable, less allowance for doubtful accounts of
$551 in 1998 and $514 in 1997 24,695 27,480
Inventories, net (note 2) 27,832 24,744
Prepaid expenses and other current assets 2,887 3,209
--------- ---------
Total current assets 78,266 82,040
--------- ---------
Property, plant, and equipment, net 36,922 37,715
Other assets, net 6,395 6,632
--------- ---------
$ 121,583 $ 126,387
--------- ---------
--------- ---------
Liabilities and Stockholder's Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 6,788 $ 8,262
Accrued expenses 12,682 19,451
Other current liabilities 1,474 248
--------- ---------
Total current liabilities 20,944 27,961
--------- ---------
Long-term debt 156,064 155,165
Other liabilities 12,164 12,127
--------- ---------
Total liabilities 189,172 195,253
--------- ---------
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 (68,090) (69,367)
--------- ---------
Total stockholder's deficit (67,589) (68,866)
--------- ---------
Commitments and contingencies
--------- ---------
$ 121,583 $ 126,387
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months
Ended January 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Sales $ 47,419 $ 45,786
Costs and expenses:
Cost of sales 30,934 27,300
Depreciation, depletion, and amortization 2,276 1,967
Selling, general, and administrative expenses 5,166 5,941
-------- --------
Total costs and expenses 38,376 35,208
-------- --------
Income from operations 9,043 10,578
Other income (expense):
Interest income 316 246
Interest expense (4,720) (4,597)
-------- --------
Total other income (expense) (4,404) (4,351)
-------- --------
Income before income taxes 4,639 6,227
Provision for income taxes 1,362 2,351
-------- --------
Net income $ 3,277 $ 3,876
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months
Ended January 31,
------------------------
1998 1997
-------- ---------
<S> <C> <C>
Net cash used in operating activities $ (1,172) $ (3,108)
-------- --------
Cash flows from investing activities -
Capital expenditures, net (1,483) (1,171)
-------- --------
Net cash used in investing activities (1,483) (1,171)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements 905 961
Repayment of long-term debt (5) (4)
Dividends (2,000) -
-------- --------
Net cash provided by (used in) financing activities (1,100) 957
-------- --------
Decrease in cash and cash equivalents (3,755) (3,322)
Cash and cash equivalents, beginning of period 26,607 20,779
-------- --------
Cash and cash equivalents, end of period $ 22,852 $ 17,457
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 8,830 $ 8,706
Cash paid during the period for income taxes $ 12 $ 71
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-5-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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>
Three months
Ended January 31,
(Unaudited)
-------------------------
1998 1997
------------ -----------
(dollars in thousands)
<S> <C> <C>
Statement of operations data:
Net sales $ 47,420 $ 45,786
Cost of sales $ 30,934 $ 27,300
Income before extraordinary item $ 3,276 $ 3,879
Net income $ 3,276 $ 3,879
January 31, October 31,
1998 1997
(Unaudited) (Audited)
------------- ------------
(dollars in thousands)
Balance sheet data:
Current assets $ 75,291 $ 78,793
Noncurrent assets $ 43,317 $ 44,347
Current liabilities $ 18,604 $ 21,336
Noncurrent liabilities $ 16,728 $ 15,792
</TABLE>
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<PAGE>
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, October 31,
1998 1997
(Unaudited) (Audited)
-------------- ------------
(dollars in thousands)
<S> <C> <C>
Finished goods $ 19,802 $ 16,264
Brine in ponds 1,262 1,400
Spare parts and supplies 7,397 7,683
Raw materials and work-in-process 734 760
-------------- ------------
29,195 26,107
Less LIFO reserve 1,363 1,363
-------------- ------------
$ 27,832 $ 24,744
-------------- ------------
-------------- ------------
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE
MONTHS ENDED JANUARY 31, 1997
SALES for the three month period ended January 31, 1998 increased 3.6 percent
over the prior period. The increase was attributable to a 2.0 percent increase
in Magcorp's revenues and a 9.3 percent increase in Sabel's revenues. Magnesium
shipments increased 6.2 percent while Magcorp's average selling price for
magnesium decreased 6.4 percent. Magnesium volumes improved due to stronger
demand across most market segments. According to International Magnesium
Association statistics, calendar 1997 shipments by western and non-western
producers represented a 10.5 percent and 21 percent increase over 1996 levels,
respectively, demonstrating both the increase in overall demand for magnesium
and the increased presence of non-western producers in the markets. Import
competition from primarily Chinese and Russian producers continues to put
pressure on magnesium prices. Magnesium pricing and volume are dependent on the
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.
