<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, 2000
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 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
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 3, 2000:
COMMON STOCK, NO PAR VALUE 1,000 SHARES
<PAGE>
FORM 10-Q
RENCO METALS, INC.
QUARTER ENDED JANUARY 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - January 31, 2000 and October 31, 1999 3
Condensed Consolidated Statements Of Operations - Three Months Ended January 31, 2000 and 1999 4
Condensed Consolidated Statements Of Cash Flows - Three Months Ended January 31, 2000 and 1999 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 6 - EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31, October 31,
2000 1999
ASSETS (UNAUDITED) (Audited)
------------ ------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,090 $ 8,448
Accounts receivable, less allowance for doubtful accounts of
$1,169 in 2000 and $532 in 1999 20,843 25,478
Inventories, net (note 2) 47,116 44,979
Prepaid expenses and other current assets 1,419 1,678
----------- -------------
Total current assets 71,468 80,583
----------- -------------
Property, plant, and equipment, net 44,383 41,862
Other assets, net 3,394 3,646
----------- -------------
$119,245 $126,091
=========== =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
---------------------------------------
Current liabilities:
Current installments of long-term debt $ 25 $ 25
Accounts payable 5,678 7,043
Accrued expenses and other current liabilities 9,072 14,294
----------- -------------
Total current liabilities 14,775 21,362
----------- -------------
Long-term debt, excluding current installments 156,827 153,204
Other liabilities 11,198 11,718
----------- -------------
Total liabilities 182,800 186,284
Stockholder's deficit:
Common stock, no par value. Authorized, issued, and
outstanding 1,000 shares 1 1
Additional paid-in capital 600 600
Accumulated deficit (64,156) (60,794)
----------- -------------
Total stockholder's deficit (63,555) (60,193)
----------- -------------
Commitments and contingencies ----------- -------------
$119,245 $126,091
========== =============
</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 OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JANUARY 31,
----------------------
2000 1999
-------- -------
<S> <C> <C>
Sales $39,153 $41,620
Costs and expenses:
Cost of sales 30,851 28,768
Depreciation, depletion, and amortization 2,208 2,336
Selling, general, and administrative expenses 4,969 4,679
---------- --------
Total costs and expenses 38,028 35,783
---------- --------
Income from operations 1,125 5,837
Other income (expense):
Interest income 89 239
Interest expense (4,656) (4,671)
Equity in earnings of affiliate 80 -
---------- --------
Total other income (expense) (4,487) (4,432)
---------- --------
Income (loss) before income taxes (3,362) 1,405
Income tax (benefit) - (2,063)
---------- --------
Net income (loss) $(3,362) $3,468
---------- --------
</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,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Net cash used in operating activities $(5,252) $(4,035)
-------- --------
Cash flows from investing activities -
Capital expenditures (4,729) (3,280)
-------- --------
Net cash used in investing activities (4,729) (3,280)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements 3,629 (270)
Repayment of long-term debt (6) (6)
Payment of financing fees - (50)
-------- --------
Net cash provided by (used in) financing activities 3,623 (326)
-------- --------
Decrease in cash and cash equivalents (6,358) (7,641)
Cash and cash equivalents, beginning of period 8,448 21,690
-------- --------
Cash and cash equivalents, end of period $2,090 $14,049
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $8,717 $8,737
Cash paid during the period for income taxes $ - $ 65
</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
(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 (the Company), 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% 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. These interim condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Form 10-K for the fiscal year ended
October 31, 1999.
Renco Metals' 11.5% Senior Notes due 2003 (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,
2000 1999
-------- --------
(dollars in thousands)
<S> <C> <C>
Statement of operations data:
Net sales $39,153 $41,620
Cost of sales $30,851 $28,768
Net income (loss) $(3,393) $ 3,450
</TABLE>
<TABLE>
<CAPTION>
October 31,
JANUARY 31, 1999
2000 (Audited)
----------- ----------
(dollars in thousands)
<S> <C> <C>
Balance sheet data:
Current assets $69,952 $78,701
Noncurrent assets $47,777 $45,508
Current liabilities $12,523 $14,701
Noncurrent liabilities $18,025 $14,922
</TABLE>
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<PAGE>
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31,
JANUARY 31, 1999
2000 (Audited)
----------- ------------
(dollars in thousands)
<S> <C> <C>
Finished goods $39,528 $34,985
Brine in ponds 1,138 1,228
Spare parts and supplies 9,330 9,076
Raw materials and work-in-process 815 963
----------- ------------
50,811 46,252
Less LIFO reserve 3,695 1,273
----------- ------------
$47,116 $44,979
=========== ============
</TABLE>
(3) SEGMENT INFORMATION
The Company classifies its operations into two operating segments:
magnesium production and steel wholesaling and fabrication. Management
evaluates a segment's performance based upon operating income. There are
no intersegment sales, allocated costs, or jointly used assets.
Summarized financial information by operating segment follows.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JANUARY 31,
-------------------
2000 1999
-------- --------
(dollars in thousands)
<S> <C> <C>
Revenues
Magnesium $28,486 $31,186
Steel 10,667 10,434
--------- ---------
Consolidated revenues $39,153 $41,620
========= =========
Profit or loss:
Income from operations:
Magnesium $ 703 $ 5,747
Steel 442 546
--------- ---------
Total reportable segments 1,145 6,293
--------- ---------
Other income (expense), net (4,507) (4,888)
--------- ---------
Consolidated income (loss) before income taxes $(3,362) $1,405
========= =========
</TABLE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JANUARY 31, 2000 COMPARED TO THREE
MONTHS ENDED JANUARY 31, 1999
SALES for the three-month period ended January 31, 2000 decreased 5.9% over
the prior period. The decrease was attributable to an 8.7% decrease in
Magcorp's revenues partially offset by a 2.2% increase in Sabel's revenues.
Magnesium shipments decreased 4.9% and Magcorp's average selling price for
magnesium decreased 4.8%. Import competition from foreign producers continues
to put pressure on magnesium pricing and volumes. 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
due to overall price increases in the U.S. steel industry.
COST OF SALES for the three-month period ended January 31, 2000 increased 7.2%
on a consolidated basis. Magcorp's cost of sales increased 11.6% due primarily
to higher production costs at Magcorp caused by production levels being below
capacity and a $2.4 million LIFO inventory valuation charge. Cost of sales at
-7-
<PAGE>
Magcorp was also adversely affected by increased processing costs associated
with increased volumes of recycled magnesium. When compared to the
corresponding period in 1999, Magcorp increased its participation in die cast
markets, which also requires handling and recycling of die cast customer
scrap, increasing costs and decreasing margins. Magcorp's cost of sales
increase was offset by a 6.0% cost of sales decrease at Sabel attributable to
volume decreases incurred while margins increased in the U.S. Steel industry
as mentioned above.
DEPRECIATION, DEPLETION, AND AMORTIZATION for the three-month period ended
January 31, 2000 decreased 5.5% due to certain long-lived assets originally
capitalized at the time of Magcorp's acquisition in 1989 becoming fully
depreciated, offset by increased depreciation for recently acquired capital
equipment additions.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES for the three-month period ended
January 31, 2000 increased 6.2% over the corresponding prior period due largely
to increased charges to allowance for doubtful accounts stemming from one of
Magcorp's customers filing for Chapter 11 bankruptcy protection.
INTEREST INCOME for the three-month period ended January 31, 2000 decreased
$150,000 due to decreased cash and cash equivalent balances on hand.
INCOME TAXES for the three-month period ended January 31, 2000 were zero.
Effective November 1, 1998, the Company was designated as a qualified subchapter
S subsidiary by Group. Accordingly, the Company is generally not subject to
income taxes. As a result of the subchapter S designation, during the three
months ended January 31, 1999 the Company recognized an income tax benefit of
$2.1 million that included the elimination of net deferred tax liabilities
recorded as of October 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements, capital
investments and interest payment obligations. The Company's primary source of
liquidity has historically been cash provided by operating activities. 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, 2000, the unused amounts available to Magcorp and Sabel were approximately
$24.2 million and $2.6 million, respectively. During the three-month period
ended January 31, 2000, Magcorp and Sabel borrowed net amounts of $2.1 million
and $1.5 million, respectively, under their revolving credit facilities.
Cash used in operating activities was $5.3 million for the three-month period
ended January 31, 2000 compared to $4.0 million for the corresponding prior
period. The $1.3 million increase in cash used in operations resulted primarily
from decreased operating income, offset by favorable changes in working capital
items. The reduced operating income is attributable to lower sales volume and
pricing from increased import competition in the magnesium operations and by
lower margins on increased sales of die cast market products. Pricing and volume
are dependent on the overall market supply and demand, and there is no assurance
that current trends will not continue.
Capital expenditures were $4.7 million for the three-month period ended January
31, 2000, and are budgeted to total approximately $20 million for 2000, $16
million for 2001, and $3 million for 2002. Of these projected capital
expenditure amounts, an estimated total of $31 million is related to new
electrolytic cell technology that is expected to improve manufacturing
efficiencies and ensure compliance with future environmental standards. Original
plans for complete plant conversion have been scaled back to allow some
flexibility due to reduced cash flow from operations caused by worsened market
conditions. Certain critical components are requiring more lead-time than was
originally anticipated. As a result, conversion of the cells is now expected to
commence in late summer or early fall of 2000 and take place over a period of
approximately two years. Associated cost reductions and related manufacturing
efficiencies will occur gradually as conversion progresses, but will not be
fully realized in the Company's operating results until 2002.