COST OF SALES for the three month period ended January 31, 1998 increased 13.3
percent on a consolidated basis. Magcorp's cost of sales increased 14.2 percent
due in large part to increases in certain energy costs and due to increased
volume noted above when compared to the corresponding period in 1997. Magcorp's
cost of sales is highly sensitive to acquired energy costs and levels of
production. The 10.7 percent cost of sales increase at Sabel is attributable to
the new steel service center mentioned above.
DEPRECIATION, DEPLETION, AND AMORTIZATION for the three month period ended
January 31, 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
January 31, 1998 decreased primarily due to decreased development costs, offset
by increases in certain legal and selling costs when compared to the
corresponding period in 1997. Development costs were $1.3 million higher in
1997 due to magnesium process enhancement piloting at Magcorp.
INTEREST INCOME for the three month period ended January 31, 1998 increased
$70,000 due to cash and cash equivalent balances on hand that increased to a
month-end average of $26.8 million in the current period from a month-end
average of $20.4 million in the corresponding prior period.
INTEREST EXPENSE for the three month period ended January 31, 1998 was higher
than that of the corresponding prior period due to higher revolving credit
borrowings at Sabel in 1998 and a shorter initial semiannual interest period in
1997 on the Senior Notes issued July 3, 1996.
-7-
<PAGE>
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 average selling prices for magnesium that are down 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
January 31, 1998, the unused amounts available to Magcorp and Sabel were
approximately $24.3 million and $2.9 million, respectively. During the three
month period ended January 31, 1998, Sabel had net borrowings of $905,000 under
its revolving credit facility to fund working capital requirements. Magcorp has
not borrowed cash under its revolving credit facility since November 1994.
Cash used in operating activities was $1.2 million for three month period ended
January 31, 1998 compared to $3.1 million for the corresponding 1997 period.
The improvement in operating cash flow in the 1998 period compared to the 1997
period resulted from changes in primarily accounts receivable, inventories, and
accounts payable, offset by a decrease in net income.
Capital expenditures were $1.48 million during the three month period ended
January 31, 1998. Capital expenditures are budgeted at approximately
$14 million for 1998, $24 million for 1999, and $17 million for 2000. An
estimated $40 million of estimated capital expenditures for 1998, 1999, and 2000
is related to new electrolytic cell technology that is expected to improve
manufacturing efficiencies and improve environmental compliance. 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.
During the three month period ended January 31, 1998, dividends totaling
$2.0 million were paid on all outstanding shares of common stock to the
Company's sole stockholder, Group. 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.
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.
-8-
<PAGE>
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 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.
(a) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which this report
is filed.
-9-
<PAGE>
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)
March 13, 1998 /s/ Ira Leon Rennert
- -------------------------- ---------------------------
Date Ira Leon Rennert
Chairman of the Board and
Principal Executive Officer
March 13, 1998 /s/ Roger L. Fay
- -------------------------- ---------------------------
Date Roger L. Fay
Vice President - Finance
Principal Financial and
Accounting Officer
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 22,852
<SECURITIES> 0
<RECEIVABLES> 25,246
<ALLOWANCES> 551
<INVENTORY> 27,832
<CURRENT-ASSETS> 78,266
<PP&E> 83,303
<DEPRECIATION> 46,381
<TOTAL-ASSETS> 121,583
<CURRENT-LIABILITIES> 20,944
<BONDS> 156,064
0
0
<COMMON> 1
<OTHER-SE> (67,590)
<TOTAL-LIABILITY-AND-EQUITY> 121,583
<SALES> 47,419
<TOTAL-REVENUES> 47,419
<CGS> 30,934
<TOTAL-COSTS> 38,376
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 4,720
<INCOME-PRETAX> 4,639
<INCOME-TAX> 1,362
<INCOME-CONTINUING> 3,277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,277
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