-8-
<PAGE>
Management anticipates that existing cash balances, cash generated from
operations, and availability under its revolving credit facilities will be
sufficient to finance the Company's liquidity needs for the foreseeable future.
However, if magnesium market conditions further deteriorate, in order to fund
its planned capital expenditures through 2001, the Company may need to consider
additional sources of liquidity or further scale back Magcorp's cell conversion
project.
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.
ENVIRONMENTAL MATTERS
Title III of the Clean Air Act will establish, on a published schedule, new
national emission standards for hazardous air pollutants (NESHAPS). NESHAPS are
to be based on maximum achievable control technology as determined by a
comparison of installations at similar facilities in specific industry
categories. Representatives from the United States Environmental Protection
Agency (EPA) have visited Magcorp's facility in preparation for the process of
establishing NESHAPS for chlorine and hydrogen chloride emissions. It is
expected that Magcorp will be required to make substantial reductions in
chlorine emissions to meet NESHAPS for primary magnesium refineries that will be
promulgated by November 2000, with an expected three to five year timetable for
compliance following promulgation of the new standards.
In anticipation of the new standards, Magcorp has embarked on a program to
install new electrolytic cell technology that will reduce chlorine emissions at
the source. The new cells are also expected to significantly reduce costs
because they have much higher throughput and are more energy efficient. As noted
above, cell conversion is expected to commence in late summer or early fall of
2000 and take place over approximately two years. With respect to hydrogen
chloride, Magcorp has recently installed and is successfully operating scrubbers
to reduce pertinent emissions. Magcorp does not expect that it will be required
to spend significant additional amounts to meet the new standards for hydrogen
chloride. Magcorp plans to spend an estimated $30 to $35 million of its total
capital expenditure budget through 2001, directly or indirectly, to meet
environmental regulatory requirements, primarily for NESHAPS, and for other
anticipated future requirements. Prototype cell-related project development
expenses to date total $6.7 million. 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 Department of Environmental Quality (UDEQ)
Division of Solid and Hazardous Waste visited Magcorp in 1994 regarding the
issue of whether piles of material generated in the electrolytic 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 as hazardous or solid waste. The State accepted
Magcorp's written storage plan, which does not consider the piles hazardous and
under which no remediation or action by the Company is necessary. If the piles
were at some point in the future to be classified as hazardous waste, thereby
becoming subject to State regulation, corrective action could be required. The
costs of such compliance, if any, could be material; however, such costs cannot
be assessed at this time.
Sampling conducted by Magcorp and by UDEQ in 1998 indicated a low but measurable
accumulation of chlorinated hydrocarbons in the form of dioxin/furan compounds
in soil and sediment samples from a contained and permitted process wastewater
collection and retention system used at the Magcorp plant site for over 25
years. While Magcorp does not consider, and believes that UDEQ does not
consider, a health hazard to be associated with these preliminary sampling
results, Magcorp conducted additional sampling to determine the extent of
accumulations of these compounds. Sampling results confirmed the accumulation of
small amounts of dioxin/furan compounds in soil and sediment from the process
wastewater collection and retention system, and that facility perimeter areas
contained only background levels of the compounds. Management does not expect
magnesium refineries to become subject to new regulations regarding these
compounds in the near future. If these compounds do become subject to government
regulation, the costs of such compliance, if any, could have a material adverse
effect on the Company's financial condition and results of operations; however,
such costs cannot be assessed at this time.
-9-
<PAGE>
Industrial companies such as Magcorp and Sabel have in recent years become
subject to changing and increasingly demanding environmental standards imposed
by governmental laws and regulations. The Company cannot currently assess the
impact of more stringent standards on its results of operations or financial
condition.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements," 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;
changes in environmental regulations; successful completion of planned
installation of new technology; major equipment failures, import and customs
regulations, and outcome of litigation. These forward-looking statements speak
only as of the date of this report. The Company expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such forward-looking statement is based.
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.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which this
report is filed.
-10-
<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 3, 2000 /s/ Ira Leon Rennert
- ---------------------------------- -------------------------------
Date Ira Leon Rennert
Chairman of the Board and
Principal Executive Officer
March 3, 2000 /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> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 2,090
<SECURITIES> 0
<RECEIVABLES> 22,012
<ALLOWANCES> 1,169
<INVENTORY> 47,116
<CURRENT-ASSETS> 71,468
<PP&E> 106,869
<DEPRECIATION> 62,486
<TOTAL-ASSETS> 119,245
<CURRENT-LIABILITIES> 14,775
<BONDS> 156,827
0
0
<COMMON> 1
<OTHER-SE> (63,556)
<TOTAL-LIABILITY-AND-EQUITY> 119,245
<SALES> 39,153
<TOTAL-REVENUES> 39,153
<CGS> 30,851
<TOTAL-COSTS> 38,028
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 637
<INTEREST-EXPENSE> 4,656
<INCOME-PRETAX> (3,362)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,362)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,362)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
